Tim Ludwig Professional Corporation et al. v. BDO Canada LLP

[Indexed as: Tim Ludwig Professional Corp. v. BDO Canada LLP]

Ontario Reports

Ontario Superior Court of Justice,

Mew J.

March 31, 2016

130 O.R. (3d) 584 | 2016 ONSC 2225

Case Summary

Partnership — Expulsion — Defendant's partnership agreement providing that partner could be compelled to resign if policy board unanimously determined that it was not in best interests of partnership for particular partner to remain in partnership — Defendant compelling plaintiff's resignation after deciding to reduce number of partners because of economic downturn — Policy board not in fact "determining" that it was not in partnership's best interests for plaintiff to remain in partnership as that decision had already been made by defendant's CEO when board voted — Plaintiff not given opportunity to be heard — Defendant providing no evidence that policy board made its determination to expel plaintiff in best interests of partnership and that power of expulsion was exercised scrupulously and in good faith even if decision was not predetermined — Plaintiff entitled to compensatory damages for lost profit allocations and to aggravated damages in amount of $100,000.

The plaintiff (through his professional corporation) was a chartered accountant and licensed trustee in bankruptcy and was a partner of the defendant from 1992 until 2014. Article 17.4 of the partnership agreement provided that a partner's resignation could be compelled if "the Policy Board unanimously determines that it is not in the best interests of the Partnership for a particular Partner to remain in the Partnership". In July 2014, the plaintiff was called into a meeting and told that he would have to retire as a decision had been made to reduce the number of partners because of the economic downturn. He was told that the matter was not negotiable, that the CEO had an absolute right to require a partner to retire and that the CEO required the plaintiff to retire at the end of the year. In October 2014, the policy board voted unanimously to compel the plaintiff's resignation. The plaintiff was not given an opportunity to be heard. The plaintiff sued the defendant for damages for breach of contract.

Held, the action should be allowed.

Since a true power of expulsion is expropriatory in nature, it will always be construed strictly. An expulsion from a partnership will always be expropriatory because even if the compelled partner receives the full value of his share, he will still be deprived of future profits. Because partners are fiduciaries inter se, the utmost good faith is due from every member of a partnership towards every other partner. In this case, the policy board did not in fact make a determination that it was not in the partnership's best interests for the plaintiff to remain as a partner, as the CEO had already made that decision. Even if the decision was not predetermined, the defendant had furnished no evidence that the policy board made its determination to expel in the best interests of the partnership. There was simply no evidence to allow an assessment of the policy board's discretion according to either an objective or a subjective standard. Nor had the defendant offered any evidence that the power of expulsion was exercised scrupulously and in good faith. The decision to expel was invalid. [page585]

The plaintiff was entitled to compensatory damages for the lost profit allocation under the defendant's profit-sharing arrangement to which he would have been entitled had he worked to his compulsory retirement date under the partnership agreement. He was also entitled to damages reflecting additional retirement benefits that would have accrued to him had he retired on the compulsory retirement date. Finally, he was awarded aggravated damages in the amount of $100,000 to reflect the embarrassment and reputational harm which he experienced.

Blisset v. Daniel (1853), 10 Hare 493, 68 E.R. 1022; Russell v. Russell (1880), 14 Ch. D. 471; Wood v. Woad (1874), L.R. 9 Ex. 190, consd

Other cases referred to

Greenberg v. Meffert (1985), 1985 1975 (ON CA), 50 O.R. (2d) 755, [1985] O.J. No. 2539, 18 D.L.R. (4th) 548, 9 O.A.C. 69, 7 C.C.E.L. 152, 37 R.P.R. 74, 31 A.C.W.S. (2d) 123 (C.A.); Hryniak v. Mauldin, [2014] 1 S.C.R. 87, [2014] S.C.J. No. 7, 2014 SCC 7, 314 O.A.C. 1, 453 N.R. 51, 2014EXP-319, J.E. 2014-162, EYB 2014-231951, 95 E.T.R. (3d) 1, 12 C.C.E.L. (4th) 1, 27 C.L.R. (4th) 1, 21 B.L.R. (5th) 248, 46 C.P.C. (7th) 217, 37 R.P.R. (5th) 1, 366 D.L.R. (4th) 641, 2014EXP-319, J.E. 2014-162; Plester v. Wawanesa Mutual Insurance Co., 2006 17918 (ON CA), [2006] O.J. No. 2139, 269 D.L.R. (4th) 624, 213 O.A.C. 241, 39 C.C.L.I. (4th) 44, [2006] I.L.R. 4539, 148 A.C.W.S. (3d) 628 (C.A.); Sweda Farms Ltd. v. Egg Farmers of Ontario, [2014] O.J. No. 851, 2014 ONSC 1200 (S.C.J.); Vorvis v. Insurance Corp. of British Columbia, 1989 93 (SCC), [1989] 1 S.C.R. 1085, [1989] S.C.J. No. 46, 58 D.L.R. (4th) 193, 94 N.R. 321, [1989] 4 W.W.R. 218, 36 B.C.L.R. (2d) 273, 42 B.L.R. 111, 25 C.C.E.L. 81, 90 CLLC Â14,035 at 12309, 16 A.C.W.S. (3d) 17; Western Larch Ltd. v. Di Poce Management Ltd. (2013), 117 O.R. (3d) 561, [2013] O.J. No. 5448, 2013 ONCA 722, 313 O.A.C. 108, 21 B.L.R. (5th) 47, 235 A.C.W.S. (3d) 248

Statutes referred to

Partnerships Act, 1890, 1890, c. 39 [as am.]

