The following is a brief paper prepared with the assistance of Lauren Vrsnik, articling student at-law on the topic of fiduciary duties in the context of the partnership relationship.
1. General Overview of fiduciary duties in the corporate setting
Section 97(1) of the MCA states that directors shall manage, or supervise the management of, the business and affairs of a corporation. The scope of a director's power is subject to any unanimous shareholder agreement, the MCA, its regulations, and the corporation's articles and by-laws. Directors may not delegate their duties, although they can create committees to report to them. A director's duties may be fettered by unanimous agreement of the shareholders of the corporation who then take on the liabilities associated with those duties. Although a director's capacity to act can be restricted by the constating documents of the corporation, or by the shareholders themselves, directors are not relieved from the duty to act in accordance with the MCA and regulations or relieved from liability.
Directors, in undertaking their duties, are subject to a certain standard of care, and owe a fiduciary duty to the corporation. The fiduciary duty and duty of care are typically seen to be owed to the corporation rather than the shareholders directly. Directors are under a general obligation to maximize the value of shareholder investment. Directors must consider the interests of the corporation's employees, customers, creditors, and other stakeholders, and not just the interests of the shareholders (Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68 (CanLII at para 42; cited with approval in Manitoba in Matic et al v Waldner et al, 2016 MBCA 60 (CanLII)). However, under certain circumstances, personal liability of directors can extend in favour of shareholders (or other stakeholders), where there has been a personal benefit (in the form of either an immediate financial advantage or increased control in the corporation), or where directors have breached a personal duty they owe as directors, or misused a corporate power. This liability may extend in situations where oppressive conduct against one or more shareholders (or other stakeholders) is found to exist, and where the facts would make a remedy against the corporation inequitable.
Fiduciary Duty
Directors are subject to a fiduciary duty enshrined in section 117(1) of the MCA:
Every director and officer of a corporation in exercising his powers and discharging his duties shall (a) act honestly and in good faith with a view to the best interests of the corporation
A fiduciary relationship, broadly interpreted by the case law, is a relationship between parties where one party is considered to be in a special relation of trust, confidence, or responsibility to the other. Therefore, as a director, one has a duty to act in every circumstance in the way in which that director honestly believes, in good faith, to be in the best interest of the corporation. This is has been the standard jurisprudence since BCE Inc. v 1976 Debentureholders ("BCE"), 2008 SCC 69, when the Supreme Court of Canada clarified that the "best interests of the corporation" does not mean the best interests of the corporation's shareholders. Rather the interests of other stakeholders may be relevant. Following the principles in BCE, Parliament amended the Canada Business Corporations Act to enumerate different stakeholder interests.
The role of the director is likened to that of a trustee so that, just as a trustee owes the fiduciary duties of loyalty and good faith to the beneficiaries of a trust, a director owes those duties to the corporation. The fiduciary duty has several features. First, corporate management must avoid conflicts of interest, except with the company's knowledge and consent. Second, directors and officers are prohibited from taking secret rewards or appropriating an opportunity that should have been available for the company (see CAS v O'Malley, [1974] SCR 592, 1973 CarswellOnt 236). Last, directors and officers must protect the corporation's confidential information. In Matic et al v Waldner et al, 2016 MBCA 60 (CanLII), the Manitoba Court of Appeal considered the fiduciary duty imposed upon directors. In that case, the majority shareholders of Springhill argued that one of their directors had diverted a corporate opportunity for his personal benefit. The Court of Appeal found the director had breached his fiduciary duty by allowing another company that he owned to take on a construction project which Springhill could have performed. In reaching this conclusion, the Court of Appeal acknowledged that determining whether a director has breached his or her fiduciary duty under the corporate opportunity doctrine requires an extensive contextual analysis, considering:
[153] the maturity of the opportunity; whether it was actively pursued by the corporation; whether the corporation was capable of taking advantage of the opportunity; whether the opportunity was in the corporation's line of business or a related business; how the opportunity arose or came to the attention of the director; whether the other directors of the corporation had knowledge of the director's pursuit of the opportunity; and whether the other directors gave their fully informed consent to the director's pursuit of the opportunity. The overall goal of the analysis is to determine whether the opportunity fairly belonged to the corporation in the circumstances.
