Van Allen et al. v. Vos et al.

[Indexed as: Van Allen v. Vos]

Ontario Reports

Court of Appeal for Ontario,

Juriansz, Tulloch and Strathy JJ.A.

July 21, 2014

121 O.R. (3d) 72 | 2014 ONCA 552

Case Summary

Equity — Laches — Appellant's wife acting as bookkeeper for parties' dental practice and failing to allocate profits in accordance with 2004 agreement between parties — Misallocation coming to light in course of negotiations to terminate partnership in 2009 — Trial judge finding that respondent did not become aware of profit misallocation until 2009 — Respondent's claim not precluded by doctrine of laches.

Limitations — Discoverability — Appellant's wife acting as bookkeeper for parties' dental practice and failing to allocate profits in accordance with 2004 agreement between parties — Misallocation coming to light in course of negotiations to terminate partnership in 2009 — Method of allocating partnership profits not apparent on face of financial statements — Trial judge not erring in finding that misallocation was not reasonably discoverable until 2009.

The parties were partners in a dental practice. In 2004, they entered into an agreement under which each partner would be allocated 100 per cent of the income he produced, minus the specific expenses incurred to generate the income. In 2008, the appellant gave notice that he wished to terminate the partnership. While the 2004 agreement contained provisions dealing with the termination of the partnership, the parties attempted to negotiate a new termination agreement in order to gain a tax advantage. They were advised by their accountant that the conclusion of a new agreement required satisfaction of three conditions: (1) agreement on the value and split of equipment; (2) agreement on the value of leaseholds; and (3) recommendation by the accountant of a split of goodwill and any remaining assets. By May 2009, the parties had fulfilled the first two steps. Before the third step was completed, the accountant raised concerns that the appellant's wife, L, the partnership's bookkeeper, had not been allocating the profits in accordance with the 2004 agreement. In an action by the respondent, the trial judge found that the 2004 agreement was valid and binding. He declared the partnership terminated effective May 31, 2009 and ordered an accounting. As a remedy for the misallocation of profits, he ordered the appellant to pay the respondent $119,056. He rejected the appellant's claim that the respondent's action was out of time. The appellant appealed.

Held, the appeal should be dismissed.

The trial judge was entitled to find that the respondent did not know about L's misallocation of partnership profits until October 2009, when L confirmed her method of allocating profits. The method of allocating profits was not apparent on the face of the financial statements. The respondent was entitled to rely on the clear wording of the 2004 agreement. He had no reason to believe that the profit-sharing was based on anything other than the arrangement in that agreement. To preclude the respondent from recovery because he failed to retain an accountant to review the documentation surrounding the financial statements would hold him to an unreasonably high [page73 ]standard. As the respondent was unaware of the misallocation of profits until October 2009, his claim was not precluded by the doctrine of laches. Finally, the doctrine of estoppel did not apply to bar the respondent's claim as he was unaware of L's conduct.

Cases referred to

Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, 211 D.L.R. (4th) 577, 286 N.R. 1, [2002] 7 W.W.R. 1, J.E. 2002-617, 219 Sask. R. 1, 10 C.C.L.T. (3d) 157, 30 M.P.L.R. (3d) 1, 112 A.C.W.S. (3d) 991; Lauren International, Inc. v. Reichert, [2008] O.J. No. 1891, 2008 ONCA 382, 237 O.A.C. 94, 45 B.L.R. (4th) 172, 70 C.P.R. (4th) 377, 167 A.C.W.S. (3d) 174; Lawless v. Anderson, [2011] O.J. No. 519, 2011 ONCA 102, 81 C.C.L.T. (3d) 220, 276 O.A.C. 75; M. (K.) v. M. (H.), 1992 CanLII 31 (SCC), [1992] 3 S.C.R. 6, [1992] S.C.J. No. 85, 96 D.L.R. (4th) 289, 142 N.R. 321, J.E. 92-1644, 57 O.A.C. 321, 14 C.C.L.T. (2d) 1, EYB 1992-67549, 36 A.C.W.S. (3d) 466; Shelanu Inc. v. Print Three Franchising Corp. (2003), 2003 CanLII 52151 (ON CA), 64 O.R. (3d) 533, [2003] O.J. No. 1919, 226 D.L.R. (4th) 577, 172 O.A.C. 78, 38 B.L.R. (3d) 42, 123 A.C.W.S. (3d) 267 (C.A.)

Statutes referred to

Limitations Act, 2002, S.O. 2002, c. 24, Sch. B [as am.]

APPEAL from the judgment of Henderson J., [2012] O.J. No. 4976, 2012 ONSC 5989 (S.C.J.) for the respondents.