Partnerships Act, R.S.O. 1990, c. P.5 [as am.], ss. 25, 28, 45

Authorities referred to

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

Finn, P.D., Fiduciary Obligations (Sydney: The Law Book Co. Ltd., 1977)

Waddams, S.M., The Law of Contracts, 6th ed. (Aurora, Ont.: Canada Law Book Inc., 2010)

ACTION for damages for breach of contract.

Louis Belzil, Q.C., and Jonathan Bell, for plaintiffs.

Jonathan Cocker, for defendant.

[1] MEW J.: — National and international professional services firms typically have tens if not hundreds of partners. Despite the fact that such firms are constituted as partnerships or limited liability partnerships, the governance and management of these firms of necessity resembles, in many respects, that of corporations, with chief executive officers, executive committees, compensation committees and the like. [page586]

[2] Notwithstanding this, partners are not employees of their firms. They have none of the traditional rights and remedies afforded to employees upon termination. Their legal status is governed by the partnership agreements that they subscribe to and by the law pertaining to partnerships, much of which is grounded upon a United Kingdom statute, the Partnerships Act, 1890 (1890, c. 39, U.K.), which was subsequently adopted by Ontario and other common law jurisdictions in Canada, as well as upon common law and equitable principles which stretch back into the mists of antiquity.

Nature of the Proceeding

[3] The plaintiff Tim Ludwig moves for summary judgment against his former firm, BDO Canada LLP. He claims that his forcible expulsion from the firm in 2014 amounted to breach of contract, and he seeks damages in the amount of $1,294,937 for lost profits and retirement benefits. He also requests aggravated damages in the amount of $100,000 for harm to his professional reputation.

Facts

[4] The facts of this case are straightforward and, for the most part, not in dispute.

[5] Mr. Ludwig is 62. He is a chartered accountant and a licensed trustee in bankruptcy. He was a partner of BDO and its predecessor firms in Edmonton, Alberta from 1992 until 2014. Strictly speaking, Mr. Ludwig was not a partner of the firm in his personal capacity. He was the principal of Ludwig Professional Corporation, which was the actual partner of BDO.

[6] On July 8, 2014, Mr. Ludwig was called into a meeting with two partners of the firm, Blair Davidson and Darren Crocker. It is common ground among the parties that Mr. Ludwig was told at this meeting that he would have to retire.

[7] In his affidavit, Mr. Ludwig described this meeting as follows:

I was told by Blair Davidson that . . . "the CEO has the absolute right to require a partner to retire and he requires that you retire at the end of this year. This is not a negotiation" . . . I was told that the firm was "over partnered" and that the decision to require me to retire had nothing to do with my performance or conduct. I was told that the decision was between "you or the guy with nine kids at home", which I believe was a reference to Jordan Day . . . I asked Blair Davidson if the non-competition clause in the Partnership Agreement would apply to me. He advised that it would.

[8] BDO says that Mr. Ludwig's departure was requested due to the economic circumstances of the insolvency practice at the Edmonton office, and to Mr. Ludwig's underperformance, [page587] including but not limited to "business development activities". No particulars of this alleged underperformance are provided.

[9] It is noteworthy that BDO does not challenge Mr. Ludwig's account of his conversation with Blair Davidson, in particular Mr. Davidson's allusion to the CEO's "absolute right to require a partner to retire".

[10] Following the July 8 meeting, it is Mr. Ludwig's uncontested evidence that BDO management announced his impending retirement to Edmonton Financial Recovery Services ("FRS") group within the firm.

[11] Mr. Ludwig complied with the request of firm management to transfer his practice to Jordan Day. However, he refused to accept that he could be forced to retire in the manner proposed.

[12] At some point between July 8 and August 4, art. 17.4 of the BDO partnership agreement was invoked as a ground to justify Mr. Ludwig's proposed requirement. So much is clear from an e-mail by Mr. Ludwig to Blair Davidson on August 4, in which he rejected the application of art. 17.4 to his situation.

[13] Article 17.4 of the partnership agreement provides:

If the Policy Board unanimously determines that it is not in the best interests of the Partnership for a particular Partner to remain in the Partnership, the Policy Board shall give notice in writing to the affected Partner, requesting such Partner to resign, and shall give notice to that effect to all the Partners and Designated Persons. Upon delivery of such notice by the Policy Board, the affected Partner shall be deemed to have resigned from the Partnership. The affected Partner shall be entitled to receive his/her Entitlement (to the extent applicable) in accordance with Article 11 as though s/he was a retired Partner at the date on which s/he is deemed to have resigned from the Partnership.

[14] The policy board comprises seven elected representatives from the membership of the partnership. Its wide powers and mandate derive from art. 4 of the partnership agreement.

[15] In August and September, there were inconclusive negotiations between the parties concerning possible retirement terms for Mr. Ludwig.

