Partnership and Business Agreements

Partnership Agreements and related Business Agreements are essential.  From time to time we get asked to comment upon key court decisions and how they impact our corporate and professional clients.

The Van Allen v.Vos, 2014 ONCA 552 (C.A.) Case

In Van Allen v.Vos, 2014 ONCA 552 (C.A.), the Court of Appeal addressed the issue of limitation periods and discoverability in relation to a business agreement where a partner had failed to realize that expenses had been misallocated to his financial disadvantage for a number of years. In its decision, the Court determined that precluding recovery because the partner had failed to retain an accountant to review the documents supporting the financial statements that would have revealed the mistreatment of expenses would hold the partner to an unreasonably high standard. In addition, because he was not aware of the misallocation, his claim was not precluded by the doctrine of laches. Finally, the doctrine of estoppel did not apply to bar the partner’s claim as he was unaware of the bookkeeper’s error in failing to adhere to the terms of the business agreement which resulted in the misallocation.

The facts of this case were not complex and were as follows:

For more than twenty years Van Allen and Vos were partners in a dental practice.   In 2004, the two dentists entered into an agreement (the “2004 Agreement”) which described how each of them were to be allocated 100% of the income they were responsible for producing, minus any expenses incurred to produce the income.  In addition, among other things, the 2004 Agreement detailed how to deal with terminating the partnership.

In 2008, Van Allen wanted to terminate the partnership and the two dentists began to negotiate a new agreement to terminate that would provide them with a greater tax advantage. The new proposed agreement to terminate required, in addition to other things, the recommendation of the partnership’s accountant on how to split the partnership’s goodwill and assets. However, in the course of reviewing the draft financial statements for this purpose, the accountant discovered that the partnership’s bookkeeper, who happened to be Van Allen’s wife, had not been allocating expenses according to the terms of the 2004 Agreement. As a result, Vos had been paying a larger portion of the partnership’s expenses than he ought to have been. Understandably things soured between the two dentists and litigation ensued.

At trial, the trial judge determined that the 2004 Agreement was valid and that it set out how partnership expenses should have been allocated. The trial judge ruled that a new agreement to terminate was not concluded as the requisite financial statements were never finalized and that the improper misallocation constituted a breach of the 2004 Agreement. Lastly, the trial judge ruled that Vos’s action was not out of time, or barred by reason of laches or estoppel, as he did not know of the misallocation of the expenses until 2009.

There were a number of issues on appeal, which were essentially as follows:

On appeal of the trial judge’s decision, Van Allen advanced four main arguments:

1. The trial judge erred in determining that the limitation period for Vos’s action had not expired;
2. Vos’s claim was precluded by the doctrine of laches;
3. Vos was estopped from advancing his claim because he ought to have known of the improper profit allocation; and
4. The trial judge erred in ordering a judicial accounting with regard to termination.

The Court of Appeal’s Decision was clear and decisive:

The Court denied each of Van Allen’s submissions and dismissed the appeal. In its reasoning, the Court concluded that the first three grounds of Van Allen’s appeal revolved around a common premise: that Vos knew or ought to have known that profits were not being allocated according to the terms of the 2004 Agreement.  In short, because he knew or ought to have known and failed to object to the profit share within a reasonable timeframe his claim should be denied. The Court concluded that this premise was unfounded.

The Court determined that the question of whether Vos knew of the misallocation was one of fact, and that the trial judge’s finding could not be reversed without a “palpable and overriding error”.  Further, the question of whether Vos ought to have known of the misallocation of expenses as early as 2004 was one of mixed fact and law.  However, given that the question was closer to the “fact end” of the spectrum, the Court was wary of interfering with the trial judge’s reasoning absent some “extricable error in principle.”

Accordingly, the Court took no issue with the trial judge’s finding that Vos did not know, and could not reasonably have known, about the improper accounting practice.   Because Vos did not know of the misallocation before 2009, he could not have acquiesced in the mistreatment of the expenses prior to that point.  Therefore, Vos was entitled to continue to rely on the terms of the 2004 Agreement, and, as a result, the time limit for his action had not expired, nor was it barred by laches or prohibited by estoppel.

Finally, with respect to Van Allen’s fourth argument, the Court found that the trial judge did not err in ordering a judicial accounting with regard to termination.  Van Allen argued that the 2008 negotiations on how to terminate the partnership for tax purposes resulted in enforceable agreements relating to the value and split of the goodwill and assets. The trial judge made the factual determination that, as a result of the parties’ inability to satisfy the pre-requisites for a new agreement, the 2008 negotiations did not result in a binding agreement.  Once again, the Court found no error in the trial judge’s findings of fact and also affirmed that these findings were again entitled to deference.

Conclusions to be drawn from this case:

By finding that Vos did not know and could not have reasonably known that the 2004 Agreement was not being followed, the Court allowed Vos to recover under the terms of the 2004 Agreement.  In its reasoning, the Court stated that “it is reasonable discovery – rather than the mere possibility of discovery – that triggers a limitation period”. The Court similarly applied this reasoning to refute Van Allen’s claims with respect to laches and estoppel.

This case is significant as it deals with the responsibility of a party to a business agreement to monitor the degree to which the business agreement is being followed.  In this case, it was only when the partnership was being wound up that Vos discovered that the business agreement was not being followed.  Because it was not being followed, Vos had paid a much greater share of the expenses than he ought to have and this is what he ultimately recovered in his claim.  It is noteworthy that the Court determined that Vos did not need to know about the mistreatment of the expenses prior to the termination of the partnership, as it was considered too great a burden to endure, with the result that he was able to bring a successful claim for recovery.

Obviously, it is better if a party to a business agreement is always fully aware of whether or not the agreement is being adhered to. Nonetheless, this decision is helpful in addressing the issue that arises when there is an undetected departure from the agreement, which, if not detected at the outset, leads to a significant deviation from the original intentions of the parties.  Notwithstanding this deviation, it is now clear that a party may still be entitled to recover which, at least in this case, reduced the amount of pain one dentist was forced to endure.

If you have a similar issue or wish to discuss a partnership or any other business agreement with JP McAvoy or any other professional at ConductLaw feel free to contact us by telephone 613.440.4888 or by email at info@conductlaw.com.