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A partnership can exist without anyone signing anything, and it can be dissolved by one partner giving notice. If your business relationship has broken down, the default rules in the Partnerships Act may not be the rules you expected.
Book My 15-Minute Assessment →Under the Partnerships Act (Ontario), a partnership at will can be dissolved by any partner giving notice to the others, and section 24 divides profits equally unless the partners have agreed otherwise in writing.
It depends on the terms. A partnership for a fixed term ends on expiry. A partnership at will can be dissolved by any partner giving notice to the others under the Partnerships Act. A written partnership agreement may impose a notice period and a buy-out mechanism instead. A court can also order dissolution under section 35 on grounds including prejudicial conduct or persistent breach.
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The Partnerships Act (Ontario), R.S.O. 1990, c. P.5, defines partnership as the relation that subsists between persons carrying on a business in common with a view to profit. No filing, agreement or formality is required. Section 3 sets out rules for determining whether a partnership exists, including that the sharing of gross returns does not of itself create one, but that receipt of a share of the profits is proof in the absence of evidence to the contrary. Two people who split the profits of a joint venture may be partners whether or not they ever used the word.
That matters because the consequences are severe. Under section 10, every partner is liable jointly with the other partners for the debts and obligations of the firm incurred while they are a partner. Under section 6, each partner is an agent of the firm and can bind it in the ordinary course of its business. A person who did not think they were in a partnership can find themselves personally liable for obligations another person created. The first question in most partnership disputes is therefore whether a partnership existed at all, and if so, on what terms.
Limited partnerships under the Limited Partnerships Act are different: the limited partner's liability is limited to its contribution provided it does not take part in the control of the business, and the general partner bears unlimited liability. Limited liability partnerships, used mainly by regulated professionals, are governed by sections 44.1 to 44.4 of the Partnerships Act and limit a partner's liability for the negligence of other partners, but not for the partnership's ordinary business obligations or for the partner's own conduct.
| Issue | Default under the Partnerships Act | What a written agreement usually provides instead |
|---|---|---|
| Division of profits | Equally, regardless of capital contributed | Pro rata to capital, effort or an agreed formula |
| Salary for working in the business | No partner is entitled to remuneration for acting in the partnership business | Defined draws or management compensation |
| Admitting a new partner | Requires the consent of all existing partners | Majority or supermajority approval |
| Ordinary business decisions | Decided by a majority; a change in the nature of the business requires unanimity | A defined governance and voting structure |
| Expelling a partner | No majority may expel a partner unless the partners have expressly agreed to that power | An express expulsion clause with defined grounds |
| Ending the partnership | A partnership at will is dissolved by any partner giving notice | A fixed term, notice period and buy-out mechanism |
| Departing partner's interest | An accounting and, potentially, a sale of the partnership assets | An agreed valuation formula and payment terms |
The default that causes the most damage is dissolution by notice. Where there is no fixed term, one partner can bring the entire firm to an end unilaterally, which triggers a winding up and, potentially, a forced sale of the business. Partners who have built substantial goodwill are often shocked to learn that the person contributing least has the same power to end the arrangement as the person who built it.
Partners are fiduciaries. Section 28 of the Partnerships Act requires partners to render true accounts and full information of all things affecting the partnership to any partner or their legal representatives. Section 29 requires a partner to account to the firm for any benefit derived without consent from any transaction concerning the partnership or from any use of the partnership property, name or business connection. Section 30 requires a partner who competes with the firm in the same line of business without consent to account for and pay over all profits made in that business.
Those three sections are the backbone of most partnership litigation. The typical claim is that one partner diverted work to a company they controlled, took an undisclosed commission, used partnership funds for personal purposes, or set up a competing operation while still a partner and took the client list with them. The remedy is an accounting and disgorgement of the profits, which is a materially different measure from ordinary contract damages because it focuses on what the defaulting partner gained rather than on what the firm lost.
Partnership accounting claims are decided on books, bank statements and client files. Where a partner controls the accounting system, an early order for production or preservation of records can be more valuable than any interim payment, because the loss of access to the ledgers is frequently what makes the claim unprovable.
Unequal contribution is the most frequent trigger. One partner works full time in the business while another has drifted away, or one contributed the capital while the other contributed only effort. Because section 24 divides profits equally and gives no partner a right to remuneration for working in the business, the harder-working partner has no statutory entitlement to a larger share. The remedy has to be found in an agreement, in an implied variation established by a consistent course of conduct, or in a negotiated exit.