[16] On September 25, 2014, Mr. Ludwig's lawyer wrote to Keith Farlinger, the CEO of the firm, with a copy to Ken Davidson, chair of the policy board. The letter asserted that the proposed forced resignation of Mr. Ludwig, pursuant to art. 17.4 of the BDO partnership agreement, was not within the competence of the policy board. Many of the legal arguments made in that letter have been reproduced in the plaintiffs' factum in this proceeding.

[17] On October 8, 2014, the policy board unanimously voted to compel Mr. Ludwig's resignation, in the best interests of the firm, pursuant to art. 17.4 of the BDO partnership agreement. [page588]

[18] The relevant minutes of the meeting read as follows, under the heading "Request for Partner Resignation":

The CEO noted that the FRS practice had been impacted significantly by a decline in the economic market. Changes were required to reduce the impact of the decline. The Policy Board unanimously agreed that it was in the best interest of the firm that the Policy Board requests the resignation of Tim Ludwig Professional Corporation pursuant to Section 17.4 of the BDO Partnership Agreement.

[19] Mr. Ludwig's lawyer received written notice of the decision, in the same laconic terms, from the policy board on October 9, 2014.

[20] The plaintiffs claim that Mr. Ludwig's forced retirement breached the terms of the BDO partnership agreement. They seek damages for lost profits and retirement benefits in the amount of $1,294,937.

[21] The partnership agreement is governed by Ontario law and the parties agree to the jurisdiction of the Ontario courts to determine disputes arising under the partnership agreement.

Arguments of the Parties

[22] Mr. Ludwig objects to the application of art. 17.4 of the partnership agreement to his situation. He points to the requirement in that article that the compulsory resignation of a "particular" partner must be in the "best interests" of the partnership.

[23] Accordingly, Mr. Ludwig submits that art. 17.4 of the agreement does not support his expulsion because no grounds for expulsion particular to him were alleged to inform the policy board's decision on October 8. He refers to the minutes of that meeting for the proposition that "the reasons given [for the expulsion] concern general economic conditions, not circumstances peculiar to Tim Ludwig, and yet the motion was directed at him".

[24] The plaintiffs' position is that the clear language of art. 17.4 requires that a particular partner's conduct detract from the best interests of the firm. No such conduct, they submit, was identified in the minutes of the October 8 meeting. The plaintiffs also point to the July 8 meeting, where Messrs. Davidson and Crocker explicitly disavowed conduct and performance as justifications for Mr. Ludwig's proposed retirement.

[25] The plaintiffs argue that art. 17.4 should be interpreted in the context of the entire partnership agreement, with the effect that art. 17.4 should only be invoked for cases of "near cause". That is, they argue that art. 17.4 should be interpreted as complementary to art. 17.1, which lists all the grounds for expulsion for cause. Seen in this light, Mr. Ludwig submits that [page589] art. 17.4 "does not permit the discretionary winnowing of the ranks in an economic downturn".

[26] Mr. Ludwig also adverts to art. 15.1 of the BDO partnership agreement, concerning the compulsory retirement of partners: "Each Partner . . . shall retire, without notice, on his/her Compulsory Retirement Date". He points to the principle of construction that a specific provision will always override a general one. Accordingly, art. 15.1 of the agreement should take precedence over art. 17.4 in these circumstances, and Ludwig should be entitled to remain a partner until his compulsory retirement date on January 1, 2019.

[27] The plaintiffs quote Roderick I'Anson Banks, Lindley & Banks on Partnership, 19th ed. (London: Sweet & Maxwell, 2010), at 16-01, for the proposition that "the utmost good faith is due from every member of a partnership towards every other member". He accuses BDO of bad faith in the series of events that led to his expulsion: BDO's uncompromising stance at the initial meeting on July 8 ("this is not a negotiation"); the effective deprivation of his practice soon after this meeting, when he was told to reassign work to others; the policy board's failure to consider his submissions of September 25 in its decision to expel; and BDO's insensitive disregard for his professional reputation in the way he was expelled.

[28] BDO asserts that firm management identified Mr. Ludwig as suitable for removal from the partnership in or about July 2014 based on (i) the poor performance of the Edmonton office; (ii) the challenges that were anticipated to affect the Edmonton economy; (iii) Mr. Ludwig's underperformance, particularly in the areas of "business development activities". This determination was made "with the input of the Edmonton Office".

[29] BDO submits that "having identified Ludwig PC as the best option for separation from BDO", the firm then tried to negotiate an amicable departure with him. The July 8 meeting with Messrs. Davidson and Crocker is the first event in BDO's chronology of its attempts to negotiate this amicable departure.

[30] That negotiation evidently did not proceed as amicably as BDO hoped it would. In the BDO narrative of events, BDO only invoked art. 17.4 when Mr. Ludwig refused to accept the firm's power to require his resignation:

The Policy Board only invoked Article 17.4 because of Ludwig's intransigence during the negotiation period and the Plaintiffs' refusal to recognize BDO's power to compel the mandatory resignation. [page590]

[31] BDO submits that the ordinary principles of contractual interpretation support the policy board's decision to expel Mr. Ludwig from the partnership.

