Canada: Business Disputes - Partnership

Many 50/50 shareholders refer to themselves as "partners", when in fact each owns half of the shares in a company, which owns the business. Partners on the other hand, hold a direct ownership interest in the business. It is important to distinguish between 50/50 shareholders and partnerships as the law governs each of them differently. Learn more about 50/50 Shareholders on our website. The Partnership Act, RSBC 1996, c 348 and the common law governs partnerships as discussed below.

What Exactly is a Partnership?

A partnership is a relationship where two or more persons are carrying out a business in common with a view of profit, as per s. 2 of the Partnership Act. Whether a partnership has been formed can be the subject of litigation, as was the case involving the potential acquisition of the Vancouver Canucks in Blue Line Hockey Acquisition v. Orca Bay Hockey Limited Partnership, 2009 BCCA 34.

The reason why it is not always clear whether a partnership has been formed is that even when there is no express agreement, there may be an implied one that creates a partnership. The parties may choose to expressly state that they are partners or the relationship that they create through their words and conduct may demonstrate an intention to become partners. The courts will consider things such as the contribution of money, property, effort, knowledge, skill or other assets to a joint undertaking, sharing of property, the sharing of profits and losses, a mutual right of control, income tax returns filed as a partnership and joint bank accounts in determining the formation of a partnership. As a result, a partnership can exist before a restaurant opens where premises are secured, improvements made, equipment, furniture and supplies acquired, which happened in Khan v. Miah (2000), [2001] 1 All E.R. 20 (U.K.H.L.). A partnership can exist in the absence of an express or written agreement and it can exist where there is an agreement, but the terms were not completed as was the case in Red Burrito v. Hussain, 2007 BCSC 1277.

Private Advantage at the Expense of the Partnership

Partners owe each other fiduciary duties. That means that a partner cannot obtain a private advantage at the expense of the partnership. In every transaction affecting a partnership, the partners are bound to do their best for the partnership itself and share any benefits with the other partners. Further, section 31 of the Partnership Act provides that partners are bound to render true accounts and full information of all things affecting a partnership. It should be noted that the mutual rights and duties of the partners can be varied by the consent of all the partners which may be expressly set out in a Partnership Agreement or inferred from their course of dealing, under section 21 of the Partnership Act. These rights and duties come to an end with the dissolution of the partnership.

Given that the rights and obligations of partners end when the partnership is dissolved, whether a partnership has in fact come to an end can be the subject matter of a lawsuit. Section 35 of the Partnership Act provides the following:

35(1) Subject to any agreement between the partners, a partnership is dissolved:

(a) if entered into for a set term, by the expiration of that term;

(b) if entered into for a single adventure or undertaking, by the termination of that adventure or undertaking; or

(c) if entered into for an undefined time, by any partner giving notice to the other or others of his or her intention to dissolve the partnership.

In Blue Line (BCSC), Justice Wedge discussed the existence and termination of a partnership. She wrote:

[79] Unlike a corporation, a partnership is not a legal person. As noted earlier, partnership is the relationship — created by contract — between individuals carrying on business in common.

[80] Because a corporation is a legal person, it survives the departure of an officer or director. That is not the case with a partnership. A partnership does not have any separate legal existence from the partners that comprise it. The rule at common law is that when a partner leaves the partnership, the relationship ends. The end of the relationship marks the end of the partnership. The remaining partners who continue to carry on the business do so as a newly formed partnership.

Blue Line Hockey Acquisition Co. Inc. v. Orca Bay Hockey Limited
Partnership, 2008 BCSC 27 ("Blue Line BCSC"), upheld on appeal 2009
BCCA 34, leave to appeal to S.C.C. refused

A partnership agreement is recommended when forming a partnership, as it can outline the nature of the relationship, the obligations and duties adopted by the partners, notice requirements, termination of the partnership and the obligations that remain at the time of termination. It can also deal with how disputes can be resolved and valuation on termination. If these various aspects of the partnership are defined in a partnership agreement, that will help to avoid costly litigation regarding what the partners intended.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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