Marc Munro, for appellants.

Michael R. White, for respondents.

The judgment of the court was delivered by

TULLOCH J.A.: —

A. Overview

[1] The appellant and respondent were partners in a dental practice for 20 years. During the partnership, they concluded an agreement addressing the allocation of annual profits and the accounting upon the partnership's termination. Later, for tax reasons, they sought to negotiate an agreement to terminate the partnership in a manner different than that set out in the original agreement. In the course of the negotiations, the respondent's accountant discovered that, for several years, the partnership profits had not been distributed in conformity with that agreement. The parties' relationship broke down soon thereafter. This litigation ensued.

[2] Two core issues emerged at trial: whether the parties had reached a new and binding termination agreement outside the original agreement, and whether the allocation of partnership profits had been consistent with provisions of the original agreement. The trial judge concluded that a new agreement [page74 ]had not been finalized and that the profits had been misallocated. The appellant challenges both conclusions.

[3] For the reasons below, I would dismiss the appeal.

B. Factual Background

[4] The appellant and respondent practised together as dentists for approximately 28 years. Initially, the respondent worked as an associate dentist for the appellant. In 1989, the respondent became a partner in the practice. He purchased a 49 per cent interest in the business, and profits were allocated in accordance with each partner's respective share.

[5] That profit-sharing arrangement did not last. The appellant consistently generated greater income than the respondent, giving the latter a disproportionately large share of the profits. In 1997, the parties agreed to change the terms of their partnership in two respects. First, the respondent's ownership share would be reduced to 47 per cent. Second, a new formula would govern the distribution of the partnership profits. The ultimate product of the parties' negotiation was the 2004 agreement.

(1) The 2004 agreement

[6] In drafting a new agreement, the parties sought advice from Lloyd Wright, the partnership's former accountant at Deloitte & Touche LLP; and Tim Leonard, Wright's replacement as the partnership's accountant from 1995 onwards.

[7] The parties opted for an "eat what you kill" arrangement. They understood that to mean that each partner would be allocated 100 per cent of the income he produced, minus the specific expenses incurred to generate the income. The parties signed a one-page memorandum of agreement in June 1997 as evidence of their arrangement. The memorandum mentioned a "new sharing formula according to Lloyd Wright and Tim Leonard", but provided no further details.

[8] The parties concluded an agreement on January 21, 2004 (the "2004 agreement"). The agreement was generally effective as of October 31, 1997, and effective as to the allocation of profits and losses as of February 1, 1999. The specific provisions of the 2004 agreement are described below. At the relevant times, Lorraine Van Allen, the appellant's wife, kept the books and records for the partnership.

(2) The termination agreement

[9] On November 14, 2008, pursuant to the terms of the 2004 agreement, the appellant gave notice to the respondent that he [page75 ]wished to terminate the partnership. He asked the respondent to vacate the premises of the practice. The respondent accepted the notice and request.

[10] The 2004 agreement contained specific provisions dealing with the termination of the partnership.[^1] However, in order to gain a tax advantage, the parties attempted to negotiate a new and discrete agreement regarding termination. The parties consulted several accountants at Deloitte, including Lana Hillier. Hillier advised that the conclusion of a new termination agreement required satisfaction of three conditions: (1) agreement on the value and split of equipment; (2) agreement on the value of leaseholds; and (3) recommendation of a split of goodwill and any remaining assets. The parties were together responsible for the first two steps, while Deloitte was responsible for the third. As part of the third step, Deloitte was required to prepare a tax plan and make recommendations to the parties. Upon completion of the three steps, a final written agreement would be drafted based on the approved plan for termination.

[11] After a series of meetings, the parties came to an agreement on several aspects of the termination, including the termination date, division of staff, division of equipment and the value of the leasehold improvements. The trial judge found that at their last meeting on May 22, 2009, the parties agreed that the appellant would pay the respondent $24,000 for the associate goodwill.

[12] In short, by May 2009, the parties had fulfilled the first and second steps of the process of reaching a new termination agreement. However, the third step -- the provision of a tax plan and recommendations by Deloitte -- was outstanding, and had to remain as such until the year-end financial statements were completed. When these statements were delivered in draft form in August 2009, the respondent and Wright -- who became the respondent's accountant -- raised concerns about the allocation of partnership profits (discussed below). This dispute over profits created a rift between the parties. As a result, the year-end financial statements were not finalized, and the third step in the process of reaching a new termination agreement was never completed. [page76 ]