[32] First, it argues that the plain language of art. 17.4 gives the policy board the right, in its sole discretion, to compel the expulsion of a partner in the best interests of the firm.

[33] Second, it says that there is nothing in the factual matrix surrounding this case that allows for a deviation from the clear and ordinary language of the partnership agreement.

[34] Third, BDO argues that a commercially reasonable interpretation of the words "best interests of the partnership" comprehends the need to reduce personnel for purely economic reasons, without reference to the conduct of the particular partner selected for removal.

[35] Turning to the partnership agreement in context, BDO observes that art. 17.4 pertains to a requested resignation rather than a compulsory retirement. Accordingly, BDO submits that Mr. Ludwig's reliance on art. 15.1 is misplaced; his situation cannot be characterized as a compulsory retirement and therefore does not come within the ambit of art. 15.1.

[36] BDO asserts that the policy board exercised its discretion under art. 17.4 reasonably and in good faith. It relies on the Court of Appeal's decision in Greenberg v. Meffert (1985), 1985 1975 (ON CA), 50 O.R. (2d) 755, [1985] O.J. No. 2539, 18 D.L.R. (4th) 548 (C.A.), paras. 18-20, for the proposition that subjective standards can justify a discretion that is exercised when that matter to be decided is not readily susceptible to objective measurement.

[37] BDO submits that an assessment of Mr. Ludwig's tangible and intangible contributions to the partnership necessarily involved some degree of subjective assessment by the firm. The following passage from BDO's factum provides an illuminating insight into BDO's understanding of its discretion and the subjective standards which informed that discretion:

As part of a broader restructuring of its insolvency practice, BDO decided that the number of partners in the Edmonton Office had to be reduced. This decision was made by BDO and, after negotiations with the Plaintiffs failed, was ultimately carried out by the Policy Board on the basis of all the available information, including the economic situation in Edmonton, the decrease in insolvency work, the Plaintiffs' underperformance on tangible and intangible metrics, and the Plaintiffs' position during the negotiation process.

[38] BDO asserts that it discharged its obligation of utmost good faith to Mr. Ludwig and that, moreover, Mr. Ludwig has adduced no evidence of bad faith. In particular, Mr. Ludwig's submissions of September 25 did not provide any new evidence or sufficient information to persuade the policy board that [page591] Mr. Ludwig's continued membership was in the firm's best interests. Mr. Ludwig's position -- that he had discharged all of his obligations faithfully, that he had devoted his entire professional life to BDO and, as such, that there was no basis to expel him -- was not accepted by the policy board. That rejection, in and of itself, is not a sign of bad faith by BDO or a breach of its fiduciary obligations.

Hryniak and the "Best Foot Forward" Principle

[39] The relevant facts in this case are not in dispute and the parties agree that the matter is suitable for summary judgment. In the aftermath of Hryniak v. Mauldin, [2014] 1 S.C.R. 87, [2014] S.C.J. No. 7, 2014 SCC 7, motions for summary judgment in Ontario are informed by the "best foot forward" principle: the court will assume that the parties have put forward all the evidence that would be available at trial: Sweda Farms Ltd. v. Egg Farmers of Ontario, [2014] O.J. No. 851, 2014 ONSC 1200 (S.C.J.), paras. 32-34.

Law and Analysis

[40] The legal analysis in this case is governed by some common law principles and by certain provisions of the Ontario Partnerships Act, R.S.O. 1990, c. P.5.

[41] The most salient provisions in the Act are

s. 25: "No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners";

s. 28: "Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or the partner's legal representatives"; and

s. 45: "The rules of equity and of common law applicable to partnership continue in force, except so far as they are inconsistent with the express provisions of this Act."

[42] The relevant common law principles are conveniently assembled in Lindley & Banks on Partnership, a text accepted by both parties as authoritative in Canada.

[43] The cardinal principle in play goes to the proposition that, "since a true power of expulsion is expropriatory in nature, it will always be construed strictly". An expulsion from a partnership will always be expropriatory because "even if the expelled partner receives the full value of his share, he will still be deprived of future profits": Lindley & Banks, 19th ed., 10-123, n. 539. [page592]

[44] Another important consideration is that, because partners at a firm are fiduciaries inter se, "the utmost good faith is due from every member of a partnership towards every other member": Lindley & Banks, 16-01 An example of that general duty is reflected in s. 28 of the Partnerships Act, going to partners' obligations "to render true accounts and full information of all things affecting the partnership to any partner or the partner's legal representatives".

[45] A particular example of the general duty of good faith among partners concerns the exercise of discretion. Lindley & Banks observes, at 16-09, that "where a discretion is conferred on the management of the firm or on a majority of partners, a partner will normally be entitled to expect that it will be exercised rationally and in good faith and not arbitrarily or capriciously".

[46] A final general principle, relevant to fiduciaries' (and hence partners') obligations inter se, is that "the fiduciary who delegates or acts under dictation plainly fails to exercise the discretion entrusted to him": P.D. Finn, Fiduciary Obligations (Sydney: The Law Book Co. Ltd., 1977), at p. 25.

[47] Keeping these principles and provisions in mind, an appropriate starting point is art. 17.4 of the BDO partnership agreement. This provision provides the express power of expulsion that is required by s. 25 of the Partnerships Act.

