



COURT OF APPEAL FOR ONTARIO

CITATION: Greenaway v. Sovran, 2014 ONCA 110

DATE: 20140211

DOCKET: C57577

Rosenberg, Strathy and Benotto JJ.A.

BETWEEN

Michael C. Greenaway

Applicant (Appellant/

Respondent by way of cross-appeal)

and

Egidio Sovran

Respondent (Respondent
    in appeal/

Appellant by way of
    cross-appeal)

David G. Greenaway, for the appellant/respondent by way
    of cross-appeal

Crista L. Rea, for the respondent/appellant by way of
    cross-appeal

Heard: February 4, 2014

On appeal from the judgment of Justice Christopher Bondy
    of the Superior Court of Justice, dated July 30, 2013.

ENDORSEMENT


[1]

The appellant and the respondent had been partners in an accounting
    business for over 20 years.  They sought, by way of application, a
    determination of the enforceability of a restrictive covenant in their
    partnership agreement.

[2]

The application judge found the partnership had been dissolved as of January
    1, 2013 as a result of the partners conduct. He declared that the restrictive
    covenant was unenforceable as a penalty, and directed a trial of an issue to
    determine the damages payable by the appellant as a result of the breach of the
    portion of the covenant he found to be valid and severable.

[3]

In coming to these conclusions, the application judge found the
    appellant had withdrawn from the partnership, thereby triggering a clause in the
    agreement which called for the reduction of the withdrawing partners capital
    account by 500% of the average fees billed by the firm to clients who transfer
    to the withdrawing partner within 24 months from the withdrawal date.

[4]

The issues on this appeal turn on the interpretation of the partnership
    agreement and the legal consequences of dissolution. The standard of review is
    one of correctness:
The Plan Group v. Bell Canada
, 2009 ONCA 548, 96
    O.R. (3d) 81.

[5]

This was a two-person partnership. It had been in operation since 1989.
    The appellant operated out of Amherstburg and the respondent out of Windsor.
    The partnership agreement was prepared by the respondent based on a precedent
    he had obtained at a conference in the United States. It was poorly drafted,
    without legal advice.

[6]

Based on the firms billings, the application of the restrictive
    covenant would have resulted in a reduction of the appellants capital account
    by $1 million if the clients he had serviced transferred to him after
    dissolution of the firm.

[7]

The application judge found the appellants withdrawal from the
    partnership ended the relationship of the partners carrying on business in
    common with a view to profit and effectively dissolved the partnership on January
    1, 2013.

[8]

The dissolution was due to the appellants dissatisfaction with the
    respondents conduct. On September 26, 2012, he gave notice to the respondent
    that he would be retiring from the partnership at the end of the year. On
    October 10, 2012, he confirmed he was retiring from the firm effective December
    31, 2012, and gave notice of his intention to dissolve the partnership as of
    that date. He planned to commence the practice of public accounting through his
    professional corporation.

[9]

After January 1, 2013, the appellant continued to work out of the
    Amherstburg office and the respondent out of the Windsor office. Each continued
    to provide services to former clients of the partnership.

[10]

There
    were separate provisions of the partnership agreement dealing with retirement
    and withdrawal. The application judge found the appellant withdrew from the
    partnership and did not retire.

[11]

While
    it might have been open to the application judge to find that the appellants
    notice of October 10, 2012 was a notice of dissolution, pursuant to s. 26(1) of
    the
Partnerships Act
, R.S.O. 1990, c. P.5, he does not seem to have to
    have been referred to that provision. He rejected the submission that
    dissolution occurred pursuant to s. 32(c) of the
Partnerships Act
as a
    result of the appellants notice. He found, at para. 22, that provision is
    limited to partnerships entered into for an undefined time, whereas the
    agreement provided that the parties would remain partners until such time as
    the partnership may be terminated in accordance with the provisions herein.

[12]

The
    application judge also rejected the appellants submission that the dissolution
    of a partnership prevents a partner from seeking to enforce a restrictive
    covenant against a former partner. The appellant relied on
Brew v. Rozano
    Holdings Ltd.,
2006 BCCA 346, 55 B.C.L.R. (4th) 233, which had cited with
    approval the following statement in R.C. lAnson Banks,
Lindley & Banks
    on Partnership
, 19th ed. (London: Sweet & Maxwell, 2010), at para.
    10-233:

Subject to the precise terms of the agreement, a
general
dissolution will effectively prevent any partner from seeking to enforce a
    restriction against his copartners but will not necessarily affect the
    enforceability of a restriction imposed on a partner who retired
before
the date of the dissolution. [Emphasis in original; citations omitted.]
[1]

[13]

The
    application judge found this proposition was subject to the freedom of contract
    and that the terms of the agreement could survive dissolution and could be
    enforced by one partner against the other.

[14]

There
    was no disagreement that this was a general dissolution, as opposed to a
    technical dissolution, because the dissolution of the two-partner firm
    brought its business to an end.

[15]

Part
    VI of the agreement, entitled Withdrawals and Dissolution, dealt with the
    consequences of withdrawal. Most of the provisions appear to speak to the
    withdrawal of one or more partners in a multi-partner firm. A number of
    provisions contemplate that the firm would continue after the withdrawal of one
    of the partners. For example, the introductory paragraph states:

Considering that the interest of the firm should take
    precedence over the interest of an individual, and further considering the need
    for mutual understanding among many partners, the terms and conditions for
    withdrawal shall be standardized in consideration of both the firm and the
    individual but any areas of doubt or conflict shall be resolved in favour of
    the partnership.

[16]

The
    references to the firm and the partnership contemplate that the withdrawal
    of a single partner in a multi-partner firm would not dissolve the firm and the
    remaining partners would continue to carry on business as a partnership. No
    provisions in part VI address what is to happen in the case of a partnership of
    two.

[17]

The
    respondent argues that this case falls within the exception referred to in
Lindley
    & Banks
, because the appellant retired before the dissolution. That is
    not the case  the appellant gave notice of dissolution before the date of
    dissolution, but his withdrawal coincided with the date of dissolution.

[18]

On
    the dissolution of the two-member firm, the firm ceased to exist and the
    parties were free to pursue their own practices. There was no contractual term preventing
    them from doing so. Had they wished to include a specific term in their
    agreement, permitting one partner to prohibit the other from competing, they
    could have done so. In the absence of such a provision, it is reasonable to
    conclude that the partners should be limited to their common law and statutory
    rights on dissolution, and nothing more.

[19]

To
    interpret the agreement as the respondent suggests would make no commercial
    sense. It would force an unhappy partner to choose between remaining handcuffed
    to the other partner or quitting the partnership and, for practical purposes, leaving
    the entire business to the other partner.

[20]

For
    these reasons, the appeal is allowed. The judgment below is varied by deleting
    paragraphs 4, 5, 8 and 9. As a result, it is unnecessary to address the
    cross-appeal. The appellant is entitled to his costs in this court, fixed in
    the amount of $10,000, inclusive of all applicable taxes and disbursements. The
    costs below, if not agreed upon, are remitted to the application judge.

M.
    Rosenberg J.A.

G.R.
    Strathy J.A.

M.L.
    Benotto J.A.





[1]
The passage cited by the British Columbia Court of Appeal was from the 18th
    edition of
Lindley & Banks.


