Large law and accounting firms ostensibly bear little resemblance to traditional, small-scale partnerships. Nevertheless, in the recent Ontario Superior Court decision in Tim Ludwig PC v BDO Canada LLP, 2016 ONSC 2225, a partner’s expulsion serves as an important reminder that the bedrock principles of 19thcentury partnership law continue to apply to all partnerships today.
In a decision released on March 31, 2016, Justice Mew considered a summary judgment motion brought by Tim Ludwig, who was formerly a partner of the defendant accounting firm, BDO Canada LLP. Mr. Ludwig’s claim was for breach of contract as a result of his forced retirement from the firm in 2014.
On July 8, 2014, Mr. Ludwig was informed by two other partners of BDO that he was required to resign, pursuant to a decision of the firm’s CEO. The reasons cited for his expulsion were purely economic, based on market decline. When Mr. Ludwig refused to agree to retire, BDO invoked the firm’s Partnership Agreement and ultimately convened the firm’s Policy Board, which voted to expel Mr. Ludwig on the purported ground that his expulsion was in “the best interests of the Partnership”.
Justice Mew found that the defendant’s actions were in breach of the firm’s Partnership Agreement, and found in favour of Mr. Ludwig in the amount of $1,294,937 for lost profits and retirement benefits, and awarded an additional $100,000 in aggravated damages for injury to his reputation.
In its analysis of the facts, the Court determined that Mr. Ludwig’s forced resignation was without cause, was pre-determined by BDO’s CEO, and that the Policy Board’s vote constituted a “mere rubber stamp” to the CEO’s decision in breach of the fiduciary duties Mr. Ludwig’s partners owed him.
The Court reaffirmed the foundations of contemporary partnership law in rendering its judgment. Justice Mew relied on relevant legislation and jurisprudence from as far back as the 1800s, as well as on principles now codified in the Ontario Partnerships Act. Significantly, the Court confirmed that the bedrock principles of partnership law apply as much to modern large partnerships as they do to more traditional smaller partnerships.
Importantly, the Court recognized that partners are not employees. They do not enjoy the same legal protections as employees, and their relationships are governed by partnership agreements and by fiduciary duties owed to one another and the partnership.
Partners enjoy a property interest in the partnership. Justice Mew emphasized this entitlement, asserting that “[t]he cardinal principle in play goes to the proposition that, ‘since a true power of expulsion is expropriatory in nature, it will always be construed strictly'”.
None of this is to suggest that a partner can never be expelled from a partnership, but such an act must be done diligently, in good faith, and in accordance with the partners’ fiduciary obligations and the partnership agreement. A fiduciary cannot fulfill his or her duties while acting “under dictation”, without the ability to exercise discretion rationally and in good faith.
In this case, BDO failed to demonstrate good faith in its decision-making processes. The Policy Board acted impermissibly at the direction of the firm’s CEO, in violation of its fiduciary obligations and of the firm’s Partnership Agreement.
Ultimately, this judgment is a cautionary tale for all large LLPs and other non-traditional partnerships – a partnership of any size remains a partnership in the eyes of the law. Importantly, this means that any committee of partners that purports to expel another partner needs to be able to demonstrate that each committee member exercised his or her own considered discretion in compliance with the fiduciary duties that he or she owes to the partner in question.