[48] The text of art. 17.4 has been provided above but it is convenient to reproduce it here also:

If the Policy Board unanimously determines that it is not in the best interests of the Partnership for a particular Partner to remain in the Partnership, the Policy Board shall give notice in writing to the affected Partner, requesting such Partner to resign, and shall give notice to that effect to all the Partners and Designated Persons. Upon delivery of such notice by the Policy Board, the affected Partner shall be deemed to have resigned from the Partnership. The affected Partner shall be entitled to receive his/her Entitlement (to the extent applicable) in accordance with Article 11 as though s/he was a retired Partner at the date on which s/he is deemed to have resigned from the Partnership.

[49] Did the BDO policy board in fact make a unanimous determination on October 8, 2014 that Tim Ludwig's continued membership of the firm was no longer in the partnership's best interests, and, if so, was such a determination valid?

[50] A threshold question is whether the policy board even made a determination, in the sense contemplated by art. 17.4 of the partnership agreement, given Mr. Ludwig's uncontradicted evidence that he was told at the initial meeting on July 8 that the CEO required his retirement, and had the absolute right to demand it. This suggests that the decision to remove Mr. Ludwig from the partnership had been made as [page593] early as July 8, 2014, well in advance of the policy board's meeting some three months later.

[51] According to what Mr. Ludwig says he was told, what BDO now describes as a negotiation was in fact "not a negotiation". The die had already been cast.

[52] Indeed, as BDO's written argument acknowledges, "this decision [to reduce the number of partners in the Edmonton] was made by BDO and, after negotiations with the Plaintiffs failed, was ultimately carried out by the Policy Board" etc. (emphasis added). This assertion serves to confirm that the policy board, in its meeting on October 8, merely formalized a decision that had been made previously and by someone other than the policy board itself. There is no evidence as to what deliberations, if any, the policy board undertook at, or in advance of the October 8 meeting.

[53] There is also BDO's assertion that "the policy board only invoked art. 17.4 because of Ludwig's intransigence during the negotiation period and the Plaintiffs' refusal to recognize BDO's power to compel the mandatory resignation". What can this mean other than that the act of expulsion was a mere rubber stamp to a decision that had been taken much earlier?

[54] It is noteworthy that the CEO, Keith Farlinger, was present at the policy board meeting on October 8, 2014 -- evidently in a non-voting capacity -- and that he prefaced the decision to compel Mr. Ludwig's resignation with an allusion to the impact of the decline in the economic market on the FRS practice.

[55] All in all, there is persuasive evidence that the policy board essentially abdicated its power of expulsion in this case, or at least acquiesced in the usurpation of that power by parties disentitled to wield it. Partners in a firm are fiduciaries inter se and "the fiduciary who delegates or acts under dictation plainly fails to exercise the discretion entrusted to him". Mr. Ludwig's evidence gives rise to the strong suspicion that the policy board acted to expel Ludwig at the dictation of the CEO of the firm.

[56] Recall also the cardinal principle in cases of this kind that "since a true power of expulsion is expropriatory in nature, it will always be construed strictly". A strict construction of the power of expulsion accorded to the Policy Board by virtue of art. 17.4 clearly suggests that the Policy Board did not make a valid determination within the meaning of that article; the determination to expel had already been made in advance of the October 8 meeting. Accordingly, the decision to expel was invalid. It amounts to breach of contract, and breach of the partnership agreement. [page594]

[57] That, by itself, is enough to dispose of this case. Assuming for the moment, however, that the decision to expel was not pre-ordained, it is useful also to consider BDO's argument that the decision to expel was at the sole discretion of the policy board, and that it could be informed by subjective standards of assessment.

[58] The potential for the abusive use of the power to expel a partner was recognised over 170 years ago by Sir William Page Wood V-C in Blisset v. Daniel (1853), 10 Hare 493, 68 E.R. 1022. In that case, a partnership agreement contained a clause empowering the holders of at least two-thirds of the partnership shares to expel a partner, Mr. Blisset, without cause, and to purchase his shares at a value stipulated in the agreement (which excluded any account of future profits). The vice-chancellor concluded that the decision of the majority in that case was prompted by the personal grievance of one partner, who alleged misconduct against Blisset, rather than by the best interests of the firm as a whole. Furthermore, the effect was to enable the majority to purchase Blisset's share at a favourable price. The expulsion was declared void because the expelling partners had not acted honourably.

[59] In his reasons, the vice-chancellor stated (at p. 505 Hare) that "everything will be construed in a Court of Equity strictly against the partners exercising the power of expulsion". "If cause be not shewn and proved", observed the vice-chancellor (at p. 522 Hare), "then it must be very clearly made out that the exercise of the power [to expel] has been in good faith".

[60] No evidence has been offered by BDO that would allow the court to assess the exercise of the policy board's discretion according to a subjective standard. A subjective standard is, by hypothesis, still a standard, and must be controlled by some criteria. Even a decision made according to subjective standards, and informed by "intangible metrics", still requires some evidence that would allow the court to inspect the propriety of that decision. To say otherwise -- to allow BDO to invoke a subjective standard with no evidence in support -- would make a mockery of the general principle that a power of expulsion in a partnership will be construed very strictly, and would effectively convert the power of expulsion in the BDO partnership agreement into a free and virtually unfettered discretion. BDO has placed no evidence before the court in support of its extremely bald assertions that the Edmonton office in general, and Mr. Ludwig in particular, were underperforming.

