Are We Partners or Aren’t We?

A recent case dealing with partnerships raises some serious questions about people who have business relationships, especially farmers as this was an agricultural situation.

A partnership will be found when two or more persons carry on business in common with a view to making a profit. The difficulty arises in that, absent specific circumstances, the partners will be jointly and severally liable for all of the debts and liabilities of the partnership. This means that a creditor of the partnership may pursue any one of the partners for the entire liability. They can go after the person with deep pockets for the entire amount. Their assets are available to be seized for the entire debt. It would then be up to that partner to seek indemnity from his or her partners. If they cannot indemnify the partner who has paid, that partner may be out of luck.

In Redfern Farm Services Ltd. v. Wright, John Wright and his sons were found to be partners. The children stated that they and their father operated their farms separately and did not share any profits of their respective farm operations, whether gross or net. The father stated the same thing but the Court disagreed.

The Court found that the operation was run co-operatively. Some of the land owned was owned by all three family members without regard for who in fact paid for each parcel. Their farm animals were also fed and pastured together. The running of the associated grain operation was, however uncertain. The farmers’ credits were to a joint account and paid by all parties. When the operation was liquidated in 2004 the Court found that the monies distributed and the debts paid did not follow a logical business pattern. The fact that the revenue and expenses were not distributed jointly in the same way was not enough and the Court found there to be a partnership.

As a result the three family members were all found responsible for the $55,365.82 debt.

It is common for people to work together in a business arrangement. Even if the various parties contribute different monetary amounts, efforts or materials, a partnership may still be found and joint liability may flow as a consequence.

The moral of the story and some lessons to be learned:

  • If you don’t intend to have a partnership, make the divisions crystal clear and act accordingly.
  • If there is no partnership, don’t mingle assets or liabilities jointly.
  • If there is a partnership, be aware of what your partners are committing you to, register it accordingly and have a well drafted legal partnership agreement.
  • Choose your partners wisely.

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Did you know?

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