Furthermore, directors must exercise their powers for a proper purpose. As long as a director's primary motive is the best interests of the company, his or her actions are not necessarily improper simply because the director also benefits from the matter. Directors who breach their fiduciary duty will be held strictly liable, even if there is no evidence of loss or damage to the corporation.
2. Fiduciary duties in the partnership setting
Partnerships, like corporations, are creatures of statute. The Partnership Act (C.C.S.M. P30, the "PA") establishes duties between partners that run along fiduciary lines, such as a duty to account (Sections 31 and 32) and a duty not to compete (Section 33). Generally, the jurisprudence has favoured the fiduciary approach to the partner relationship akin to that of directors to a corporation.
Accordingly, subject to any agreement or behavior to the contrary (more on this later), partners in a partnership, (which includes a limited partnership) owe each other certain duties of good faith. In Rochwerg v. Truster, 2002 CarswellOnt 990 (Ont. C.A.), the court held that the obligation to account arises under section 29(1) of the Ontario equivalent of the PA (which contains the same language as Section 31 of the PA) without proof of a competing activity.
This case is often cited in discussions surrounding the fiduciary duties owed between partners and provides a brief history of the origins of these duties. A chartered accountant disclosed to his partners that he had become a director of a corporate client of the firm. He had remitted his first year's director's fees to the firm but neglected to tell his partners that he was also entitled to certain shares and stock options granted to him by the client "to lock in" the continuation of his "counsel and advice". Rochwerg later left the partnership and in the course of its winding up, the issue arose as to whether his partners were entitled to an accounting of the benefits he had received. In its analysis, the Court confirmed:
36 It has long been established that partners owe a fiduciary duty to each other, and that equitable principles hold fiduciaries to a strict standard of conduct, encompassing duties of loyalty, utmost good faith and avoidance of conflict of duty and self-interest. These are well recognized, core principles of the law of partnership.
[...]
63 Mutual trust, confidence and good faith are the cornerstones of the modern professional services partnership. Without them, the very essence of the partnership arrangement is eroded and, ultimately, destroyed. In my view, the equitable principles developed over the last century concerning the fiduciary obligations of partners continue to control contemporary partnerships. They may require, however, flexible application to respond to changing partnership structures, activities and settings. Support for this approach is found, in my opinion, in the observations of Laskin J. (as he then was) in Canadian Aero Service Ltd. v. O'Malley (1973), 40 D.L.R. (3d) 371 (S.C.C.) when discussing the principles applied in Regal (Hastings) Ltd. (at pp. 382-383):
[W]hat I would observe is that the principle, or, indeed, principles, as stated, grew out of older cases concerned with fiduciaries other than directors or managing officers of a modern corporation, and I do not therefore regard them as providing a rigid measure whose literal terms must be met in assessing succeeding cases. In my opinion, neither the conflict test, referred to by Viscount Sankey [in Regal (Hastings)], nor the test of accountability for profits acquired by reason only of being directors and in the course of execution of the office, reflected in the passage quoted from Lord Russell of Killowen [in Regal (Hastings)], should be considered as the exclusive touchstones of liability. In this, as in other branches of the law, new fact situations may require a reformulation of existing principle to maintain its vigour in the new setting.
Although Laskin J.'s comments concerned the responsibilities of directors and officers of corporations, and the appropriation of maturing corporate opportunities, in my view, they apply with equal force to the definition of fiduciary concepts and their application to modern partnerships. (See Davis v. Ouellette (1981), 27 B.C.L.R. 162 (B.C. S.C.), at p. 176, per McEachern C.J.S.C.).
3. Fiduciary duties in the limited partnership setting
The fiduciary relationship of a general partner to the limited partners may create a somewhat different, and possibly lower, standard than that of each partner among the partners of a general partnership. The PA provides, at Section 64, a duty to account on the general partners:
64 The general partners of a limited partnership are liable to account, both at law and in equity, to each other and to the limited partners for their management of the concern, in like manner as other partners are liable.
Unlike other comparable legislation in other jurisdictions in Canada, Manitoba has no other restrictive language on the general partner, and general partners appear to have broader unrestricted powers with regard to their undertaking of the business of the limited partnership. In the PA, the only specific statements made, with regard to the responsibilities of the general partner, require that the general partners render an account of their management or administration to the remaining limited partners.