[61] While "it is theoretically possible to frame a ground of expulsion which requires a degree of subjective judgment by the [page595] other partners . . . this is not generally to be commended". Furthermore, courts will "almost inevitably scrutinise the ground relied on and may conclude that the partners are obliged to take a aereasonable' view of the expelled partner's conduct": Lindley & Banks on Partnership, 10-120.

[62] BDO's assertion that the policy board has an unfettered discretion when making a determination about the best interests of the partnership under art. 17.4 of the partnership agreement cannot be reconciled with the requirement that the discretion to expel a partner must be exercised rationally and in good faith, and not arbitrarily or capriciously.

[63] In Wood v. Woad (1874), L.R. 9 Ex. 190, a power of expulsion was given to the committee of a mutual insurance society to expel a member of the society "if the committee shall at any time deem the conduct of any member suspicious, or [if they deem] that such member is for any other reason unworthy of remaining in this society". The committee expelled the plaintiff from the society on the alleged ground that his conduct was suspicious. The Court of Exchequer held that, the language of the society's rules notwithstanding, the discretion to expel a member was not unfettered. According to Lord Chief Baron Kelly, at p. 198:

. . . it was incumbent on [the committee] to give the partner the opportunity of stating his case, and that to act without giving him that opportunity was wholly wrongful and unlawful. The decision . . . was absolutely void, and did not cause the plaintiff to cease to be a member of the partnership.

[64] While there is evidence in the record of negotiations between BDO and Mr. Ludwig in the summer and fall of 2014, there is no evidence that the policy board notified the plaintiffs in advance of its meeting on October 8, 2014 that it would be deciding whether or not to compel Mr. Ludwig to resign. Nor was Mr. Ludwig afforded an express opportunity to be heard by the policy board.

[65] In Russell v. Russell (1880), 14 Ch. D. 471, a partner sought a declaration that a notice given by his partner, the defendant, purporting to terminate the partnership, should be declared void because of the latter's allegedly fraudulent conduct. The court declined to grant the relief sought by the plaintiff. In doing so, however, Lord Jessel M.R. considered the earlier decision in Wood v. Woad, and in particular the analysis in that case of the clause in the defendant's rules purporting to confer upon the committee the power to "deem" a member's conduct to be suspicious, or that such member was for any other reason unworthy of continued membership of the society. Noting that the word "deem" has more than one meaning, and that one of its [page596] meanings is to adjudge or decide, the Master of the Rolls continued (at p. 479 Ch. D.):

. . . the old word "deemster" or "dempster" was the name for judge. To "deem" at one time meant to decide judicially. Consequently, taking that meaning, what [the committee in Wood v. Woad] had to do was to "deem" that the member's conduct was suspicious and such as made him unworthy. That was in fact a decision not merely depending upon opinion, but depending on inquiry. No one could suppose that it was to be left to the caprice of the members of the committee to stigmatise as dishonourable or dishonest any member of the society. Of course it was not. It was intended that they should be satisfied by something like reasonable evidence that his conduct was unworthy.

[66] The expulsion clause in Wood v. Woad is different from the one in the present case because it pertained to suspicious conduct rather than "the best interests of the partnership". Nevertheless, the words "determine" in this case and "deem" in Wood v. Woad are analogous. "Determine" has a dictionary meaning very similar to "deem". Among the definitions of "determine" offered by the Oxford English Dictionary is "to come to a judicial decision" and "to conclude from reasoning, investigation etc."

[67] Lord Jessel M.R. concluded that the power of expulsion in Wood v. Woad could only be exercised on the basis of reasonable evidence, which presumptively imports an objective standard. BDO asks to court to accept the policy board's ability to decide according to subjective rather than objective standards. Assuming that the policy board could so act in a subjective way, its determination to expel should surely have been, in Lord Jessel's words, "a decision not merely depending upon opinion, but depending on inquiry". BDO has furnished the court with no evidence of its relevant inquiries about Mr. Ludwig's alleged underperformance nor of any "determination" to expel made according to the strict standards expected in this area of partnership law. A mere vote to confirm a decision that had already been made, on the basis of information that has not been made available to the court, is not a "determination" in the sense required by art. 17.4 of the partnership agreement.

[68] In the absence of cause, good faith on the part of the expelling partners is a sine qua non. How is good faith to be shown? The expelling partners in Blisset v Daniel might have demonstrated their bona fides on the facts of that case if they had afforded Mr. Blisset an opportunity to state his position. Blisset stands for the proposition that if an expulsion is instigated by one aggrieved partner alone, who seeks to persuade a relevant majority to concur in the expulsion, the expellee should have the opportunity of stating his case to the other partners wielding the power of expulsion. The general point is [page597] that, even if not strictly required, affording the expellee a right to be heard is an indication of good faith on the part of the expelling partners and might cure an otherwise defective procedure.

