Back

Defendants in Partnerships

August 12, 2021

Ontario

,

Canada

Issue

Is it appropriate to name both a general partnership and its individual partners as defendants in an action?

Conclusion

A proceeding by or against two or more persons as partners may be commenced using the firm name of the partnership (r.8.01(1)). Subrule (1) extends to a proceeding between partnerships having one or more partners in common (r.8.01(2). Where a proceeding is commenced against a partnership using the firm name, the partnership’s defence shall be delivered in the firm name and no person who admits having been a partner at any material time may defend the proceeding separately, except with leave of the court (r.8.02). In a proceeding against a partnership using the firm name, where a plaintiff or applicant seeks an order that will be enforceable personally against a person as a partner, the plaintiff or applicant may serve the person with the originating process, together with a notice to alleged partner (Form 8A) stating that the person was a partner at a material time specified in the notice (r.8.03). (Rules of Civil Procedure)

In a general partnership, any partner may participate in the management of the business, including binding the others with respect to the business of the partnership. Perhaps more important, every partner in a general partnership is fully liable for the obligations of the partnership. A limited partnership, meanwhile, consists of one or more general partners and one or more limited partners. Only the general partners manage the business. Provided there is compliance with the statutory requirements of the relevant jurisdiction with respect to formation, registration and other matters discussed in this book, the limited partner is only liable to the extent of his capital contribution or, in some jurisdictions, capital agreed to be contributed. (Tancho-Defyrus (GP) Inc. v. Masotti)

The leading case in respect of whether an action may properly be commenced against both the partnership and the individual partners is Wabi Iron Works Ltd. v. Patricia Syndicate, in which the court held that it was illogical to do so. That is, by beginning an action against the partnership the action is in fact being taken against all partners, and so it is not necessary to name any one of them as a party again. More recent cases have held that it is appropriate to name both a partnership and a specific partner as defendants when there is a cause of action specific to the partner that is independent of the cause(s) of action for which the plaintiffs seek to hold the partnership liable as a whole. These cases have developed from the principle that every partner is an agent of the other partners for the purpose of the business of the partnership, so that the acts of every partner in the usual course of its business bind the entire partnership. The antithesis is that it is appropriate to name an individual partner when there are acts alleged for which the partnership would not be liable. Typically, these would be acts of the individual which are outside the usual course of the partnership business. (IAP Claimant K-10106 v. Nelligan O’Brien Payne LLP)

Pursuant to ss. 10 (2) – (4) of the Partnerships Act, claims against limited partnerships do not create personal liability for the partners who are not themselves negligent. (Maisonneuve et al. v. Langlois et al.)

Rule 8 does not create new legal liabilities for limited partners, who are governed by the LPA. The fact that a Limited Partner Subscriber could become liable to pay a limited partnership obligation at some point does not generate a cause of action. Seeking enforcement under Rules 8.03 and 8.06 against the assets of the limited partners by a creditor of a limited partnership would be contrary to the applicable principles and legislation governing limited partnerships. (Forvest Trust S.A. v. The Devine Entertainment Film Library Limited Partnership)

An individual partner who is alleged to be a wrongdoer can be named as a party defendant along with the partnership. (Drabinsky v. KPMG; CC&L Dedicated Enterprise Fund (Trustee of) v. Fisherman; General electric capital Canada Inc. v. Deloitte & Touche LLP)

A plaintiff may choose to bring a proceeding in the name of a partnership or in the name of the individual partners, but it is improper to do both, unless there is independent tortious conduct alleged against the individual partner. (Canadian Imperial Bank of Commerce v. Deloitte & Touche)

In Moffat v. Wetstein, the plaintiffs brought an action against the defendants based on professional and taxation services provided by the defendants to the plaintiffs regarding certain investments. The plaintiffs were represented by a law firm and by a former partner at the firm, who was also a former partner in the defendant accounting firm at the time that the conduct complained of took place (although he was not himself involved in the conduct). Granger J. held that by virtue of rule 8.01 and rule 8.02, when the lawyer issued a claim against the limited partnership he was suing all of its partners at the time of the alleged wrongdoing, and so he had essentially sued himself as his liability as a partner was subsumed in the action, and so was in an actual conflict of interest position.

Law

Rule 8.01 of the Rules of Civil Procedure, RRO 1990, Reg 194 provides:

PARTNERSHIPS
8.01 (1) A proceeding by or against two or more persons as partners may be commenced using the firm name of the partnership. R.R.O. 1990, Reg. 194, r. 8.01 (1).

(2) Subrule (1) extends to a proceeding between partnerships having one or more partners in common. O. Reg. 535/92, s. 4.