General partners are liable at law to account to the other partners for their management, meaning: they are liable to the extent that either the governing statute requires them to account, or to the extent that the partnership agreement requires them to account.
Additionally, general partners are liable in equity to account to the other partners for their management, meaning: they could be liable to the extent that they are bound by a fiduciary duty to account.
We know that general partners generally have some level of fiduciary responsibility to the other partners in a limited partnership. An element of most fiduciary relationships is an obligation of the fiduciary to disclose matters relating to the "trust" to the "beneficiary". This seems to apply to partnerships as well. So, a general partner may be liable in equity to account to the other partners for their management of the partnership on an issue that may not be specifically included in the wording of the partnership agreement, or in the statute, if the general partner would not be acting in good faith by keeping it a secret.
This section of the legislation has not been judicially considered in Manitoba.
Other jurisdictions
In Molchan v. Omega Oil & Gas Ltd., [1988] 1 SCR 348, a limited partnership was involved in oil and gas development operations. The partnership had exhausted its sources of capital and ceased operations. All but one limited partner agreed to have the parent company of the general partner purchase the partnership units and certain partnership assets in order to allow the limited partners to recoup some of their investment. The disagreeing limited partner asked the court to, among other things, restore the assets to the general partner and to order the parent to account for and distribute the limited partner's share of any revenues earned from the assets.
The Court considered whether a general partner owes a fiduciary duty to its limited partners, and whether or not the above transaction resulted in a breach of that duty.
35 For these purposes I assume the highest status of the general partner under the limited partnership, namely, that of a trustee holding the properties of the partnership on behalf of all other partners. [...]
After a consideration of the general rules relating to purchases of trust property by fiduciaries, the Court concluded:
42 On the facts before the court on this appeal, and applying the law thereto as examined shortly above, I conclude that the general partner owes a fiduciary duty to Molchan, the one remaining limited partner, but in the circumstances of this case there is no breach of that duty in the sale of non-producing lands because:
43 i. there is no evidence of bad faith of the general partner and neither Shannon J. nor Prowse J.A. made any such finding;
44 ii. there has been no attempt by the appellant to demonstrate that Hydrocarbons paid an inadequate consideration for the non-producing lands;
45 iii. the general partner's assertion that the sale was in the best interests of the partnership is supported by evidence at trial which indicates the strained financial circumstances of the partnership and the difficulty of selling the lands to third parties because of the encumbrances upon the lands; and
46 iv. the terms of the agreement, of which Molchan was fully aware, provided the general partner with the power to dispose of properties at its discretion.
In a case out of British Columbia (Naramalta Development Corp. v. Therapy General Partner Ltd., 2012 BCSC 191), the Court examined a similar question, although in this case it appeared there may have been nefarious activity. This case concerned a limited partnership operating a winery business. The developer, McBean, owned both the general partner and its parent company. The partnership agreement did not provide for any profit participation by the general partner until a certain return threshold had been met. In order to get around this, McBean had the parent company begin charging a management fee to the general partner unbeknownst to the limited partners.
The Court considered Molchan and Rochwerg and confirmed that the general partner owed a fiduciary duty to the limited partners. The management fee arrangement was "entirely inconsistent" with the duty to the limited partners and was not in their "best interests".
In Simkeslak Investments Ltd. v. Kolter Yonge LP Ltd., 2011 ONSC 7134, the Ontario Courts considered whether the fiduciary relationship could be brought to an end by the actions of the partners. In this case, Kolter and Simkeslak were both limited partners in a limited partnership whose purpose was to acquire and develop property. Kolter was also the general partner.
The Simkeslak partners offered to sell their interests to Kolter, who later sold them to a third party for a higher price. The Simkeslak partners argued that Kolter breached its fiduciary duty to the rest of the limited partners by keeping secret a partnership opportunity as a result of failing to disclose the details of the subsequent sale.
While a fiduciary relationship originally existed between the partners, it ended when both parties began engaging in negotiations designed to maximize their own interests.
59 There is no dispute between the parties that as partners in Nastapoka, Kolter and the Class A Partners stood in a fiduciary relationship to each other: see Hodgkinson v. Simms, [1994] 3 S.C.R. 377 (S.C.C.), at pp. 407-408 and Ruggiero v. Swartz, 2003 CarswellOnt 6018 (Ont. S.C.J.) at para. 40. However, what is in dispute is whether these fiduciary duties ended when the Class A Partners made the Offer to sell their partnership interest to Kolter.