[69] That general point is developed in Lindley and Banks on Partnership, at 10-128. Three salient conclusions emerge for the purposes of this case:

1. A partner need not be given an opportunity to explain his conduct where all the partners entitled to exercise the power of expulsion independently form the view that grounds for expulsion exist;

2. Where one or more partners seek to persuade the others that grounds for expulsion exist, prudence dictates that the partner to be expelled should in all cases be given an opportunity to state his case, even if this is not always strictly required as a matter of law. This will be particularly appropriate in a large firm, where the partners may have little knowledge of each other's circumstances, much less of the grounds for a proposed expulsion;

3. An opportunity for explanation should always be given where the relevant grounds for expulsion are framed in purely subjective terms.

(Emphasis added)

[70] On the facts of this case, there is no evidence that the seven members of the policy board independently formed the view that Ludwig should be expelled. In fact, all the evidence is in the other direction, to the effect that the members of the policy board did not form their views independently but rather as a common response to a decision that had already been made.

[71] Furthermore, the evidence suggests that the CEO, Mr. Farlinger, having determined that Mr. Ludwig should go, sought to persuade the policy board that Mr. Ludwig should be expelled (assuming he did not dictate that outcome to the board). On that account, prudence required that Mr. Ludwig should have had the opportunity to state his case, an especially important consideration in a large firm such as BDO.

[72] Going to the third of the points above, it is debatable whether BDO seeks to justify Mr. Ludwig's expulsion in purely subjective terms, or merely partially subjective terms. The subjective component is emphasized so strongly in BDO's argument that, once again, prudence surely required that Mr. Ludwig be given an opportunity to be heard.

[73] It is clear that he was given no such opportunity. In the letter of September 25, 2014, written on Mr. Ludwig's behalf to Mr. Farlinger, and copied to Ken Davidson, chair of the policy board, Mr. Ludwig's lawyer provided three reasons for the proposition that art. 17.4 could not be invoked to justify Mr. Ludwig's expulsion from the firm. The minutes of the policy board's meeting on October 8 make no reference to this letter and there is no [page598] evidence that the members of the policy board turned their minds to Mr. Ludwig's argument before they voted to expel. No evidence was provided by BDO from anyone who attended that meeting. Consequently, I conclude that Mr. Ludwig was given no meaningful opportunity to be heard by the policy board in this case.

[74] The case law shows that affording to an expellee an opportunity to be heard can be a powerful demonstration of good faith by the expelling partners. Remember that, in the words of Page Wood V-C, "if cause be not shewn and proved then it must be very clearly made out that the exercise of the power [of expulsion] has been in good faith". In Blisset v. Daniel, providing an opportunity to be heard might have gone some way to showing that the expulsion in that case was not actuated by the improper motives of one aggrieved partner.

[75] In the instant case, affording Mr. Ludwig a meaningful opportunity to be heard might have shown that the policy board approached their determination to expel fairly and with an open mind. It would have gone some way to dissolve the taint, otherwise powerfully suggested by the evidence, that the outcome of their determination had been impermissibly predetermined.

[76] I have already found that the policy board's determination was predetermined before the meeting of October 8 and therefore invalid. Even if I had not made that finding, however, BDO has furnished the court with no evidence that the policy board made its determination to expel in the best interests of the partnership. There is simply no evidence to allow an assessment of the policy board's discretion according to either an objective or a subjective standard. Nor has BDO offered any evidence that the power of expulsion was exercised scrupulously, and in good faith. Construing everything strictly against the partners exercising the power of expulsion, as I am obliged to do, I would find that the decision to expel was invalid even absent my previous conclusion that it was predetermined.

[77] None of this is to suggest that the policy board could not expel a partner, without cause, if it relied on evidence demonstrating that such an expulsion would be in the best interests of the partnership as a whole. Plainly, the board is competent to make that determination when it has reasonable grounds to act, and when it does so in the utmost good faith.

Remedy

[78] The plaintiffs outline their position on damages, in paras. 43-59 of their factum. BDO took no position on damages in its factum and, in argument, did not contest the plaintiffs' analysis. [page599]

[79] As a threshold matter, it should be noted that "the doctrine of repudiation has no application to partnerships" and that "the service of an invalid expulsion notice can never amount to a repudiatory breach of the partnership agreement": Lindley & Banks, 10-132.

[80] The law on remedies for expelled partners is otherwise rather unclear. Lindley & Banks, at 10-131, records that it has been held that "since service of an invalid notice of expulsion does not affect the recipient's status as a partner, he cannot claim damages against his co-partners for wrongful expulsion". This extremely formalistic view is based on the proposition that an invalid expulsion does not affect the expellee's status, which continues on as before.

[81] It only takes a moment's thought to see how unrealistic a proposition that is in practice.

[82] In fairness, the current editors of Lindley & Banks, at 10-131, agree with the conclusion by the editors of the seventh edition that "if a partner has been in fact wrongfully expelled and damnified, it is not easy to see why an action for damages should not lie". They see no reason why an expelled partner should not recover damages for loss of reputation although they think that, generally, "cases in which a recoverable loss can be proved are likely to be rare".