Rule 8.02 speaks to how a claim against a partnership is to be defended:

DEFENCE
8.02 Where a proceeding is commenced against a partnership using the firm name, the partnership’s defence shall be delivered in the firm name and no person who admits having been a partner at any material time may defend the proceeding separately, except with leave of the court. R.R.O. 1990, Reg. 194, r. 8.02.

Rule 8.03 provides the mechanism for notification where enforcement is sought against an alleged partner:

NOTICE TO ALLEGED PARTNER WHERE ENFORCEMENT SOUGHT AGAINST PARTNER
8.03 (1) In a proceeding against a partnership using the firm name, where a plaintiff or applicant seeks an order that will be enforceable personally against a person as a partner, the plaintiff or applicant may serve the person with the originating process, together with a notice to alleged partner (Form 8A) stating that the person was a partner at a material time specified in the notice. R.R.O. 1990, Reg. 194, r. 8.03 (1).

(2) A person served as provided in subrule (1) shall be deemed to have been a partner at the material time, unless the person defends the proceeding separately denying that he or she was a partner at the material time. R.R.O. 1990, Reg. 194, r. 8.03 (2).

Rule 8.06(2) provides for the enforcement against any person who was served with the notice under r.8.03 and who was deemed to have been a partner, admitted having been a partner, or was adjudged as having been a partner at the material time. 8.03(3) provides for a party to seek leave if they wish to enforce against a person not served as an alleged partner:

Against Partnership Property

8.06 (1) An order against a partnership using the firm name may be enforced against the property of the partnership. R.R.O. 1990, Reg. 194, r. 8.06 (1).

Against Person Served as Alleged Partner

(2) An order against a partnership using the firm name may also be enforced, where the order or a subsequent order so provides, against any person who was served as provided in rule 8.03 and who,

(a) under that rule, is deemed to have been a partner;
(b) has admitted having been a partner; or
(c) has been adjudged to have been a partner,

at the material time. R.R.O. 1990, Reg. 194, r. 8.06 (2).

Against Person not Served as Alleged Partner

(3) Where, after an order has been made against a partnership using the firm name, the party obtaining it claims to be entitled to enforce it against any person alleged to be a partner other than a person who was served as provided in rule 8.03, the party may move before a judge for leave to do so, and the judge may grant leave if the liability of the person as a partner is not disputed or, if disputed, after the liability has been determined in such manner as the judge directs. R.R.O. 1990, Reg. 194, r. 8.06 (3).

In Tancho-Defyrus (GP) Inc. v. Masotti, 2013 ONSC 2043 (CanLII), Smith J. dealt with a motion to strike a statement of claim where the defendants alleged the claim by the general partner against one of the limited partners was invalid. Smith J. cited Limited Parnerships with respect to the liability of general partners and limited partners:

[28] In L.R. Hepburn, Limited Partnerships, Volume 1 (Toronto: Carswell, 2012), c. 1, pp. 1‑1, 1‑2, the author stated as follows with regards to general partnerships and limited partnerships:

In a general partnership, any partner may participate in the management of the business, including binding the others with respect to the business of the partnership. Perhaps more important, every partner in a general partnership is fully liable for the obligations of the partnership.
A limited partnership, meanwhile, consists of one or more general partners and one or more limited partners. Only the general partners manage the business. Provided there is compliance with the statutory requirements of the relevant jurisdiction with respect to formation, registration and other matters discussed in this book, the limited partner is only liable to the extent of his capital contribution or, in some jurisdictions, capital agreed to be contributed. (Emphasis added.)

In 1062484 Ontario Inc. v. Williams McEnery, 2020 ONSC 825 (CanLII), aff'd 2021 ONCA 129 (CanLII) Bell J., dealing with a solicitor's negligence action, held that a judgment obtained in a proceeding against a law firm using the firm's name would be against the law firm and would be enforceable, including against an alleged partner, in accordance with the provisions of r.8:

[37] The plaintiffs commenced a proceeding against the law firm using the firm name. Any judgment obtained would be against the law firm, and enforceable, including as against a person served as an alleged partner, in accordance with the provisions of r. 8 of the Rules of Civil Procedure.

In IAP Claimant K-10106 v. Nelligan O’Brien Payne LLP, 2020 ONSC 6746 (CanLII), Gordon J. held as follows with respect to whether an a action may properly be commenced against both a partnership and its individual partners:

[17] The leading case in respect of whether an action may properly be commenced against both the partnership and the individual partners is Wabi Iron Works Ltd. v. Patricia Syndicate (1923), 54 OLP 640 (Ont. C.A.), in which the court held that it was illogical to do so. That is, by beginning an action against the partnership the action is in fact being taken against all partners, and so it is not necessary to name any one of them as a party again.

