The Court of Appeal for Ontario released its decision on February 11, 2014, in Greenaway v Sovran 2014 ONCA 110 on the appeal by a “withdrawing” partner of a two-member firm from the decision of the Superior Court of Justice on an application to determine the enforceability of a “restrictive covenant” in their partnership agreement.
The application judge found that the two-member firm partnership had been dissolved and declared the restrictive covenant unenforceable as a penalty, but directed a trial of an issue to determine the damages payable by the appellant as a result of a breach of the portion of the portion of the covenant he found valid and severable – the withdrawal having triggered a clause in the agreement which called for the reduction of the withdrawing partner’s capital account “by 500% of the average fees billed by the firm to clients who transfer to the withdrawing partner within 24 months of the withdrawal date”.
Using a standard of review of correctness, the Court of Appeal allowed the appeal of the withdrawing partner. After noting that there was no disagreement that this was a general dissolution, because the dissolution of the two-partner firm brought its business to an end, it found that the Part of the partnership agreement dealing with “Withdrawals and Dissolution”, dealt with the consequences of withdrawal, but that most of the provisions therein contemplated the continuation of the firm after withdrawal of one or more partners in a multi-party firm. The appellate court observed that nothing in the agreement dealt with what would happen in the case of partnership of two on dissolution.
The Court of Appeal held that on the dissolution of a two-member firm, the firm ceased to exist and the parties were free to pursue their own practices, there being no contractual term preventing them from doing so. In consequence, the partners should be limited in their common law and statutory rights of dissolution, and nothing more. To do otherwise the appellate court reasoned “..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.”
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