[83] But even that view, giving the expellee a remedy for loss of reputation alone, is rather unrealistic. It is premised on the assumption that the expelled partner can simply resume work at his or her firm and carry on as before. That assumption does not comport with the facts of this case. Mr Ludwig is 62 years old and reaching the end of his career. He has been unceremoniously -- I use the word advisedly -- ejected from his firm. His practice has been absorbed by others. His complaints about the manner of his expulsion have gone unheeded. It is unrealistic and unfair to expect Mr. Ludwig to rejoin BDO firm and carry on as before.

[84] Mr. Ludwig does not seek a dissolution of the partnership. He requests damages on the expectation principle, seeking to be placed in the position he would be in had the contract of partnership been performed: Western Larch Ltd. v. Di Poce Management Ltd. (2013), 117 O.R. (3d) 561, [2013] O.J. No. 5448, 2013 ONCA 722, para. 73, referring to S.M. Waddams, The Law of Contracts, 6th ed. (Aurora, Ont.: Canada Law Book Inc., 2010), at p. 548. On that basis, he seeks compensatory damages for his lost profit allocation, under the BDO profit-sharing arrangement, to which he would have been entitled had he worked to his compulsory retirement date under the partnership [page600] agreement, January 1, 2019. In addition to this sum, $1,233,739, Mr. Ludwig seeks $61,198 in additional retirement benefit that would have accrued to him had he retired on the compulsory retirement date.

[85] To his credit, Mr. Ludwig does not seek punitive damages. Although he complains of a breach of good faith by BDO, Mr. Ludwig accepts that the firm's behaviour does not meet the threshold of conduct that would attract punitive damages that has been described by the Supreme Court of Canada in Vorvis v. Insurance Corp. of British Columbia, 1989 93 (SCC), [1989] 1 S.C.R. 1085, [1989] S.C.J. No. 46.

[86] Mr. Ludwig does, however, seek aggravated damages of $100,000 because of the harm to his reputation that was entailed by his expulsion. Aggravated damages are meant to compensate plaintiffs for intangible harms -- such as humiliation, shame and degradation -- that they suffer as a result of reckless or intentional conduct by defendants: Plester v. Wawanesa Mutual Insurance Co., 2006 17918 (ON CA), [2006] O.J. No. 2139, [2006] I.L.R. 4539 (C.A.), para. 64.

[87] Mr. Ludwig contends that he suffered embarrassment and reputational harm because of his expulsion, and that BDO was reckless with respect to these consequences in the way it managed and communicated his expulsion to the rest of the firm.

Mitigation

[88] Neither party has raised the issue of mitigation. However, I mention it because of Mr. Ludwig's uncontradicted evidence that, at the July 8 meeting, Blair Davidson indicated that BDO would be invoking the non-competition clause in the partnership agreement against him following his compulsory resignation.

[89] Normally, in case involving breaches of employment contracts, a former employee's ability to mitigate his or her damages by seeking alternative employment is an important consideration in assessing the quantum of his or her damages award. Those considerations do not neatly transpose to the circumstances of this case, where we are dealing with a partnership agreement rather than a contract of employment. Nevertheless, in assessing the quantum of Mr. Ludwig's award, regard should be had to Mr. Ludwig's ability to mitigate his losses by seeking alternative work or employment.

[90] The non-competition clause is relevant in this regard because it deprived Mr. Ludwig of the opportunity to make a living in his profession. As Mr. Belzil, Q.C., put it eloquently at the conclusion of oral argument, the combined effect of the [page601] compulsory resignation and the non-competition clause meant that Mr. Ludwig's professional career was effectively over. Accordingly, Mr. Ludwig was not in a position to mitigate his damages -- including embarrassment and reputational harm because of his expulsion -- by seeking and obtaining alternative professional employment or remuneration. Mitigation considerations should therefore not reduce the quantum of his damages.

Result

[91] The plaintiffs are entitled to damages of $1,233,739 for the lost profit allocation, under the BDO profit-sharing arrangement, to which Mr. Ludwig would have been entitled had he worked to his compulsory retirement date under the partnership agreement. In addition to this sum, they should receive $61,198, reflecting additional retirement benefit that would have accrued to Mr. Ludwig if he had retired on the compulsory retirement date.

[92] In making these awards, I have not sought to distinguish between the corporate and individual plaintiffs. However, I can be spoken to if either party takes the position that it is necessary to make such a distinction (any request in this regard to be made on or before April 11, 2016).

[93] In addition, I am of the view that the circumstances of Mr. Ludwig's removal, including the "negotiation" that was not, in fact, a negotiation (at least vis-à-vis the fundamental issue of the termination of Mr. Ludwig's partnership), the unilateral announcement of his "retirement" by BDO, his subsequent ejection ("deemed" resignation) from the partnership and BDO's invocation of the non-competition clause in the partnership agreement, warrant an award of aggravated damages reflecting the embarrassment and reputational harm which he experienced. I fix those damages at $100,000.

[94] I am presumptively of the view that the plaintiffs should receive their costs of this motion and of the action. If counsel cannot agree on costs, they may file costs summaries, and written submissions of not more than four pages each in length, addressing both the scale and quantum of costs by April 15 (plaintiffs) and April 22 (defendant).

Action allowed.

[page602]

End of Document