[18] More recent cases have held that it is appropriate to name both a partnership and a specific partner as defendants when there is a cause of action specific to the partner that is independent of the cause(s) of action for which the plaintiffs seek to hold the partnership liable as a whole. [See Drabinsky v. KPMG (1999), 1999 CanLII 14767 (ON SC), 43 O.R. (3d) 153; Canadian Imperial Bank of Commerce v. Deloitte & Touche, 123 ACWS (3d) 30 (Ont. Div. Ct.)].

[19] These cases have developed from the principle that every partner is an agent of the other partners for the purpose of the business of the partnership, so that the acts of every partner in the usual course of its business bind the entire partnership.

[20] The antithesis is that it is appropriate to name an individual partner when there are acts alleged for which the partnership would not be liable. Typically, these would be acts of the individual which are outside the usual course of the partnership business.

In Maisonneuve et al. v. Langlois et al., 2021 ONSC 3587 (CanLII), Master MacLeod considered a summary judgment motion and a boomerang summary judgment motion brought in a solicitor's negligence action. Master MacLeod found that the claim against one of the defendants, a named partner, had no chance of success. The defendant was no longer a partner at the time, and while it was foolish of the partner to permit his name to continue as part of the partnership name, there was no evidence that the plaintiff dealt with him or relied on his status as partner. Master MacLeod noted that, pursuant to the Partnerships Act, claims against limited partnerships do not create personal liability for the partners who are not themselves negligent:

[43] Let me deal firstly with the claim against Pierre Charron in his personal capacity. In his case, there is no chance of success and the action should be dismissed against him. Charron Langlois is or was a limited liability partnership. Mr. Charron was no longer a partner when the plaintiff consulted Mr. Langlois. While it was foolish of Mr. Charron to permit his name to continue as part of the partnership name and may well have been misleading to the public, there is no evidence that the plaintiff had any dealings with Mr. Charron, relied on his apparent status as a partner or was misled in any way. [17] The plaintiff only dealt with Mr. Langlois and always believed the retainer was with Charron Langlois LLP. Pursuant to ss. 10 (2) – (4) of the Partnerships Act, claims against limited partnerships do not create personal liability for the partners who are not themselves negligent.[18]

In Forvest Trust S.A. v. The Devine Entertainment Film Library Limited Partnership, 2013 ONSC 3347 (CanLII), the plaintiff brought a motion to amend its statement of claim to add proposed defendants who were all limited partners of a general partnership.

Master Glustein added the following remarks with respect to the effect of naming the limited partnership and its interaction with r.8. Master Glustein held that r.8.03 and 8.06 did not authorize seeking enforcement against the assets of limited partners merely because the fact that they could become liable to pay a limited partnership obligation. Master Glustein held that possibilities open to the plaintiff for execution after judgment which would include going after the partnership subscriptions did not create a cause of action against the limited partners, which would require a tenable claim of privity:

B. Effect of naming the limited partnership

[64] Forvest relies on no case law to support its legal assertion that naming Devine LP as the limited partnership (or making a demand for payment from Devine LP) is the same as naming (or seeking payment from) the Limited Partner Subscribers. The case law set out above demonstrates that such a claim is “clearly impossible of success”.

[65] Rule 8 does not create new legal liabilities for limited partners, who are governed by the LPA. It is settled law that the general partner is the partner with legal liability for the debts and obligations of the limited partnership. While there may be a tenable cause of action that naming the limited partnership under Rule 8 or making a demand for payment from the limited partnership is the same as naming the general partner under Rule 8 or making a demand for payment from the general partner[8] (an issue I do not decide), the same cannot be said for naming limited partners with no liability other than the money or other property provided to the limited partnership.

[66] Even if the ALDA can be considered a “contribution” by the Limited Partner Subscribers to Devine LP, the asset to be seized would be that of the limited partnership and would not support a cause of action against the Limited Partner Subscribers just by naming limited partners with whom there is no privity of contract.

C. Enforcement against limited partners under Rules 8.03 and 8.06

[67] Forvest submits that because the Limited Partner Subscribers’ contribution includes the ALDA and each Limited Partner Subscriber assumes a pro rata share of the Devine LP debt obligation to Devine Corp., Forvest can name the Limited Partner Subscribers as they may be later called upon to pay any outstanding debt of Devine LP. However, the fact that a Limited Partner Subscriber could become liable to pay a limited partnership obligation under the ALDA at some point does not generate a cause of action for Forvest.