60 Fiduciary duties have their roots in equity. At their core, fiduciary duties seek to ensure that the law protects vulnerable individuals in their transactions with others. That said, courts have been clear that "... the concept of vulnerability is not the hallmark of a fiduciary relationship though it is an important indicium of its existence." (Hodgkinson v. Simms, at p.405)
61 The fact that fiduciary duties exist in a particular category of relationship, such as a partnership, does not mean that the fiduciary duties inherent in that relationship will necessarily continue unaffected throughout the course of the parties' relationship. It will be "the facts surrounding the relationship" and the expectation of the parties that will determine the existence and nature of any fiduciary duties.
4. Contracting out of Fiduciary duties
With a carefully crafted partnership agreement, it may be possible to contract out of particular duties and obligations including the fiduciary relationship. Further, although there are no cases on the topic, it may be possible to infer, as a result of the actions of partners, a consent to the waiver or release of the fiduciary duties imposed under the PA.
Section 22 of the PA contemplates the concept of variation of the duties and terms between partners:
Variation by consent of terms of partnership
22. The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and the consent may be either express or inferred from a course of dealing.
While there appears to be agreement within the jurisprudence that a fiduciary duty exists between partners, the exact scope of those fiduciary duties can vary from partnership to partnership, depending on the nature of the relationship, the historical actions of the partners and the agreement governing the relationship.
Section 22 grants to partners the right to tailor their mutual rights and duties towards each other by way of a partnership agreement. Fiduciary duties that exist under equity or statutory law can thus be modified on consent under an agreement. The Courts have, in some cases, construed agreements that limit or extinguish fiduciary obligations narrowly, and as is always the case with equity, the facts, and the egregious nature of the parties' behavior, will influence a Court's reading of any limiting language.
In McKnight v. Hutchison, 2013 BCCA 340, 2013 CarswellBC 2229, the question arose as to whether the following Article from the Partnership Agreement acted to provide a list of activities to which the Partnership Act would not apply, and that therefore the related fiduciary obligations (of notice to the firm) would not apply either.
2.8 Partners may conduct business, other than the practise of law, upon notice to the other partners, and receive remuneration separately therefrom, provided that such activities shall not compromise the practise of law within the partnership [...] Without limiting the generality of the foregoing, such activities may include:
a) holding of share interests in operating companies;
b) holding of directorships of corporate bodies or other institutions;
c) acting as executor of an estate, except in circumstances where the appointment has occurred by reason of succeeding another partner or previous partner due to the membership in the partnership;
d) holding and administering private investments; or
e) providing legal or other business services to family members or to family businesses.
The Court did not find that this Article of the Partnership Agreement excluded the partners from their fiduciary obligations but opened the door to the possibility when it said:
18 In my opinion, it would take very clear wording to exclude the fiduciary principle from any partners' relationship, or to exclude ss. 22, 31, 32 and 33 from the partnership that was reconstituted by the 1990 Agreement. Nothing in the document purports to do so: indeed, Article 1.3 stated that the partnership is "subject to ... the Partnership Act of British Columbia." It follows that the partners here must be taken to have intended that the Agreement would operate against the backdrop of the Act and fiduciary principles generally. [Emphasis added]
19 I do not read the Agreement as excluding or broadening the "practise of law" or the applicability of the Act beyond partnership matters. Rather Article 2.8 seems to be intended to address the division between "private business" and firm business, to provide a mechanism - the giving of notice and the consequential discussion that would naturally ensue between partners - for the line to be drawn in cases as they arise, and to provide examples of activities that "may" in some circumstances be permitted to be carried out privately (i.e., without an accounting to the firm) provided notice is given.
