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Why Venturing Into a Verbal Partnership Is Fraught With Risk

By Jonathan Feingold, from our Business Law Group

December 11, 2020 — The case of Brossard v. 2868768 Canada Inc. (PDF), October 5, 2020, Montreal, 500-17-079916-139 (CS) is yet another cautionary tale about the hazards of doing business (and entering into a partnership) on a handshake.

As simply stated by the Court,

This case is the story of the purchase of a building located at 3510 de la Montagne Street in Montreal (the “Building”) and a partnership, 3510 de la Montagne S.E.N.C. (“3510” or the “Partnership”), which has become unworkable. 3510’s partners have asked this Court to settle their disputes, dissolve the Partnership and order the sale of the Building. [par 1].

The partnership was composed of three holdcos and two trusts which came together for the purpose of acquiring a multi-unit apartment building.

According to the managing partner, who ultimately prevailed, his mandate was to transform the building into an upscale property by extensively renovating and modernizing the common spaces and units.

In so doing, the managing partner succeeded in increasing revenues (rent) as well as the overall value of the partnership’s sole asset.

Naturally, the transformation required significant capital investment, which was advanced by the managing partner. However, when the managing partner asked his partner and cross-defendant to contribute its share (i.e. 45%), the latter claimed that the scope of work (approximately $2.5 million) was never approved or consented to.

In the absence of a written agreement, an 18-day trial involving multiple experts was required to adjudicate the dispute.

In the end, the Court ordered that the building be sold, but following complex mechanisms to allow each of the parties to bid while allowing third parties to take part in the process to reflect market conditions.

The Superior Court reminds us that, in the absence of a written agreement, it has the authority to infer the nature of a partnership based only upon the conduct of the parties and corroborating evidence. In fact, the Court can go so far as to: i) infer the creation of a general partnership; ii) identify the managing partner; and, iii) confirm the nature and scope of the manager’s powers.

The Court also reminds us that once appointed, the managing partner may perform any act falling within the scope of her management powers, provided she does not act fraudulently.

This case also stands for the principle that a partner who chooses to invest through a particular investment vehicle, such as a trust, must live with the consequences of such a choice. As such, an individual who chooses to invest in a partnership through a trust cannot repudiate the decisions of his trustees acting within the scope of their mandate.

Although there is always redress to the courts, it remains that the best way to avoid a protracted and costly dispute about the nature and scope of a partnership is to invest in a comprehensive partnership agreement that clearly sets out the common intentions of the parties.

This case was successfully pled on behalf of the co-cross-plaintiffs by the author, a partner in the Civil and Commercial Litigation Practice Group, who encourages you to paper all your agreements.

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