Two Person Partnerships

June 17th, 2014 by

two-person partnershipMichelle Stephenson, Summer Law Student

A recent Ontario Court of Appeal decision Greenaway v. Sovran, is a good illustration of what happens when one partner in a two-partner firm decides to leave the firm, and more importantly, the importance of obtaining legal advice when individuals or businesses enter into contracts.

In Greenaway, the parties were the two partners in an accounting business. One partner, the appellant, gave notice to the other that at the end of the year he would be terminating their partnership and continuing his business separately, citing his dissatisfaction with the respondent’s behaviour.

A dispute arose over whether the appellant had “withdrawn” from the partnership, in which case a clause in the partnership agreement would be triggered that would greatly reduce his capital, based on the clients transferring their business to him when he left.
Based on the firm’s billing, if the clause was applied it would result in a reduction of the appellant’s capital account by around $1,000,000 if he independently serviced all of his previous clients.

The issue turned on the interpretation of the partnership agreement, which was poorly drafted without legal assistance and largely copied from an American precedent one of the partners had obtained at a conference.

In the boilerplate contract used by these partners, the section of the agreement dealing with dissolution and withdrawals of partners of the firm was largely phrased as though it were a multi-partner firm which would continue after the withdrawal of one or more partners. There was nothing addressing the situation at hand, with one of only two partners withdrawing.

The respondent, who sought to enforce the clause, had argued that by giving notice of his withdrawal, the appellant had retired from the partnership, and thus triggered the clause. However, the Court found that the appellant had merely given notice of the impending dissolution of the partnership. The Court felt that to enforce the clause in this case would set a poor precedent, as if it did so, dissatisfied partners would have to choose between remaining tied to the other partner or forfeiting their business to him, without the option of simply parting ways.

Ultimately, it was established that when a two-member firm dissolves, the firm ceases to exist and the ex-partners are each free to pursue their own practices so long as there is no valid contractual term preventing it. As there was no contractual term in this case, it was reasonable to conclude that the parties should be limited to their common law and statutory rights, nothing more.

From the perspective of the partner who wished to enforce the clause, this is a clear example of how obtaining legal advice in drafting business contracts can be necessary in order to have desirable, enforceable rights down the road.

Link to the full decision here.

For more topics like these, please check out our other Corporate/Business Law blogs or if you need help regarding any business related matters, please contact our Business and Corporate group at 416-446-1400.

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