Drawings are the second flashpoint. Partners frequently take money out of the business without recording whether the payment is a draw against profit, a repayment of capital, an advance or a loan. When the relationship ends, the accounting exercise has to characterise years of transactions retrospectively, and the partner whose bookkeeping was looser usually fares worse. Section 24 does draw an important distinction: a partner who makes an actual payment or advance beyond the agreed capital is entitled to interest on it, whereas capital contributed is not interest-bearing before profits are ascertained.
Client and goodwill ownership is the third, particularly in professional and service firms. On dissolution, the question of who is entitled to continue serving the clients, and whether the continuing partner must account for the value of the goodwill, is rarely addressed in advance. Restrictive covenants between partners are enforceable in principle but are read narrowly and must be reasonable in scope, geography and duration. A covenant drafted too widely will often be held unenforceable in its entirety rather than being read down.
Personal liability for firm debts is the fourth. Because liability under section 10 is joint, a creditor can pursue whichever partner is most solvent, leaving that partner to seek contribution from the others. Where one partner has given a personal guarantee to a lender or landlord and the others have not, the exposure is unequal even though the business benefit was shared. Any exit negotiation should deal expressly with the release or indemnification of guarantees, because a partner who leaves without addressing them remains exposed long after the business relationship has ended.
Limited partnerships are used widely in real estate and investment structures. Under the Limited Partnerships Act a limited partner's liability is limited to the amount it has contributed or agreed to contribute, but that protection is conditional: a limited partner who takes part in the control of the business becomes liable as a general partner to persons dealing with the limited partnership. Disputes in this area frequently concern whether a limited partner's involvement in decisions crossed that line, and whether the general partner complied with its fiduciary and contractual obligations under the limited partnership agreement.
Limited liability partnerships, permitted under sections 44.1 to 44.4 of the Partnerships Act, are available where the governing body of a profession permits their use. A partner in an LLP is not personally liable for the negligent acts or omissions of another partner or of an employee not under that partner's direct supervision or control. The partner remains fully liable for their own negligence, and the partnership property remains available to satisfy claims. The LLP form limits exposure to colleagues' errors; it does not convert a professional firm into a corporation.
Joint ventures deserve a caution. Parties who describe an arrangement as a joint venture rather than a partnership do not thereby avoid the Partnerships Act. If the substance is a business carried on in common with a view to profit, partnership consequences follow, including joint liability and fiduciary duties, regardless of the label used in the documents. Where the parties genuinely intend to avoid partnership, the arrangement should be structured as a contractual services or co-ownership relationship, with the commercial terms drafted to match.
Determine whether a written agreement governs, and if not, which default rules in the Partnerships Act apply. This single question decides most of the dispute.
Dissolution may occur by notice in a partnership at will, by expiry of a fixed term, by death or insolvency of a partner, or by court order under section 35 on grounds including permanent incapacity, conduct prejudicial to the business, wilful or persistent breach of the agreement, a business that can only be carried on at a loss, and circumstances that make dissolution just and equitable.
Where assets or client relationships are at risk, apply for an injunction under section 101 of the Courts of Justice Act and Rule 40, or for the appointment of a receiver to preserve the business pending resolution.
An action for an accounting establishes what each partner contributed, drew and owes. Section 44 governs the order of distribution on final settlement: debts to outside creditors first, then advances by partners, then capital, then any residue divided in the profit-sharing proportions.
In practice most partnership disputes end with one partner buying the other out on agreed terms rather than with a court-supervised liquidation, which usually destroys the value both partners are fighting over.
Section 38 continues the authority of partners after dissolution so far as is necessary to wind up the affairs of the firm and complete unfinished transactions. Section 36 protects third parties who deal with the firm without notice of a partner's departure, which is why a departing partner should ensure that notice of the change is properly given and that any business name registration is updated.
Partnership litigation has an unusual feature: while the parties fight, the asset they are fighting over is usually deteriorating. Clients leave, staff resign and lenders get nervous. Our first objective is therefore stabilisation, whether by a standstill agreement, an interim operating protocol or, if necessary, court-ordered relief. Only then do we litigate the accounting and valuation issues on a phased budget.
Where a claim is for money of $200,000 or less exclusive of interest and costs, Rule 76 simplified procedure applies and materially reduces the cost. Where the claim is for an accounting or dissolution rather than a fixed sum, the ordinary procedure applies. We advise on which route your claim falls into before you commit to it. Contact us to discuss a partnership dispute.
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