Partnerships

• Author: J. Anthony Vanduzer
• Pages: 25-78

CHAPTER

2

PARTNERSHIPS

A.

WHAT

IS A

PARTNERSHIP?

1)

Introduction

Originally,

partnership

law

developed

as

part

of the

English common

law.

In a

common

law

system,

the law in

areas

not

governed

by

statute

consists

of the

accumulation

of

rules made

in

judicial decisions. Once

a

rule

is

applied

in a

particular case,

it

becomes

a

precedent:

all

courts

are

bound

to

decide

all

subsequent cases

in a

manner consistent with

this

rule.1

The

application

of the

rule

from

the

precedent case

to

differ-

ent

facts

in

subsequent cases

clarifies

and

refines

the

rule.

As a

result

of

this binding character

of

precedent cases,

it is

often

said that com-

mon law is

made

by

judges.

Prior

to the

enactment

of

partnership legislation,

the

English courts,

in

deciding individual cases,

had

developed rules

of

their

own to

deter-

mine when

a

partnership relationship existed

and

what

its

legal conse-

quences were.

In the

late nineteenth

century,

the

judge-made rules

for

partnerships were

codified

in the

English

Partnerships

Act of

1890.

1 To be

precise, only courts lower

in the

hierarchy

of

courts than

the

court render-

ing a

decision

are

bound

to

follow

the

decision.

So, for

example,

a

decision

of

the

Ontario Court

of

Appeal

is

binding

on the

Ontario Superior Court

of

Justice,

but not on the

Supreme Court

of

Canada.

25

26 THE LAW OF

PARTNERSHIPS

AND

CORPORATIONS

In

Canada,

the

provinces have constitutional jurisdiction

to

enact

laws

regulating partnerships under section 92(13)

of the

Constitution

Act,

1867,

which gives

the

provinces jurisdiction

in

relation

to

"Prop-

erty

and

Civil Rights."

All the

provinces except Quebec

are

common

law

jurisdictions, like

the

United Kingdom,

and all

have enacted statu-

tory

regimes based

on the

English

Partnerships

Act of

1890.2

Few

changes have been made

to

these provincial statutes since their enact-

ment,

and

there

is an

extensive body

of

judicial decisions interpreting

them. These decisions

are

also precedents binding

on

courts

in

subse-

quent cases.

The

common

law

continues

to

apply

to the

extent

not

inconsistent with

the

applicable provincial

legislation.3

In

Quebec, Canada's only civil

law

jurisdiction, partnerships

are

governed

by the

Civil

Code.4

In

civil

law

jurisdictions, judges

do not

make

the law in the

common

law

sense.

All law has its

source

in the

Civil

Code.

Although previous

decisions

are

used

to

argue

in

favour

of

a

particular interpretation

of the

Civil

Code,

they

are not

binding

on

courts

in

future

cases.

Under

the

Civil

Code,

the

nature

of a

partnership

is

different,

in

some

respects,

from

partnerships

under

the

laws

in the

other

provinces.

A

partnership

in

Quebec takes

on

different

characteristics

depending

on the

manner

in

which

the

partnership

is

formed.

Partner-

ships

are

either "declared"

or

"undeclared." Declared partnerships

are

those

registered

under

the

Code,

while

undeclared

partnerships

are

similar

to

partnerships

in the

common

law

jurisdictions

in

that

no

reg-

istration

is

required

for

them

to

exist.

An

important

difference

between

undeclared partnerships under

the

Code

and

partnerships

in

common

law

jurisdictions

is

that,

in an

undeclared partnership, only those part-

ners

who are

known

by a

third-party creditor doing business with

an

undeclared partnership

are

liable

to the

third

party.

In a

declared part-

nership,

all

partners

are

liable whether

the

third party knows about

them

or

not. Declared partnerships

may be

limited partnerships, very

like limited partnerships

in the

common

law

jurisdictions,

or

general

partnerships, which have characteristics similar

to

common

law

part-

nerships

as

discussed

below.5

Limited partnerships

are a

special kind

of

partnership discussed near

the end of

this chapter.

2

See,

for

example, Ontario

Partnerships

Act,

R.S.O.

1990,

c. R5

[OPA];

Alberta

Part-

nership

Act,

R.S.A.

2000,

c. P-3

[APA];

British Columbia

Partnership

Act,

R.S.B.C.

1996,

c. 348

[BCPA];

and

Nova

Scotia

Partnership

Act,

R.S.N.S.

1989,

c. 334

[NSPA].

3

OPA,

ibid.,

s. 45.

4

Civil Code

of

Quebec,

Arts.

2186-2266.

5

Civil

Code

of

Quebec,

Arts.

2250-2257.

Partnerships

27

The

statutory

law in

Quebec

and the

other provinces deals with

the

nature

of the

partnership,

the

relationship

of the

partners

to

each other

and to

outsiders dealing with

the

partnership,

and the

dissolution

of

the

partnership.

In no

jurisdiction, however,

do

these

provisions

pro-

vide

a

complete code

to

regulate

the

affairs

of

partnerships, with

the

result that

the

substantial body

of

judicial decisions dealing with part-

nerships constitutes

an

important source

of the law

governing partner-

ships.

As

well, partners will frequently supplement

or

modify

the

rules

governing their relationship

in a

contract commonly

referred

to as a

partnership agreement. Some

of the

ways

in

which this

is

done

are

described below.

In

order

to

deal with

any

issue involving

a

partner-

ship,

one

must have regard

to the

relevant partnership statute,

the

case

law,

and any

partnership agreement.

This chapter focuses

on the

partnership

law of the

common

law

provinces, emphasizing

the

Ontario

Partnerships

Act,

though some

comparisons with Quebec

law and the

laws

of

other provinces

are

included.

It

also discusses some

of the

considerations relevant

to

draft-

ing

partnership agreements. Limited partnerships

and

joint ventures

are

considered

at the end of

this

chapter.

2) The

Legal Nature

of

Partnership

Provincial

partnership

laws6

provide that

a

partnership

exists

any

time

there

are

...

persons carrying

on a

business

in

common with

a

view

to

profit

..

.7

As

noted

in

Chapter

1,

a

partnership

is

like

a

sole

proprietorship

in

that

partners themselves carry

on

business directly;

the

partnership

is not a

legal

entity separate

from

its

partners.

The

chief consequence

is

that

each partner is liable to the

full

extent of his personal assets for debts

and

other liabilities

of the

partnership

business

as

provided

in the

part-

nership

statutes.8

A

further

consequence

is

that,

in the

absence

of an

6

References

to

provincial partnership laws

in

this chapter mean those laws

in the

common

law

provinces.

7

OPA, above note

2, s. 2. The

remainder

of the

definition

reads

as

follows:

"...

but the

relation between members

of a

company

or

association that

is

incorpo-

rated

by or

under

the

authority

of any

special

or

general

Act in

force

in

Ontario

or

elsewhere,

or

registered

as a

corporation under

any

such Act,

is not a

partner-

ship within

the

meaning

of

this Act."

See

BCPA,

above note

2, s. 2; and

NSPA,

above

note

2, s. 4 to

similar

effect.

8

E.g.,

OPA,

above note

2, ss.

10-13;

BCPA,

above note

2, ss.

11-15;

and

NSPA,

above note

2, ss.

12-15.