Partnership - For Better or for Worse #150

By Gerry Neely
B.A., LL.B.

When several people agree to buy property in their names with the intention of developing it for resale at a profit, but without any further agreement or discussion of what the legal relationship among them is to be, have they created a partnership? Joint ownership does not by itself create a partnership, for if each person reserves the right to sell or deal with his or her interest in the property, regardless of the wishes or intentions of the other parties, then their relationship may be merely that of co-owners.

If their intention is to jointly develop and sell the property, then they probably are partners.

While the answer as to whether they are co-owners or partners is a question of fact, the difference between co-ownership and partnership can be significant, not only in respect of tax, but also for liability.

In an Alberta case, property was listed for sale with the licensee by an owner who set the net price he would accept. Several months prior to obtaining the listing, the licensee had a reasonable belief through discussions with the owner that the listing would be his. As a result of these discussions, the licensee had agreed with a contractor and an investor, that the three of them should purchase the property when the licensee obtained the listing.

An offer was submitted in the name of the contractor's company for a price which, after commission, gave the owner his net price of $250,000 and eventually, the purchasers a profit of $141,000. Included in this profit was a benefit of $64,500 received by the licensee.

The owner then learned that the licensee was one of the purchasers and subsequently discovered the nature of the agreement to share profits made with the other purchasers. He sued the purchasers for the profit obtained by them, alleging a twofold breach of duty by the licensee.

The first breach was the failure by the licensee to disclose his interest and intention with respect to the purchase of the property, as was required of him by the Alberta Real Estate Act. Secondly, under agency law, the licensee had a duty to fully disclose to the owner all relevant facts, including not only whether the price was adequate, but whether the sale was as advantageous to the owner as any other sale the licensee could have obtained from a third party. The licensee's breach of duty and his liability to the owner was apparent, but how did that affect the contractor and the investor?

The judge held that the three of them were partners. Each was therefore jointly and severally liable for the wrongful act or omission of the licensee while acting in the ordinary course of business of the partnership. Judgment for $141,000 was awarded jointly and severally against all three parties. A separate judgment was made against the licensee for the benefit he had received. This was done to fix his liability for the secret profit of $64,500 made by him through his breach of fiduciary duty to his principal.¹

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Following the publication of Column 140, Mr. Jackson spoke to me concerning the Reasons for Judgment referred to in that column. Mr. Jackson informs me that he warned the purchaser of the defects but that the Court chose to believe the home owner. Column 140 repeated the Judge's remarks that Mr. Jackson has a good reputation as an efficient and experienced contractor. From the information provided to me, it is apparent that Mr. Jackson did not examine the wrong house and I regret having indulged in this hyperbole.

1.

Calbar Securities Ltd. v. H. & B. Construction Ltd., 25 R.P.R. 226.

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