(3) The misallocation of the partnership profits

[13] The parties' dispute about profit allocation related to the treatment of the expenses of the practice's associate dentist. The associate, who was also the appellant's daughter, was an employee of the partnership. She did dental work for patients of both partners, in addition to having patients of her own. Her remuneration was 40 per cent of the billings for the work that she did, regardless of whose patients she worked on. Wright testified that this 40 per cent -- the "associate's expense" -- was to be treated as a direct expense. In other words, the associate's expense for each patient was to be deducted against the income generated by the associate's work on that patient. In the partnership books, the associate's expense would be apportioned to reflect the work that the associate did for the patients of each dentist. For example, the respondent would receive credit for the billings generated by the associate for her work on the respondent's patients, minus the associate's expense for those patients. Wright's testimony -- which the trial judge accepted -- was that he directed Lorraine Van Allen to treat the associate's expense in this fashion in the partnership books.

[14] Contrary to Wright's instructions and the wording of the 2004 agreement, however, Lorraine treated the associate's expense as a shared expense in allocating partner profit. That is, Lorraine allocated revenue from the associate's work on a partner's patients to that partner, but treated the associate's expense as a shared expense between partners, rather than a direct expense against each partner's production. The beneficiary of this method was the appellant, who referred far more patients to the associate than the respondent. The result was that the respondent bore a disproportionate share of the associate expense.

[15] Lorraine treated the associate's expense as a shared expense for each year after 1997, and forwarded the books and records to Leonard, the partnership accountant, to prepare the financial statements. The financial statements were then circulated to and approved by the appellant and respondent.

[16] As noted above, Wright questioned the allocation of profits in August 2009. Wright made inquiries of Hillier, who in turn referred the matter to Lorraine. By e-mail dated October 23, 2009, Lorraine confirmed her application of the shared expense method in apportioning profits. [page77 ]

C. The Trial Judge's Reasons

[17] The trial judge concluded that the 2004 agreement is valid and binding. He rejected the appellant's contention that because the 2004 agreement was intended to codify the manner in which Lorraine had been keeping the books, the portion of the 2004 agreement dealing with the associate's expense is incorrect. There was no meeting of the minds as to the allocation of partnership profits before 1997 or anytime until 2004. In contrast, the written agreement of 2004 was detailed, considered and unambiguous on its face.

[18] Nor did the trial judge accept the appellant's submission that the parties made a binding termination agreement outside the 2004 agreement. This "contract to make a contract" did not become binding because there was no agreement on all of its essential provisions. The oral agreements between the parties were contingent on receipt of the tax plan and recommendations from Deloitte and acceptance of those recommendations by the parties. As these never occurred, a new termination agreement was never finalized.

[19] The trial judge declared the partnership terminated effective May 31, 2009. On the basis that the 2004 agreement continues to be in force, the trial judge also ordered an accounting pursuant to para. 11 of that agreement. As a remedy for the improper treatment of the associate's expense -- which constituted a breach of the 2004 agreement -- the trial judge ordered that the appellant pay the respondent $119,056. Finally, the trial judge rejected the appellant's claim that the respondent's action was out of time. The limitation period commences on the date the respondent knew or ought to have known that the profits were being misallocated. The respondent here did not know -- or have reason to know -- of the misallocation until his action was well within the two-year limitation period.

D. The Issues on Appeal

[20] The appellant advances four grounds of appeal.

[21] First, he says the trial judge erred in determining that the limitation period for the respondent's action had not expired. The alleged breach of the agreement was discoverable at the outset, and the requirements of the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B cannot be rendered inoperative by "blind indifference" to a prospective claim.

[22] Second, the appellant submits that the doctrine of laches precludes the respondent's claim. The respondent effectively [page78 ]acquiesced in the profit allocation formula, and it would be unfair to now retroactively amend the formula in his favour.

[23] Third, there was a meeting of minds regarding the profit allocation formula in 1997. The conduct of the parties represented their shared understanding, and the respondent is estopped from arguing otherwise.

[24] Fourth, the trial judge erred in ordering a judicial accounting, because the parties had negotiated several aspects of the termination between themselves.

[25] As I explain below, I would reject all of the appellant's submissions.

E. Analysis

[26] I preface my analysis with a brief comment on the interpretation of the 2004 agreement. This issue was not explicitly raised as a ground of appeal. However, in both his factum and in argument, the appellant's counsel suggested that the trial judge erred in his interpretation of the provision of the 2004 agreement dealing with the allocation of partnership profits.

[27] Schedule A of the agreement says, in relevant part, the following:

A Partner's "Portion" of the Associate Staff Expense is an amount equal to the ratio that the fees charged by the Partnership to the Partner's Clients in respect of Associate Billings bears to the total of all fees charged by the Partnership in respect of Associate Billings to the Clients of all the Partners.

