RESEARCH MEMORANDUM

*This is a sample memo intended as a study aid for the UBC Faculty of Law First Year Legal Research and Writing Program. This document does not constitute legal advice and may not be reproduced without permission.

TO: FROM: DATE: RE:

John Anderson Philip Roberts September 21, 2010 The Formation of a Partnership

CLIENT: MATTER: FILE NO:

ABC Ltd. Rail Service 12345

SUMMARY The circumstances in this matter involve a commercial arrangement without a written contract. You asked me to consider whether the parties to the arrangement could be held to constitute a partnership.

FACTS ABC Ltd. (ABC) has commenced an action against Speedy Rail Ltd. (Speedy), alleging the existence of an unwritten contract based on conduct, and its wrongful termination by Speedy. Pursuant to the alleged contract, Speedy provided railway services to a ferry service which was provided by ABC. ABC provided the ramp which assisted in loading and unloading the rail cargo onto ABCs ferries. S peedy provided rail service to the ABC for approximately 12 years. The parties did not share profits, did not own any property jointly or in common, did not pool their returns, did not have a common organization or resource structure, nor did they hold themselves out as a single, unified business or enterprise. In addition, the parties did not exercise or have a right to any mutual managerial control over each others behaviour. Speedy terminated its service to the ABC ramp on December 29, 2009. In addition to the breach of contract issue, we are considering advancing the alternative argument that ABC, and Speedy had formed a partnership, from which Speedy wrongfully withdrew.

ISSUE Was a partnership formed?

CONCLUSIONS It is highly unlikely that a partnership would be held to have formed in these circumstances. While the Partnership Act sets out a variety of factors which may be used as evidence of a partnership, none of them are applicable in this case. With respect to the common law, the cases discussing the existence of a partnership almost universally emphasize the sharing of profit as the primary indicium of a partnership. No profit or revenue sharing has occurred in this case. Other factors, such as a common business organization or joint ow nership of assets, are similarly absent in these circumstances. Ultimately, there are no facts which suggest anything more than the mere regulation of business endeavours by independent parties for mutual benefit.

DISCUSSION The Partnership Act , RSBC 1996, c 348, supplies the following definition of a partnership, at section 2: Partnership is the relation which subsists between persons carrying on business in common with a view of profit. Beyond this general test, the Partnership Act supplies several additional rules in section 4. The rules permit factors such as common ownership, the sharing of gross returns, and the sharing of profits to be used as evidence of the existence of a partnership. None of those rules apply in the present circumstances. The criteria for the formation of a partnership are not limited to those statutory sources. Section 91 provides for the applicability of the common law as follows: The rules of equity and of common law applicable to partnership continue in force, except so far as they are inconsistent with the express provisions of this Act. The leading case in B.C. on the general test for the existence of a partnership is that of the B.C. Court of Appeal in Hayes v British Columbia Television Broadcasting System Ltd. (1992), 74 BCLR (2d) 120 [ Hayes], leave to appeal to SCC refused (1993), 80 BCLR (2d) xxvi. The Court described the nature of the analysis that must take place in determining whether a partnership has formed, and in so doing considered the meaning of the wo rds carrying on business in common with a view of profit. The parties must intend a partnership to form ( Sproule v McConnell, [1925] 1 DLR 982 (Sask CA)). The analysis used to discern the intention of the parties is two -pronged. A court

3 will first review the agreement between the parties, then will look to the conduct of the parties. Because there is no express contract in the present circumstances, a court would immediately turn to the second branch of the analysis, which was described in Hayes as follows: [It] requires the court to enquire into whether the conduct of the parties during the currency of their joint project constituted a partnership relationship notwithstanding their contrary intention and the provisions of their agreement (at 123). In attempting to ascertain whether the parties intended to form a partnership, Gibbs J.A., for the majority, observed that sharing is a dominant characteristic of a partnership. He listed a variety of factors which would indicate an intention to participate in a partnership, including: the sharing of profits and costs; common accounting; co-mingling of funds; joint ownership of assets or joint responsibility for liabilities; and a common firm name, personnel and address for the common business enterprise. None of those indicia are present in these circumstances. Having set out these factors, Gibbs J.A. turned to a consideration of what constitutes a view of profit, as set out in the Partnership Act . He adopted the statement in the 15 th edition of Lindley on Partnership that: It is essential that what is to be shared is the profits of the business in the sense of the net gain resulting after payment of all outgoings (at 124). The parties in Hayes did not meet the business in common with a view to profit test. While the parties all expected to obtain something of value from the enterprise in that case, the Court observed that it was not in the view of either that what would be obtained would be the profit of the business being carried on in common. There could not be a profit in the sense of the amount of gain made by the business because, as pointed out earlier, there was neither cost or revenue sharing and there were no accounts, and there were not contemplated to be any accounts, which could be turned to or relied upon to determine the gain made by the business over the period during which it was being carried on. Whether either party realized a profit turned upon that partys costs and that partys revenue from that partys market area (at 126). These statements seem directly applicable to the present circumstances. Because there was no cost, revenue, or profit sharing, but instead simply a linked arrangement in which the parties were economically distinct, it is unlikely that a partnership can exist on our facts.

