The recent case of Ioannidis v. Ioannidis is a useful reminder of the legal implications of carrying on business in a partnership, even between family members.
The Three Legal Elements Essential to a Partnership
Before reviewing the case, it is helpful to remember when someone will generally be deemed to constitute a “partner” for the Partnerships Act. In referring to that statute, case law has held that a partnership requires three essential elements: “(i) a business, (ii) carried on in common, and (iii) with a view to profit” (see Backman v. Canada). Case law has also clarified that an intention among co-owners of a building “to acquire, hold, and sell” that building “for profit” does not in and of itself make them partners (see Hornstein v. Kats et al.). Instead, “partnerships arise from contract,” and so consideration must be given to the “true contract and intention of the parties appearing from all the facts of the case” (see Hornstein).
Section 3 of the Partnerships Act sets out several rules to consider in determining whether a partnership exists. For example, it specifies that the form of ownership of property generally does not create a partnership, nor does the sharing of gross returns.
Family Partnership Leased Property in Kingston and the Sale of that Property by One of The Partners
The Ioannidis case concerned several brothers who were in a business partnership that included leasing a property in Kitchener. After time passed, only two of the brothers, Steve and Peter, and the wife of another brother, Maria, remained in the partnership. Legal title to the Kitchener property was held solely in Steve’s name, though he held it in trust for himself and his partners. The partners had no written partnership or trust agreements.
In 2014, the partners met with other family members as Peter wanted to discuss what to do with the Kitchener property. According to Steve and Maria, Peter stated at this meeting that they had to “buy him out or he would buy them out.” Peter’s evidence, however, was that he only wanted to discuss the future of the property at that meeting. However, His evidence confirmed that at a subsequent meeting that year, he stated to Steve and Maria “that he wanted to be bought out or he would buy them out” of the property. In any event, Steve and Maria testified they were left with the impression from Peter’s comments that Peter had “other uses” for his share of the proceeds from the sale of the property “and he wanted the money by the end of June 2014.”
Steve signed a listing agreement with a real estate agent for the Kingston property. Two entities made offers to purchase. Eventually, a sale price of $1.725 million was accepted without discussing the price with either Peter or Maria. Peter was “very upset when he heard about the sale” and wanted his brother to cancel it, but Steve refused. It was admitted that Peter did not authorize “either the listing for sale” or the sale price. Peter brought a claim for damages based on allegations of breach of fiduciary duties and negligence.
Partner’s Statement Wanted Other Partners to Buy Him Out to Dissolve the Partnership
The Court first set about to determine if Steve and Maria owed a fiduciary duty and had breached it. The Court concluded that the partnership was effectively ended when Peter stated at a meeting in 2014 that he wanted them to buy him out or else have him buy them out. The Court referenced section 32(c) of the Partnerships Act, which provides that a partnership is dissolved “if entered into for an undefined time, by a partner giving notice to the … others of his … intention to dissolve the partnership.” The Court concluded that Peter’s mere utterance of the words “buy me out or I will buy you out” met the requirement of section 32, such that the partnership was dissolved, leaving its affairs to be wound up. The question then became whether the partners’ fiduciary duties continued even after the partnership’s dissolution.
General Duties Owed by Partners to One Another
The Court noted several general principles that apply to partnerships. These are worth repeating:
- The rights and duties of partners are governed by the Partnerships Act where there is no written partnership agreement among them;
- Partners owe one another “duties of loyalty, utmost good faith and avoidance of conflict and self-interest;”
- Partners have a “strict duty” of disclosure, which requires them to disclose “full information of all things affecting the partnership;” and
- Partners owe one another a duty to account.
Duties May Continue Even After Dissolution
Ultimately, the Court concluded that the fiduciary duties owed by the partners remained in effect until the partnership’s business was wound up and the Kitchener property was sold. After finding evidence of “trust, confidence and vulnerability” among the partners, it drew this conclusion. It noted that Peter was vulnerable to and dependent on Steve since the legal title to the Kingston property was in Steve’s name alone.
The Court then considered which fiduciary duties the defendants may have breached. It determined that, in failing to “disclose full information” to Peter concerning the sale of the Kitchener property, Steve had breached his duty to “render true accounts and full information of all things affecting the partnership” (section 28 of the Partnerships Act).
Peter also argued that unanimous consent of the partners had been required to sell the Kingston property; however, the Court concluded this was not the case since section 38 of the Partnerships Act “contemplates partners being able to continue to bind each other as necessary to wind up the affairs of the partnership.”
Court Finds No Damages Should Be Awarded for Breach of the Duty of Full Disclosure
The Court ultimately noted that since Steve had sold the Kitchener property “without full disclosure,” he was legally obligated to account for the sale fully. This obligation was imposed under section 29(1) of the Partnerships Act. However, the Court concluded that the property sale had not been “improvident,” as Steve had acted reasonably in taking steps “to obtain the fair market value” of the property. Further, the price paid had been “adequate.” The Court also expressly indicated that it did not find Steve and Maria had acted “for personal gain or benefit,” and there was no evidence of “fraudulent conduct.” As such, no damages were assessed in relation to the breach of the duty of full disclosure.
The court declared, among other things, that each of Peter, Steve, and Maria was entitled to 1/3 of the “balance of the net sale proceeds” from the sale of the Kitchener property.
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