Greenaway v. Sovran

Ontario Reports

Court of Appeal for Ontario,

Rosenberg, Strathy and Benotto JJ.A.

February 11, 2014

119 O.R. (3d) 260 | 2014 ONCA 110

Case Summary

Partnership — Dissolution — Appellant giving notice to respondent that he would be retiring from their two-man partnership at end of year and giving notice of his intention to dissolve partnership as of that date — Application judge erring in finding that appellant had withdrawn from partnership and had thereby triggered restrictive covenant.

The parties were partners in a two-man accounting business. As a result of his dissatisfaction with the respondent's conduct, the appellant gave notice to the respondent that he would be retiring from the partnership at the end of the year and gave notice of his intention to dissolve the partnership as of that date. The application judge found that the appellant had "withdrawn" from the partnership, thereby triggering a clause in the agreement which called for the reduction of the withdrawing partner's capital account by "500% of the average fees billed by the firm to clients who transfer to the withdrawing partner within 24 months from the withdrawal date". The appellant appealed.

Held, the appeal should be allowed.

On the dissolution of the two-member firm, the firm ceased to exist and the parties were free to pursue their own practices. There was no contractual term preventing them from doing so. In the absence of such a provision, it was reasonable to conclude that the partners should be limited to their common law and statutory rights on dissolution, and nothing more.

Cases referred to

Brew v. Rozano Holdings Ltd., [2006] B.C.J. No. 1655, 2006 BCCA 346, [2006] 10 W.W.R. 655, 229 B.C.A.C. 76, 55 B.C.L.R. (4th) 233, 19 B.L.R. (4th) 201, 151 A.C.W.S. (3d) 707; The Plan Group v. Bell Canada (2009), 96 O.R. (3d) 81, [2009] O.J. No. 2829, 2009 ONCA 548, 252 O.A.C. 71, 81 C.L.R. (3d) 9, 62 B.L.R. (4th) 157, 179 A.C.W.S. (3d) 40

Statutes referred to

Partnerships Act, R.S.O. 1990, c. P.5, ss. 26(1), 32

Authorities referred to

l'Anson Banks, Roderick, Lindley & Banks on Partnership, 19th ed. (London: Sweet & Maxwell, 2010)

APPEAL from the judgment of Bondy J. of the Superior Court of Justice dated July 30, 2013. [page261]

David G. Greenaway, for appellant/respondent by way of cross-appeal.

Crista L. Rea, for respondent/appellant by way of cross-appeal.

[1] Endorsement BY THE COURT: -- The appellant and the respondent had been partners in an accounting business for over 20 years. They sought, by way of application, a determination of the enforceability of a "restrictive covenant" in their partnership agreement.

[2] The application judge found the partnership had been dissolved as of January 1, 2013 as a result of the partners' conduct. He declared that the restrictive covenant was unenforceable as a penalty, and directed a trial of an issue to determine the damages payable by the appellant as a result of the breach of the portion of the covenant he found to be valid and severable.

[3] In coming to these conclusions, the application judge found the appellant had "withdrawn" from the partnership, thereby triggering a clause in the agreement which called for the reduction of the withdrawing partner's capital account "by 500% of the average fees billed by the firm to clients who transfer to the withdrawing partner within 24 months from the withdrawal date".

[4] The issues on this appeal turn on the interpretation of the partnership agreement and the legal consequences of dissolution. The standard of review is one of correctness: The Plan Group v. Bell Canada (2009), 2009 ONCA 548, 96 O.R. (3d) 81, [2009] O.J. No. 2829 (C.A.).

[5] This was a two-person partnership. It had been in operation since 1989. The appellant operated out of Amherstburg and the respondent out of Windsor. The partnership agreement was prepared by the respondent based on a precedent he had obtained at a conference in the United States. It was poorly drafted, without legal advice.

[6] Based on the firm's billings, the application of the restrictive covenant would have resulted in a reduction of the appellant's capital account by $1 million if the clients he had serviced transferred to him after dissolution of the firm.

[7] The application judge found the appellant's withdrawal from the partnership ended the relationship of the partners carrying on business in common with a view to profit and "effectively dissolved the partnership" on January 1, 2013.