[68] As I discuss above, seeking enforcement under Rules 8.03 and 8.06 against the assets of the limited partners by a creditor of a limited partnership would be contrary to the applicable principles and legislation governing limited partnerships (Gemini, at para. 4). Limited partners provide “money or other property” to the limited partnership and are then to be free of a claim made for limited partnership debts unless the limited partner manages the limited partnership.

[69] Forvest’s claim on the Promissory Note as assignee is against Devine LP[9]. Devine LP may have an “asset” in the form of ALDAs from the Limited Partner Subscribers, and if Forvest obtains default judgment against Devine LP or Devine GP (both noted in default), Forvest can then seek to enforce the judgment, either through the sheriff seizing assets and collecting money for distribution to execution creditors pursuant to the Creditors’ Relief Act, 2010, S.O. 2010, c. 16, Schedule 4, or through bankruptcy and insolvency proceedings either by the trustee acting on behalf of the bankrupt Devine LP or Devine GP, or the creditor bringing action on notice to other creditors under section 38 of the BIA if the trustee refuses to do so.

[70] However, the above execution possibilities do not generate a cause of action. The situation in the present case is similar to a judgment creditor of a corporation who seeks to enforce a judgment by requiring the corporation to collect debts owed by shareholders. While such relief may be available to a sheriff or by derivative action or under section 38 of the BIA, it does not give a creditor the right to name a shareholder without privity of contract.

[71] As I discuss above, Rule 8 is a procedural rule which does not create in itself a cause of action. A tenable cause of action against the Limited Partner Subscribers requires a tenable claim of privity, which does not exist for the reasons I discuss above.

D. Conclusion on Rule 8

[72] Consequently, I follow the statement of Carthy J.A. in Gemini, the reasoning of Farley J. in Lehndorff, and the applicable statutory provisions governing limited partnerships and enforcement and conclude that there is no tenable cause of action for Forvest against the Limited Partner Subscribers under Rule 8 of the Rules of Civil Procedure. Such a claim is “clearly impossible of success”.

In Moffat v. Wetstein, 1996 CanLII 8009 (ON SC), the plaintiffs brought an action against the defendants based on professional and taxation services provided by the defendants to the plaintiffs regarding certain investments. The plaintiffs were represented by a law firm and by a former partner at the firm, who was also a former partner in the defendant accounting firm at the time that the conduct complained of took place (although he was not himself involved in the conduct). Granger J. held that by virtue of rule 8.01 and rule 8.02, when the lawyer issued a claim against the limited partnership he was suing all of its partners at the time of the alleged wrongdoing, and so he had essentially sued himself as his liability as a partner was subsumed in the action, and so was in an actual conflict of interest position:

Notwithstanding the self-serving nature of this evidence, David Thompson does not have to be disbelieved before it is justifiable to prevent him from acting. The justification does not lie in the confidential nature of the solicitor and client relationship, but in the fiduciary nature of that relationship. As a fiduciary, David Thompson must act and must be seen to act with undivided loyalty towards his client. An irreparable conflict is present once it is acknowledged that he will potentially bear financial exposure as a member of the defendant at the time of the alleged wrongdoing, should he be successful in advancing the plaintiffs' cause.

Rule 8.01(1)
of the Rules of Civil Procedure provide that "a proceeding by or against two or more persons as partners may be commenced using the firm name of the partnership". Further, pursuant to rule 8.02, the partnership must defend such an action in the name of the partnership and individual partners are precluded from entering separate defences.

By virtue of these rules, when David Thompson issued a statement of claim against Peat Marwick, he was suing all the partners of Peat Marwick at the time of the alleged wrongdoing. That time period includes the time in which David Thompson was a partner. Accordingly, Thompson has "sued" himself, as his liability as a partner of the defendant is subsumed in the action. Essentially, Thompson has divided his loyalties between his duty to his client and his personal financial interest or, in other words, he has created an actual conflict of interest.

In these circumstances, the public interest must prevail and Thompson should not be permitted to act. The fact that the plaintiffs' solicitor admitted on the cross-examination of his affidavit that it occurred to him that he was suing himself, is enough to create the impression of impropriety in the mind of a reasonably informed member of the public. While the plaintiffs have waived the conflict, there is no evidence which indicates they were provided with independent legal advice with respect to the waiver, and one must question if they fully comprehended the nature of the conflict.

