September 18, 2022
If you are a partner in a business venture, you not only have risks to outsiders, you have risks arising from your duties to your partners.
Many business people enter into partnerships, particularly joint ventures for the holding or development of real estate, with very little if any documentation. Our recommendation is that if you are entering into any such venture, even with your close associate or family member, that it is always best to reduce the understanding to writing while things are running smoothly and there is agreement. The process of reducing the understanding to writing is often valuable to identify any potential disagreements and sort them out while everybody is friendly.
In Ontario, the Partnerships Act provides a default framework of rules governing partnerships. Many partners prefer to create their own rules by entering into a partnership agreement setting out different terms.
THE ISSUE
One of the things that differs between partnerships and being a shareholder in a corporation is that unless provided otherwise in a partnership agreement, each partner owes duties of loyalty, good faith, and avoidance of conflict and self interest to the other partners. So, for instance, if you are entering into a partnership for a specific purpose such as purchasing specific real estate, you might want a partnership agreement to allow the partners to continue or start other outside business ventures. You and your partners then define the limits of any competition. It is far better if the partners turn their minds to that question, and the nature of competition which is permitted, than to have to spend money later arguing about it in court.
It is also far better to deal with issues such as the dissolution of the partnership, and what that means for the duties of the partners, in a partnership agreement rather than leaving it up to the courts. Even long term partners, including family members, may end up in a dispute over the winding up of a partnership, or actions taken by one of the partners that affect the others.
THE CASE
This is illustrated in the case of Ioannidis v. Ioannidis. Four brothers went into business together owning a commercial rental property. Title to the property was registered in the name of Steve, one brother, as trustee. There was never a written partnership agreement or trust agreement. One brother was bought out of the partnership in 1993 and the second brother passed away in 2001 and was replaced in the partnership by his widow. By 2013, the property had a market value more than $1,000,000. In 2014, Peter, the other remaining brother, decided that he wanted to either buy the property for himself or be bought out. There was a dispute about exactly what was said at a meeting of the partners.
A realtor was consulted about the value of the property, and about the potential for sale. There was disagreement in the evidence about what the realtor was actually hired to do, but eventually the realtor brought forward an offer of $1.725 million which was accepted Steve, without consulting Peter.
The first thing the judge had to decide was the status of the partnership. Because there was no written partnership agreement, the judge had to decide whether the partnership had been dissolved by Peter’s request to depart, despite the disagreement about what exactly was said. The judge applied the provisions of the Partnership Act to the facts. It was impractical, if not impossible, for the partnership to continue with the partners not in agreement. That meant the partnership had to be wound up and the property sold.
That did not in and of itself decide whether or not the property should be sold to an outsider or whether Peter should have had first opportunity to buy the property. That depended upon the question of what duties the partners owe to each other after dissolution of the partnership. In a 2011 Superior Court case with somewhat similar facts, the court had determined that the dissolution of the partnership ended any fiduciary duties. In that case, the dispute arose because of an alleged secret profit made by one partner which made it obvious that the partners were each acting in their own self interest with no loyalty or trust between them. That was not clear in the Ioannidis case: Peter was vulnerable because the property was only registered in Steve’s name and Peter had not acted in any way contrary to the interests of his partners. On that basis, the judge in Ioannidis found that the fiduciary duties owed by the partners continued during the winding up of the partnership and the sale of the property.
The judge then found that Steve had breached his duty of full disclosure owed to Peter by not giving Peter full information about the sale. However, the judge did not find that Steve required Peter’s consent to the sale of the property because in the circumstances, he only needed majority approval. This result was consistent with the result in trusts law which holds that a trustee of property can sell the property without the consent of the beneficiaries unless the partnership agreement or trusts agreement provides otherwise.
All that Peter got out of his lawsuit was an order that Steve account for the sale proceeds.
TAKEAWAYS
This decision illustrates:
- the value of having a written partnership agreement, and a written trust agreement if the property is to be held by one of the partners in trust;
- that partners owe each other duties of utmost good faith, the absence of conflict of interest, to account, and full disclosure;
- that partnership duties may continue during the winding up of a partnership;
- that those duties can be very onerous;
- that you might want to write your own rules;
- that when differences of opinion arise, good records are important; and
- that subtle differences in facts can alter results in law suits.
WHAT WEILERS LLP CAN DO FOR YOU
The commercial and real estate lawyers at Weilers LLP are experienced and adapt in drafting all sorts of business agreements, including partnership or joint venture agreements. We know the questions to ask to make sure that your agreement covers all the important issues and captures your intentions. They also are trusted advisors on issues of disposing of assets or dissolving and winding up partnerships.
If you find yourself in a dispute about a partnership or joint venture, the litigation team at Weilers LLP can appreciate the significance of the facts of your unique case, and try to steer the case to a safe decision. Whether you are entering into a partnership, or looking to dissolve one, Weilers LLP may be the right lawyers for you.