[8] The dissolution was due to the appellant's dissatisfaction with the respondent's conduct. On September 26, 2012, he gave notice to the respondent that he would be retiring from the partnership at the end of the year. On October 10, 2012, he [page262] confirmed he was retiring from the firm effective December 31, 2012, and gave notice of his intention to dissolve the partnership as of that date. He planned to commence the practice of public accounting through his professional corporation.

[9] After January 1, 2013, the appellant continued to work out of the Amherstburg office and the respondent out of the Windsor office. Each continued to provide services to former clients of the partnership.

[10] There were separate provisions of the partnership agreement dealing with retirement and withdrawal. The application judge found the appellant withdrew from the partnership and did not retire.

[11] While it might have been open to the application judge to find that the appellant's notice of October 10, 2012 was a notice of dissolution, pursuant to s. 26(1) of the Partnerships Act, R.S.O. 1990, c. P.5, he does not seem to have to have been referred to that provision. He rejected the submission that dissolution occurred pursuant to s. 32(c) of the Partnerships Act as a result of the appellant's notice. He found, at para. 22, that provision is limited to partnerships "entered into for an undefined time", whereas the agreement provided that the parties would remain partners "until such time as the partnership may be terminated in accordance with the provisions herein".

[12] The application judge also rejected the appellant's submission that the dissolution of a partnership prevents a partner from seeking to enforce a restrictive covenant against a former partner. The appellant relied on Brew v. Rozano Holdings Ltd., [2006] B.C.J. No. 1655, 2006 BCCA 346, 55 B.C.L.R. (4th) 233, which had cited with approval the following statement in R.C. l'Anson Banks, Lindley & Banks on Partnership, 19th ed. (London: Sweet & Maxwell, 2010), at para. 10-233:

Subject to the precise terms of the agreement, a general dissolution will effectively prevent any partner from seeking to enforce a restriction against his copartners but will not necessarily affect the enforceability of a restriction imposed on a partner who retired before the date of the dissolution.[^1]

(Emphasis in original; citations omitted)

[13] The application judge found this proposition was subject to the freedom of contract and that the terms of the agreement could survive dissolution and could be enforced by one partner against the other. [page263]

[14] There was no disagreement that this was a general dissolution, as opposed to a "technical dissolution", because the dissolution of the two-partner firm brought its business to an end.

[15] Part VI of the agreement, entitled "Withdrawals and Dissolution", dealt with the consequences of withdrawal. Most of the provisions appear to speak to the withdrawal of one or more partners in a multi-partner firm. A number of provisions contemplate that the firm would continue after the withdrawal of one of the partners. For example, the introductory paragraph states:

Considering that the interest of the firm should take precedence over the interest of an individual, and further considering the need for mutual understanding among many partners, the terms and conditions for withdrawal shall be standardized in consideration of both the firm and the individual but any areas of doubt or conflict shall be resolved in favour of the partnership.

[16] The references to the "firm" and the "partnership" contemplate that the withdrawal of a single partner in a multi-partner firm would not dissolve the firm and the remaining partners would continue to carry on business as a partnership. No provisions in part VI address what is to happen in the case of a partnership of two.

[17] The respondent argues that this case falls within the exception referred to in Lindley & Banks, because the appellant retired before the dissolution. That is not the case -- the appellant gave notice of dissolution before the date of dissolution, but his withdrawal coincided with the date of dissolution.

[18] On the dissolution of the two-member firm, the firm ceased to exist and the parties were free to pursue their own practices. There was no contractual term preventing them from doing so. Had they wished to include a specific term in their agreement, permitting one partner to prohibit the other from competing, they could have done so. In the absence of such a provision, it is reasonable to conclude that the partners should be limited to their common law and statutory rights on dissolution, and nothing more.

[19] To interpret the agreement as the respondent suggests would make no commercial sense. It would force an unhappy partner to choose between remaining handcuffed to the other partner or quitting the partnership and, for practical purposes, leaving the entire business to the other partner.

[20] For these reasons, the appeal is allowed. The judgment below is varied by deleting paras. 4, 5, 8 and 9. As a result, it is unnecessary to address the cross-appeal. The appellant is entitled to his costs in this court, fixed in the amount of $10,000, [page264] inclusive of all applicable taxes and disbursements. The costs below, if not agreed upon, are remitted to the application judge.

Appeal allowed.

Notes

[^1]: The passage cited by the British Columbia Court of Appeal was from the 18th edition of Lindley & Banks.

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