In Ruggiero v. Swartz, 2003 CarswellOnt 6018, one of Swartz' claims against his previous law firm partners was that they breached their fiduciary duty to him by failing to make an equitable distribution of profits. The partnership agreement provided that certain profits would be allocated "as the partners may agree at the end of the partnership fiscal year by majority vote amongst the partners which majority vote shall be binding upon the partners and the partnership." The Court stated:
40 It is true that partners stand in a fiduciary relationship to one another, and this governs certain aspects of their relations. However, the partners here also entered into a contractual relationship with each other to govern other aspects of their relations - most importantly for purposes of this motion, the division of the profits of the firm. In my view, there is no factual basis to indicate that there was a breach of fiduciary duty in the way in which the profits were distributed. Given the terms of the partnership agreement, a partner would not have a reasonable expectation that the other partners would be bound to act in his interest when it came to the distribution of profits. Nor is there evidence of a relationship of trust, confidence or vulnerability among these individuals that are the usual indications of a fiduciary relationship. The parties agreed that profits would be distributed by majority vote. In each year, Mr. Swartz received a share of profits, although not the amount which he would have liked. In his examination, he indicated that the others were critical of his efforts at client promotion and of his work ethic. In my view, there is no factual basis for a trial judge to find a breach of a fiduciary duty in the manner in which the profits were divided over the years. [Emphasis added]
And in yet another law firm dispute, Springer v. Aird & Berlis LLP, 2009 CarswellOnt 1832 considered the duty in allocating an interest in the partnership. Each January, the partners of the firm were allocated partnership units for that year based on certain performance criteria. The plaintiff resigned, and later contended that the firm had a fiduciary duty to warn him that his units would be significantly reduced in 2002. Had he been warned, he argued that he could have served his notice of withdrawal in 2001 and obtained his withdrawal share valued on 400 (which he was allocated in 2001) rather than 175 units (which he was allocated in 2002).
169 Section 20 of the Partnerships Act, R.S.O. 1990, c. P. 5 provides that the mutual rights and duties of partners, whether ascertained by agreement or defined by the Act, may be varied by the consent of all the partners. Thus, section 24 of the Act provides for profits of a partnership to be divided equally amongst all partners unless there is an agreement to the contrary. Section 20 of the Act recognizes that partners are free to regulate their dealings with one another by agreement. See also Rochwerg v. Truster, supra, at para 50. In the case of Aird & Berlis, of course, the partners have agreed in their partnership agreement to give the Executive Committee the exclusive right to set the partners' income by means of allocating units to the partners.
170 The fact that partners owe certain fiduciary duties to each other does not mean that every decision taken by a partner necessarily carries with it fiduciary duties of the kind asserted by the plaintiff. A fiduciary duty traditionally has resulted from a relationship of dependency and vulnerability of the person to whom the duty is owed such that the fiduciary must act only in the interests of the beneficiary and not in his or her own self interest. La Forest J. discussed these concepts in Hodgkinson v. Simms, [1994] 3 S.C.R. 377 (S.C.C.), at 405. That cannot be the situation in a partnership in which the Executive Committee must allocate profits amongst all the partners. If the Executive Committee were the fiduciary, it would mean that it could not act in the interests of all of the partners to whom it was charged with the responsibility of allocating income units. Rather it would be bound to act only in the interest in this case of Mr. Springer or any other partner who thought he or she was being treated unfairly.
173 In my view, there was no fiduciary duty on the part of the Executive Committee to allocate Mr. Springer any particular number of units, or any number that he thought fair. Under the partnership agreement, the Executive Committee had the exclusive entitlement and obligation to allocate income units and in doing so it had to weigh the interests of all partners.
174 I agree with the plaintiff that the members of the Executive Committee had to act in good faith. That is one of the duties owed by partners to each other, and the partnership agreement did not contract out of that duty. For example, if a decision to allocate units to a particular partner was motivated by some irrelevant consideration to the affairs of the partnership, such as a decision that no red haired persons should be set above threshold level two, it may be that such a decision could be challenged. But there was no evidence whatsoever that the decisions to allocate Mr. Springer 400 units in January, 2001 and 175 units in January, 2002 were taken in bad faith.
In a limited partnership setting, do the actions of the limited partners (willingly relinquishing all management decisions to the general partner, acknowledging and enforcing their rights to limited liability, receiving income or loss allocations and distributions as their sole entitlement to the assets of the partnership, waiving their rights to partition the assets, or otherwise limiting any duty to account to the partnership) eliminate the fiduciary duty? Arguably yes, and with a carefully crafted partnership agreement, given Section 22 of the PA, there is no reason to assume that general partners are in a fiduciary relationship to limited partners.
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.
