Partnerships

• Author: J. Anthony VanDuzer
• Profession: Faculty of Law University of Ottawa
• Pages: 28-89

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CHAPTER 2

PA RTNER S HIPS

A. INTRODUCTION

As discu ssed in Chapter 1, partnership is a legal relationship th at exists

between two or more people carrying on business together. This chapter

expands on the introductory discussion in Ch apter 1, beg inning with

a more detailed exami nation of what a partnership is and when it will

be found to exist. The next section turns to the rules th at govern the

inter nal relation s between partner s, followed by a discu ssion of the ru les

applicable to the relationships that partners have to outsiders, like credit-

ors. These latter rule s determine when a partnership and its pa rtners are

liable to creditors and others. Then some of the considerations relevant

to drafting par tnership agreements are presented. Agreements between

partners supplement and often replace the rules t hat govern part ners’ in-

ter na l rel ati ons and a ddr ess some of t he li abi lit y ri sks cre ated by t he ru les

that deal with when partnerships are liable to outsiders. Limited partner-

ships and joint ventures are considered at the end of thi s chapter.

B. WH AT IS A PARTNERSHIP?

1) Partnership Law

Partnership l aw determines when a part nership is created and the re-

sulting legal consequences. Originally, partnership law developed as

Partnersh ips 29

part of the English common law. In a common law system, the law

in area s not governed by statute consists of the accumulation of r ules

made in judicial decisions. Once a r ule 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 to d ifferent facts in subsequent cases clar if‌ies and

ref‌ines the rule. As a result of this binding character of precedent cases,

it is often said that common law is made by judges.2

Prior to the enactment of partnership legislation, the English courts,

in deciding individual cases, developed rules to determine when a part-

nership existed and what its legal consequences were. In t he late nine-

teenth centur y, these judge-made rules for partnerships were cod if‌ied

in the English Partnerships Act of 1890.

In Canada, the provinces have constitutional jur isdiction to enact

laws regulating partnerships under section 92(13) of t he Constitution

Act, 1867, which gives the provinces jurisdiction i n relation to “Prop-

erty and Civil Rights.” All the provinces except Quebec are common

law jurisdictions, li ke the United Kingdom, and all have enacted statu-

tory regimes based closely on the English Partnerships Act of 1890.3

Few cha nges have b een made to t hese provincial statutes since their

enactment, and there is an e xtensive body of judicial decisions inter-

preting them. These decisions are also precedents binding on courts

in subsequent cases. The common law continues to apply to the extent

consistent with the applicable provincial legislation.4

In Quebec, Canada’s only civil law jurisdiction, partnerships are

governed by t he Civil Code.5 In civil law jurisd ictions, judges do not

make the law in the common law sense. Partnership law has its source

1 To be precise, only court s lower in the hierarchy tha n the court rendering a

decision are bound t o follow the decision. So, for example, a decis ion of the

Ontario Cour t of Appeal is binding on the O ntario Superior Court of Just ice,

but not on the Supreme Court of Ca nada.

2 It is sometimes s aid that judges “discover” the com mon law. On the common

law system gener ally, see S. Waddams, Introduction to the Stu dy of Law, 6th ed.

(Toronto: Carswell, 2004) at 65–77.

3 See, for example, Ontario Partnerships Act, R.S.O. 1990, c. P.5 [OPA]; Alberta Part -

nership Act, R.S.A. 2 000, c. P-3 [APA]; British Colu mbia Partnership Act, R.S.B.C.

1996, c. 348 [BCPA]; Nova Scotia Partne rship Act, R.S.N.S. 1989, c. 334 [NSPA];

Saskatchewa n Partnership Act, R. S.S. 1978, c. P-3 [SPA]; Manitoba Partnership

Act, C.C.S.M. c. P30 [MPA]; New Brun swick Partnership Act, R.S.N.B. 1973, c.

P-4 [NBPA]; Newfoundl and and Labrador Partnership Act, R.S .N.L. 1990, c. P-3

[NLPA]; and Pr ince Edward Island Partner ship Act, R.S.P.E.I. 1988, c. P-1 [PEIPA].

4 OPA, s. 45; BCPA, s. 91 ; NSPA, s . 3.

5 Civil Code of Quebec, S.Q. 1991, c. 64 [C.C.Q.], arts. 2186–2266.

THE LAW OF PARTNERSHIPS AND COR PORATIONS30

in the Civil Code. Although previous decisions are u sed to argue in

favour of a particular interpretation of the Civil Code, they are not bind-

ing on courts in future ca ses.

Under the Civil Code, the basic n ature of a par tnership is t he same

as in other provinces.6 A partnership in Quebec takes on some different

characterist ics, however, depending on the manner i n which the part-

nership is formed. Part nerships are either “declared” or “undecla red.”

Declared partnerships are those registered under t he Cod e, while un-

declared partnerships are similar to partnerships in the common law

jurisdictions in that no registration is required for them to exist. An

important dif ference between undeclared pa rtnerships under t he Code

and partnerships in common law jurisdictions is that, in an undeclared

partnership, only those par tners who are known by a third-party

creditor doing busi ness with the partnership are liable to the third

party. In a declared partnership, like pa rtnerships in other provinces,

all partners are liable whether the third party knows about them or not.

Declared partnerships may be limited partnerships, ver y like limited

partnerships in the common law jurisdict ions, or general partnerships,

which have characterist ics similar to common law par tnerships as dis-

cussed below.7 Limited par tnerships are a special kind of partnership

discussed ne ar the end of this chapter.

The statutory law i n Quebec and the other province s deals w ith the

nature of the part nership, 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 prov isions provide

a complete code to regulate the affairs of partnerships. As a result, t he

substantial body of judicial decisions dealing with partnerships con-

stitutes a n import ant source of partnership law. As well, pa rtners will

frequently supplement or modify the rules governing their relationship

in a contract commonly referred to a s a partnership ag reement. Some

of the ways in which this i s done are described below. In order to deal

with a n issue involv ing a partnership, t ypically one must have regard to

the releva nt part nersh ip stat ute, the case law, and a ny par tnersh ip agre e-

ment.

This chapter focuses on the partnership law of the common law

provinces, emphasiz ing the Ontar io Partnerships Act, though some com-

parisons w ith Quebec law and the laws of other prov inces are included.

6 See the def‌init ion of partnership at C.C.Q., art. 2186.

7 C.C.Q., arts. 2250–2257.