A Guide to Partnership Disputes in Toronto

They say that “two heads are better than one”, and in the case of business partnerships, it makes sense. After all, pooled capital resources present bigger investment opportunities, and a diverse set of expertise can mean more innovative approaches. It’s no wonder that business partnerships are so prevalent in the Toronto business world and beyond. But what happens when partners’ interests diverge? 

Break-ups of any kind are difficult — never mind the division of assets or costly financial breaches. This is what you need to know about partnership disputes in Toronto, the rest of Ontario, and elsewhere in Canada.

Business partnerships can be:

• General. A general partnership means that all partners are equally responsible for managing the company — and for the venture’s liabilities and other obligations. Partners share both the profits and liabilities of the business — each partner can be personally sued for debts or other obligations of the business.
• Limited. A limited partnership has general and limited partners. The (one or more) general partners run the company and have unlimited liability, whereas the (one or more) limited partners tend to be investors with limited liability who do not typically partake in everyday operational management — i.e., they are “silent” partners. LPs are commonly set up with the general partner being a corporation with limited partners who are individuals. Should a limited partner become involved in operations, their liability will become the same as the general partner’s.
• Limited Liability. A limited liability partnership allows partners to protect their individual, private assets and is commonly used by professional services where the practitioners’ commercial activities don’t have much overlap.  

In Ontario, general and limited liability partnerships are governed by the provincial Partnerships Act, whereas limited partnerships are governed by the Limited Partnerships Act. Partnerships in other provinces are governed by their respective provincial partnership statutes.

Understanding Partnership Disputes

Sadly, there comes a time in many ventures when continuing the partnership is no longer in the best interest of all the parties, and the business is affected by the divergence. The cause could be any number of events, including but not limited to:

• Breach of Partnership Agreement. Partnership agreements set out the partners’ contractual obligations to each other and to the business. If one partner breaches an integral provision of the agreement, it could trigger the termination of the partnership and/or claims of damages by the other partner(s).
• Breach of Fiduciary Duty. Members of a partnership have a special duty to place the interests of the partnership above their own, individual interests. A partner can breach their fiduciary duty in a number of ways, including:
  • Misappropriating/embezzling funds or assets from the company
  • Committing theft of company property
  • Breach of company bylaws, shareholder or other agreements
  • Unauthorized use or sharing of private or otherwise confidential information
  • Failing to disclose a conflict of interest or other material information that affected the partnership 
  • Negligent actions, misconduct, or serious mismanagement
• Change in Partners. If a partner ends their membership pursuant to provisions of the partnership agreement, there is usually no harm, no foul. However, if they have violated the agreement and abandoned the partnership, especially if their withdrawal has harmed the business, there could be serious legal ramifications. There are (or should be!) usually mechanisms available in partnership agreements to deal with the expulsion of a partner and other scenarios.

It could simply be financial disagreements or that the partners no longer share the same business interests. Sometimes terminating the partnership is an amicable, mutual decision, but a dispute may arise in the midst of winding down — for example, if the business property isn’t divided to the satisfaction of the former partners.

Whatever the reason, unresolved disputes can have a highly detrimental effect on the business and its ability to operate. Lingering hard feelings and resentments can jeopardize professional and personal relationships. That’s why it is important to deal with the dispute as soon as possible. Time is money — time wasted disagreeing is money not being made.

Solutions for Partnership Disputes

Disputes could be resolved in a number of ways, including:

• Amendments to the partnership agreement
• Buying out a partner (who may or may not be subsequently replaced) and continuing the partnership
• Terminating the partnership and winding down the business

Depending on the provisions of the partnership agreement and the nature and severity of an impugned partner’s actions, the matter could be dealt with:

• By agreement of the partners (and pursuant to the partnership agreement)
• Through negotiated resolution (mediation, arbitration, as agreed upon by the partners)
• In court by way of lawsuits for injunctions, damages awards, and other relief

Litigation should really be the last resort. It’s expensive and adversarial, and outcomes are impossible to guarantee. 

Ideally, the partnership can be salvaged with honest, open dialogue — that is always the best first step. For many parties, structured negotiation can be a highly effective solution that not only fosters relationship building but avoids the time sink and excessive costs of litigation. A seasoned lawyer will bring sound negotiation strategies, including staying open-minded, solution-driven, and working collaboratively, so that parties can resolve their conflict while achieving the best outcomes. 

If negotiation doesn’t end the stalemate, alternative dispute resolution — mediation and/or arbitration — is available. Both tend to be more cost-effective than going to court, and proceedings are less formal. 

With mediation, a neutral third-party professional is hired by the parties to facilitate communication in the hopes that the partners will come to a mutually beneficial solution. With an experienced, impartial mediator, the process does not pit parties against each other. Parties are encouraged to find common ground. And since the agreement isn’t binding unless entered into court, parties may feel less pressure to dig in their heels. 

With arbitration, the third-party arbitrator isn’t there to help the parties work things out themselves but to determine the outcome based on what the parties have presented. In many cases, business contracts set out arbitration as the dispute resolution mechanism in lieu of court, meaning that unless there was an irregularity in the process, the parties are bound by the arbitrator’s decision.

Of course, there is the litigation option. Going to court can be extremely expensive and time-consuming — complex cases can take years even just to get to trial. Parties will have to deal with document discovery, depositions, and other pre-trial processes. After weighing the evidence and considering the law, the court will make a decision about issues like who’s at fault, whether the partnership should be terminated, and legal remedies for aggrieved parties. There may be appeals and other matters even after the final disposition of the case.

The Impact — and Importance — of the Partnership Agreement

Technically, a partnership agreement is not required by the partnership legislation to form a partnership, but this document provides the integral framework and terms that will govern the partnership. A proper partnership agreement drafted by a competent legal professional clearly sets out information such as:

• The nature and details of the business partnership
• The liability of partners and the limited liability of limited partners
• Roles, responsibilities, and authorizations of each partner
• Term of the partnership agreement
• Fiscal dates
• Capital contributions of each partner
• Distribution of profits among partners
• Sharing of losses among partners
• Process for amending the partnership agreement, adding or removing partners, dissolving the partnership, and distributing assets at dissolution
• Dispute resolution mechanisms
• Governing laws/counterparts

Having a comprehensive partnership agreement in place provides not only certainty, which can actually help to prevent partnership disputes, but also helpful guidance and resolution possibilities in the case of a partnership dispute. 

Legal Help Options

Business disputes can come with high stakes. It is important for the parties to have legal representatives to clarify issues and ensure fairness. Litigation lawyers represent clients in business disputes and partnership disputes arising from breaches of fiduciary duties and issues in day-to-day operations. Allan Rouben has the expertise and know-how to provide quality legal assistance tailored to your best interests. We resolve disputes under the Partnerships Act, utilizing partnership agreement reviews and other dispute resolution strategies.

Contact us today. The faster you can resolve your partnership dispute, the faster you can get back to growing your business and cultivating your success.

Partnership Disputes FAQs