4 However, McEachern C.J.B.C.s dissenting judgment in Hayes is worthy of note, to the extent that it rejects the net profit test and broadens the circumstances in which a partnership may form. McEachern C.J.B.C. stated that, the most important factors are an agreement to participate in the operation of a business carried on in common and the sharing of profits or production (at 148). On the facts of that case, in which two companies actively collaborated on the production of a TV show, from which each reaped distinct profits, McEachern C.J.B.C. held that, I cannot regard the arrangement reached between these two parties, particularly the technical support of production and the sharing of creative decision making, as a mer e regulation of their individual businesses (at 149). The parties were, in his view, a partnership. Even the McEachern formulation is unlikely to aid ABC in this case. While ABC certainly coordinated with Speedy for mutual gain, there was none of the active sharing of resources and decision-making power that McEachern C.J.B.C. found so persuasive in Hayes.. As cited in Hughes v Page (1998), 77 ACWS (3d) 432 (BCSC) [ Hughes], it is the majority decision in Hayes which sets down the test used today in B.C. As a consequence, it seems highly unlikely that a partnership will be held to form in our circumstances, in the absence of any of the indicia or criteria discussed by Gibbs J.A. The emphasis placed on profit sharing in Hayes is not unique to that case. The case law is clear that an absence of evidence as to participation in profits strongly suggests that a partnership does not exist ( Big Bend Construction Ltd. v Donald (1958) 25 WWR 281 (Alta TD); reversed on other grounds (1958), 26 WWR 336 (Alta CA)). In B.C., see also Hughes and Jenks v McCrory, [1998] BCJ No 995 (QL) (BCSC). In the latter case, the finding that there was no intention to share in profits definitively resolved in the negative the determination of whether a partnership existed. In Tel-Ad Advisors Ontario Ltd. v Tele-Direct (Publications) Inc. (1986), 8 CPC (2d) 217 (Ont HCJ), Griffiths J., citing the decision of the Ontario Court of Appeal in Ottawa Lumbermans Credit Bureau v. Swan , [1923] 4 DLR 1157, held that for a partnership to exist there must be community of interest by all parties, such that the parties are partners in profits as well as losses. Where the profits were exclusively those of individual members, the relationship was not held to be a partnership. The above cases represent merely a small sampling of the abundance of case law which focuses on the profit sharing concept as critical to the formation of a partnership. Conflicting authority may be found in the case of Poulos v Caravell Homes Ltd. , [1995] 9 WWR 262 (Alta QB) [ Poulos]. In that case, the Court held that profit referred to benefit or advantage. One party expected to benefit in terms of profit from their joint arrangement, while the other expected to gain increased goodwill. The two parties carried on business

5 under one business name, and one party was given priority of access to a business asset. Based on the definition of profit adopted by the Court, a partnership thus existed between the parties. The Poulos, case was reversed on other grounds on appeal ((1997), 49 Alta LR (3d) 385 (CA)). It is probably poor authority in B.C., as its loose concept of common business with a view to profit is directly contrary to the test set out in Hayes. Moreover, the Poulos, approach is not sensible, for the reason that it would result in partnerships forming in almost any business enterprise in which two parties are jointly organized and receive a benefit from being so organized. Thus, while its approach could be used as the basis for an argument that a partnership existed in the present circumstances, Poulos would provide an extremely tenuous foundation for such an argument. There may be additional criteria worthy of discussion, but ABC would nonetheless fail to meet them. In Alison R. Manzer, A Practical Guide to Canada Partnership Law , (Aurora, Ontario: Canada Law Book Inc., 2001) at 2-26, it is stated that, A mutual right of control or management of an enterprise is a characteristic of partnership. [] The right of control or management of the enterpri se does not seem to require hands-on participation but merely the right to participation. Having reviewed the authorities cited by Manzer for that proposition, I am not convinced that a mutual right of control or management is a factor which has yet bee n explicitly recognized by the courts. However, even if such a test were to be applied, it seems clear from the facts in the present circumstances that the collective enterprise engaged in by ABC and Speedy was not mutually controlled or managed at all. It involved two parties who managed their affairs relative to each other, but independently of each other. In the present circumstances, there are simply no readily identifiable factors which support the existence of a partnership. The Partnership Act refers to common property ownership, the sharing of gross returns, and the sharing of profits as factors which could be used to draw an inference that a partnership exists, but none of those factors are triggered by the facts in this matter. Similarly, factors weighed at common law, such as a common firm name and business organization, are wholly absent here. Given the extent to which the law seems unlikely to accommodate an argument that a partnership exists in the present circumstances, the nature of the onus of proof bears mentioning. The onus of proof is on the person alleging that a partnership existed, and will never shift to the other party ( Digdon v Gillies (1973), 13 NSR (2d) 35 (SC)). Accordingly, it is my conclusion that ABC will be unable to discharge their burden and prove the existence of a partnership.