The Danger of Partnerships

Often those starting up or otherwise involved in construction businesses do so in partnerships.  But rarely is sufficient thought given to the dangers of doing so, as was painfully experienced by an innocent partner in a case decided by the British Columbia Supreme Court recently.

FACTS

Two architects worked together for years in operating a successful architectural firm.  While they were formally a partnership “A & B Architects”, they each incorporated their own companies and ran separate projects.  But they shared the overhead and profits equally.  Things went well for about 15 years, when they decided to part company.  But shortly before doing so, Partner A took on a big low-rise stucco condominium project.  Upon dissolution of the partnership, Partner A took the ‘big project’ as his own.

Some 4 years after the partnership had ended, the strata owners of what was by now a ‘leaky condo’ with a multi-million dollar repair bill sued A & B Architects and each of A and B personally, as partners in the firm.  After 4 more years went by the case settled, with both A & B pitching in an amount that they shared.  B, the ‘innocent’ partner, claimed he should not be obliged to pay half, as he never did anything wrong.   A, the ‘not so innocent’ partner, said it was a partnership and all profits, losses and liabilities were shared ‘50/50’.

Because the partnership agreement called for disputes to be referred to arbitration, and arbitrator decided the matter.  Unfortunately for ‘innocent’ partner B, the arbitrator held against him.  Partner B attempted to ‘right that wrong’ by taking the matter to court, saying that the arbitrator was wrong at law.

DECISION

The court hearing the case held that unless a partnership agreement provides that the ‘innocent’ partner has a right of indemnity as against the ‘not so innocent’ partner, none exists at law.  Each innocent partner must pay his share of the damages arising due to the acts of the ‘not so innocent’ partner.

The Partnership Act of British Columbia says some important things about partnerships, including:

“A partner is the agent of the firm and the other partners for the purposes of the business of the partnership”

“The acts of every partner who does any act for carrying on in the usual way business of the…firm…bind the firm and…partners”

“A partner is jointly and severally liable with his or her partners for everything for which the firm…becomes liable”


TAKE NOTE

If you are in a partnership, ensure you have a written agreement spelling out how each partner is to act and how you will deal with liabilities.

If you dissolve a partnership, ensure that you agree on how future liabilities will be dealt with.

Beware entering into any partnership with anyone who does not have the means to pay their share of any liability that may arise.  Ask “what if…” before shaking that hand or signing that partnership deal.  While partnerships usually start off like honeymoons, they often end up in expensive ‘divorce courts’ because adequate consideration and care was not taken before ‘getting into bed together’.

This article was written by Robert G. Kuhn, a lawyer who practices in construction law at the law firm of Kuhn LLP. It is only intended as a guide and cannot cover every situation. It is important to get legal advice for specific situations. If you have questions or comments about this case or other construction law matters, please contact us at 604-864-8877.