[28] On my reading, this provision is unambiguous: each partner's share of the associate expense is determined according to the proportion of the partner's clients referred to the associate. In other words, the associate expense is to be treated as a direct -- rather than shared -- expense. In my view, the trial judge's interpretation is plainly correct.

[29] I now turn to the grounds of appeal.

[30] The appellant's first three arguments rest on a common premise, namely, that the respondent knew or ought to have known that Lorraine was not allocating the profits in accordance with the terms of the 2004 agreement. The respondent's failure to raise objections to the profit-sharing within a reasonable time defeats his claim.

[31] In my view, this premise is unfounded.

[32] The issue of whether the respondent knew of the misallocation is one of fact, and the trial judge's finding cannot be reversed absent a palpable and overriding error: Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, at para. 10. [page79 ]The question of whether the respondent ought to have known of the error is one of mixed fact and law. Such questions lie along a law-fact spectrum. Where a matter is closer to the "fact end" of the spectrum -- as it is here -- appellate courts should be wary of interfering with a trial judge's findings absent some extricable error in principle: Housen, at para. 36.

[33] The appellant locates no error in the trial judge's findings with regard to the respondent's subjective and objective knowledge. The judge found, consistent with the evidence, that the respondent did not know that the associate's expense was being treated as a shared expense until October 2009. The method of allocating partnership profits is not apparent on the face of the financial statements, as these statements contain only net figures for each partner's allocation. Moreover, the respondent had no reason to believe that the profit-sharing was based on anything other than an "eat what you kill" arrangement. In these circumstances, the respondent was entitled to rely on the clear wording of the 2004 agreement.

[34] That the respondent did not know and could not have reasonably known of the misallocation is fatal to the appellant's first three arguments. On the issue of the limitation period, the appellant submits, as he did at trial, that the respondent would have discovered the error had he retained his accountant to review the documentation supporting the financial statements. The observation, even if true, is immaterial. It is reasonable discoverability -- rather than the mere possibility of discovery -- that triggers a limitation period: Lawless v. Anderson, [2011] O.J. No. 519, 2011 ONCA 102, at para. 22. To preclude the respondent from recovery because of his failure to review the underlying financial statements would, in the circumstances of this case, hold him to an unreasonably high standard.

[35] The same is true for the appellant's laches and estoppel arguments. The doctrine of laches provides a defence to an equitable claim where the plaintiff's delay in bringing a claim constitutes acquiescence or results in circumstances that make prosecution of the action unreasonable: M. (K.) v. M. (H.), 1992 CanLII 31 (SCC), [1992] 3 S.C.R. 6, [1992] S.C.J. No. 85, at pp. 77-78 S.C.R. However, a plaintiff cannot acquiesce without knowledge of the facts giving rise to her claim: M. (K.) v. M. (H.), supra, at p. 78 S.C.R. The respondent here lacked this requisite knowledge.

[36] With regard to estoppel, the appellant cites this court's decision in [page80 ]Shelanu Inc. v. Print Three Franchising Corp. (2003), 2003 CanLII 52151 (ON CA), 64 O.R. (3d) 533, [2003] O.J. No. 1919 (C.A.), at para. 54, for the proposition that "[w]here the parties have, by their subsequent course of conduct, amended the written agreement so that it no longer represents the intention of the parties, the court will refuse to enforce the written agreement". That principle has no application here. In Shelanu, the intention of the parties could be inferred from their course of conduct. No such inference can be drawn where, as here, one party is entirely unaware of the relevant conduct: Lauren International, Inc. v. Reichert, [2008] O.J. No. 1891, 2008 ONCA 382, 237 O.A.C. 94 (C.A.), at paras. 31-33.

[37] Therefore, I would not give effect to the appellant's first three submissions.

[38] This leaves the appellant's fourth argument, namely, that the trial judge erred in ordering a judicial accounting with regard to termination. The appellant suggests -- contrary to the explicit findings of the trial judge -- that the agreements between the parties were not contingent on a future understanding, but were instead discrete and enforceable agreements. In other words, the appellant contests the trial judge's factual findings regarding the parties' intentions, rather than his application of principles of contractual interpretation. These findings are owed deference, and the appellant has failed to show that they are tainted by a palpable and overriding error. Accordingly, I would dismiss this ground of appeal.

F. Conclusion

[39] The appeal is dismissed. Costs of $15,000 inclusive are awarded to the respondent.

Appeal dismissed.

Notes

[^1]: Paragraph 11 of the agreement provided for matters related to the dissolution, including the respondent's vacation of the premises, allocation of equipment, accounting of leasehold improvements, payment for the associate's goodwill, and the allocation of liabilities and obligations between partners.

End of Document