Partnerships

• Author: J. Anthony Van Duzer
• Pages: 28-95

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CHA PTER 2

PA RTNE R SHIPS

A. INTRODUCTION

As discus sed in Chapter 1, partnership is a legal relationship that ex ists

between two or more people carry ing on business together. This chapter

expands on the introductory discussion of partnerships in Chapter 1,

beginning w ith a more detailed examin ation of what a partnership is

and when it will be found to exist. The next sect ion turns to the rules

that govern the interna l relations between partner s, followed by a dis-

cussion of the rules applicable to the relat ionships that partners have to

outsiders, like creditors. These latter rules determine when a partner-

ship and its partners a re liable to creditors and other outsiders. Then

some of the considerations relevant to draft ing partnership agreements

are presented. Agreements bet ween partners supplement and often

replace the rules that govern partners’ internal rel ations and address

some of the liability risks created by the rules that deal with when

partnerships are liable to outsiders. Limited partnerships a nd joint ven-

tures are considered at the end of this chapter.1

1 For a more detailed di scussion of partnersh ip law, see Alison R Ma nzer, A Prac-

tical Guide to Cana dian Partnership Law (Aurora, ON: Canada L aw Book, 1994)

(loose-leaf ) [Manzer] and Darcy MacPherson & Sun ita Doobay, 2014 Annotated

Ontario Partne rships Act (Toronto: Carswell, 2014).

Partnersh ips 29

B. WHAT IS A PARTNERSHIP?

1) Partnership Law

Partnership law determi nes when a partnership is created a nd the re-

sulting legal consequences. Or iginally, partnership law developed as

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

in areas not governed by statute consist s of the accumulation of rules

made in judicial decisions. Once a r ule is applied in a particular case, it

becomes a precedent: all courts are bound to decide subsequent cases

in a manner consistent w ith this rule.2 The application of the rule from

the precedent to different facts in subse quent cases clar if‌ies and ref‌ines

the rule. As a result of th is binding character of precedent cases, it is

often said that common law is made by judges.3

Prior to the enactment of part nership legislation, the English courts,

in deciding individua l cases, developed rules to determ ine when a part-

nership existed and what its legal con sequences were. In the late nine-

teenth century, these judge-made rules for part nerships were codif‌ied

in the English Partnerships Act of 18 90.

In Canada, the provinces have constitutional jurisdiction to en-

act laws regulating pa rtnerships under section 92(13) of the Constitu-

tion Act, 1867, which gives them jurisdiction in rel ation to “Property

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

jurisdictions, li ke the United Kingdom, and all have enacted statutory

regimes based closely on the English Partnerships Act of 189 0.4 These

statutes address (1) the formation and nature of partnerships, (2) the

relationship between part ners and persons dealing with partnerships,

(3) the relationship of partners to each other, and (4) dissolution of

partnerships. Few changes have been made to these provincial statutes

2 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 Can ada.

3 It is sometimes sa id that judges “discover” the common l aw. On the common

law system gener ally, see S Waddams, Introduction to the Study of L aw, 8th ed

(Toronto: Carswell, 2016) at 71–86.

4 See, for example, Ont ario Partnerships Act, RSO 1990, c P.5 [OPA]; Alberta Pa rtne r-

ship Act, RSA 2000, c P-3 [APA]; Briti sh Columbia Partnership Act, RSBC 1996, c

348 [BCPA]; Nova Scoti a Partnership Act, R SNS 1989, c 334 [NSPA]; Saskatch-

ewan Partnership Act, R SS 1978, c P-3 [SPA]; Manitoba Partnership Act, CCSM c

P30 [MPA]; New Brunsw ick Partnership Act, RSNB 1973, c P-4 [NBPA]; New-

foundland and Labrador Partne rship Act, RSNL 1990, c P-3 [NLPA]; and Pr ince

Edward Islan d Partnership Act, R SPEI 1988, c P-1 [PEIPA].

THE LAW OF PARTNERSHIPS AND COR PORATIONS30

since their enactment, and t here is an extensive body of judicial deci-

sions interpreting them. These decisions are also precedents and are

binding on courts in subsequent cases. The common law continues to

apply to the extent consistent with the applicable provi ncial legislation.5

In Quebec, Canada’s only civil law jur isdiction, partnersh ips are

governed by the Civil Code.6 In civil law jurisdictions, judges do not

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

in the Civil Code. Although previous decisions are used to argue in

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

ing on courts in future ca ses.

The basic nature of partnerships in the common law provinces was

described in Ch apter 1. Under the Civil Code, partnerships are the sa me

in most respects.7 A partnersh ip in Quebec takes on some different

characterist ics, however, depending on the manner in which the part-

nership is formed. Partnerships are either “declared” or “undeclared.”

Declared partnerships are those registered under the Code, while un-

declared partner ships come into existence without being registered,

like partnerships in the common law jurisdictions. An i mportant dif-

ference between undeclared part nerships under the Code and partner-

ships in common law jurisdict ions, however, is that, in an undeclared

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

creditor doing business wit h the partnership are liable to the third

party. In a declared partnership, like partnerships in other provinces,

all partners a re liable whether the third pa rty knows about them or not.

Declared partnerships may be limited partnerships, very like limited

partnerships in t he common law jurisdictions, or general partnerships,

which have characteristics similar to common law partnerships as dis-

cu ss e d b elow.8 Limited partnerships are a sp ecial kind of partner ship

discussed ne ar the end of this chapter.

The statutory law in Quebec and the other provinces deals with the

nature of the partner ship, the relationship of the partners to each other

and to outsiders dealing with the partnership, and the dissolution of the

partner ship. In no jurisdiction, however, do these provisions prov ide a

complete code to regulate the affairs of par tnerships. As a result, the sub-

stantial body of judicial decisions dealing wit h partnerships constitutes

an important source of part nership law. As well, partners w ill frequently

supplement or modify the rules governing their relationship in a con-

tract commonly referred to as a par tnership agreement. Some of the ways

5 OPA, s 45; BC PA, s 91; and NSPA, s 3.

6 Civil Code of Quebec, CQLR c C-1991 [CCQ], arts 2186–266.

7 See the def‌in ition of partnership at CCQ, art 2186.

8 CCQ, arts 2250–257.