In General electric capital Canada Inc. v. Deloitte & Touche LLP, 2002 CanLII 30158 (ON SC), dealing with whether it was proper for individual partners as well as the partnership to be sued, Epstein J. held that an individual partner who is alleged to be a wrongdoer can be named as a party defendant along with the partnership

[36] Does the amended claim plead tortious conduct on the part of the partners? GECC's counsel attempted to make the pleading more efficient by using terms that may have blurred the separation of the allegations against the partners from those against Deloitte & Touche. As previously mentioned, the law applicable to motions of this nature includes that the pleading must be read generously. The allegations in the amended statement of claim are that the partners are not being sued merely in their capacity as partners of Deloitte & Touche but on the basis that they directly participated in the torts of negligent misrepresentation and negligence. The issue to be addressed is whether the elements of the two causes of action have been pleaded in relation to the partners separately. In my view they have. Thus, even if the test in ScotiaMcLeod does apply equally to partnerships, the claim against the partners is not sure to fail and should be allowed to proceed past the pleading stage. The two recent decisions of Drabinsky v. KPMG (1999), 1999 CanLII 14767 (ON SC), 43 O.R. (3d) 153 ( Gen. Div.) at 158 and CC&L Dedicated Enterprise Fund (Trustee of) v. Fisherman, 2001 CanLII 28387 (ON SC), [2001] O.J. No. 4622 (S.C.) make it clear that an individual partner who is alleged to be a wrongdoer can be named as a party defendant along with the partnership.

In CC&L Dedicated Enterprise Fund (Trustee of) v. Fisherman, 2001 CanLII 28387 (ON SC), Cumming J. considered whether it was proper to add both a law firm and one of its partners as defendants to an action. Cumming J. remarked that it is generally improper to sue both the firm under the partnership name and also the individual partners, as per r.8.01. However, in the case at hand, the partner was not being sued merely in his capacity as a partner of a law firm, but also on the basis of his individual actions. Cumming J. remarked that, as set out in Drabinsky v. KPMG, 1999 CanLII 14767 (ON SC), an individual partner who is alleged to be a wrongdoer can be named as a party defendant:

[43] The proposed new defendants submit that in all events it would be improper to name Wilder as a defendant because the law firm, Cassels, in which he is a partner is also a proposed named defendant

[44] Rule 8.01 provides that a proceeding against two or more persons as partners may be commenced by using the name of the partnership. It is generally improper to sue both the firm under the partnership name and also the individual partners: Wabi Iron Works Ltd. v. Patricia Syndicate (1923), 1924 CanLII 455 (BC SC), 54 O.L.R. 640 (Ont. C.A.) per Middleton J.A.

[45] In the case at hand, the allegations (see for example paras. 50, 55, 57, 64, 65, 67, 70, 75, 84, 85, 98, 100, 106 and 107) are that Wilder was a direct participant in the negligent misrepresentations made to the plaintiffs and in the breach of the duty of care owed to the plaintiffs. Mr. Wilder is not being sued merely in his capacity as a partner of the law firm who is liable on a joint and several basis with all the partners of the firm because of the operation of the provincial statutory law (which codified the historical development of the common law in the common law provinces) applicable to a partnership: see for example ss. 6, 9, 10, 11 and 13 of the Partnership Act R.S.O. 1990, c. P.5. Rather, Wilder is being sued on the basis of his individual actions. An individual partner who is alleged to be a wrongdoer can be named as a party defendant: Drabinsky v. KPMG (1999), 1999 CanLII 14767 (ON SC), 43 O.R. (3d) 153 (Ont. Gen. Div.), at 158 (leave to appeal to Div. Ct. refused).

In Canadian Imperial Bank of Commerce v. Deloitte & Touche, 2003 CanLII 38170 (ON SCDC), the Divisional Court held that a motions judge properly concluded that a plaintiff may choose to bring a proceeding in the name of a partnership or in the name of the individual partners, but it is improper to do both, unless there is independent tortious conduct alleged against the individual partner:

[19] In addition, the motions judge properly concluded that a plaintiff may choose to bring a proceeding in the name of a partnership or in the name of the individual partners, but it is improper to do both, unless there is independent tortious conduct alleged against the individual partner (Wabi Iron Works v. Patricia Syndicate (1923), 1924 CanLII 455 (BC SC), 54 O.L.R. 640 (C.A.); CC & L Dedicated Enterprise Fund (Trustee of) v. Fisherman, 2001 CanLII 28387 (ON SC), [2001] O.J. No. 4622 (S.C.J.) at paragraph 45). Given my earlier conclusion that there is no tortious conduct properly pleaded against the individual partners, the action can not proceed against both the individual partners and the partnership. The motions judge correctly struck the claims against the individual partners.
Alexsei publishing date:
29