Thinking way back to partnerships for my final post—Discussion Activity 3.2:
The provisions of the Ontario Partnership Act relevant to determining the existence of a partnership between X and Y are sections 2 and 3. Section 2 of the Act defines partnership as the relationship between “persons carrying on a business in common with a view to profit…”. Section 3 lays out the rules for determining a partnership—clarifying that while common property or part ownership and sharing of gross returns (revenues) do not automatically create a partnership, there is a presumption of partnership, in the absence of evidence to the contrary, where a person receives a share of the profits.
X and Y’s situation raises two questions:
- Are they carrying on a business in common?
- Are they sharing profits, and as a result in the position of a presumptive partnership subject to evidence to the contrary?
The factors that differentiate co-ownership from a partnership agreement, and what it means to carry out a business in common and share profits, is elucidated by the case law. A.E. LePAGE Ltd. v Kamex Developments Ltd. provides that co-ownership does not automatically create a partnership relationship. Rather, we must look to the intentions of the co-owners in the context of their particular situation to determine whether or not they intended to carry on a business together. In that case, the court found that the co-owners of an apartment building had not formed an intention to carry on a business together based the terms of the co-ownership agreement, and the further steps taken to keep the co-owners’ respective beneficial interests separate for tax purposes. The need to look both to the Act and the particular facts of a case was re-iterated in Volzke Construction Ltd. v Westlock Foods Ltd. There the court rejected control as a determinative factor of partnership, finding instead that factors such as the existence of a joint checking account, the agreement to share costs and profits on an 80/20 basis, the company’s referral to each other as partners, and the company’s joint management of the property, when taken together with the Act, indicated that the companies were in a partnership relationship. Finally, looking to Pooley v Driver, it should be kept in mind the declaration by parties that they are not partners is not in itself determinative of a partnership. Whatever the parties claim, the court may analyze the business relationship and examine the true circumstances of that relationship to determine whether or not it is, in practice, a partnership.
Certain language and terms within the agreement between X and Y appears to be indicative of an intention to carry on a business in common. Similar to Westlock the parties make reference to themselves as Partners, and the agreement itself purports to deal with the work schedules and rules for the “management and operation” of the business. The parties also share certain costs, namely, 50% each of the responsibilities and obligations under the lease agreement. Unlike Westlock, and more similarly to Kamex, however, multiple terms of the agreement appear aimed at keeping the parties’ interests separate. There are clearly defined days on which either party manages the business, and they are entitled to “any and all” of the revenues earned on their particular days of occupation. Clause 2.10 requires that the parties report respective revenues separately and file taxes separately. Moreover, the parties retain the latitude to run their own advertising campaigns and source and sell their own hair related products, with a few restrictions.
Given the structure of the agreement, I would argue that X and Y are not sharing profits from the business. The division of operation days and entitlement to revenues from those days could be framed as a mechanism for dividing profits. However, because that X and Y maintain a right to gross profits rather than net profits for their operation days, and assuming the only costs they are required to cover together are those that arise under their lease obligations, it seems the structure of the agreement was intended to allow them to keep their respective net profits separate.
Even should a court construe the division of revenue as a sharing of profits however, the provisions of the agreement, read as a whole, would likely rebut a presumptive partnership in favour of co-ownership. The facts of this case bear more similarity to Kamex than Westlock. The parties keep revenues separate, they do not share a bank account, they do not file income tax returns together, and whether or not they manage the enterprise together is debatable. Yes, they laid down rules together, but each appears free to manage and promote the business as they wish on their respective operation days, provided they fulfill certain obligations (keeping the shop clean, not selling products that are not hair related, etc.). While the parties refer to themselves as partners in the agreement, the provisions of the agreement seem to be aimed at setting out their respective rights and obligations as co-owners, as opposed to laying out a partnership agreement.