Legal Duties in Partnerships vs. Corporations
Written by Emily Zheng, JD Candidate 2024 | UCalgary Law
Whether you are a partner in a partnership or a director of a corporation, there are duties that you owe to your fellow partners or directors that tend to go unspoken and unwritten during the lifetime of a business. Yet, breaching these duties can lead to a partner or a director being held liable to the other partners or the corporation respectively and subject to damages, disgorgement of profits, or other relief.
Duties Owed Between Partners in a Partnership
According to Section 6 of the Alberta Partnership Act,[1] partners within the same partnership are agents of each other, meaning they have given each other the power to affect their legal relationships.[2] Courts have identified two main categories of duties that an agent owes to their "principal":[3]
Duty of care – this means agents must act with the care, competence, and diligence expected of agents in like circumstances, and they are obligated to follow all lawful and reasonable instructions from their principal.[4] Their duties must be carried out with reasonable diligence, and what is reasonable will depend on the circumstances of each case.[5]
Fiduciary duties – otherwise known as "duties of loyalty"- require an agent to keep their principal's interests foremost in mind when completing assigned matters.[6] These duties include acting with perfect good faith and fully disclosing any information that may conflict with their principal's interest.[7] Additionally, an agent cannot enter any transactions that may conflict with their principal's interest unless the exact nature and extent of their interest is disclosed and the principal consents.[8]
The duties above are recognized by the courts and incorporated into the Alberta Partnership Act within Sections 22-35.
Duties Owed by Directors to Corporations
You can find almost identical duties listed above within the Alberta Business Corporations Act[9] in Section 122(1). However, courts have elaborated upon these duties within the context of corporations, expanding certain interpretations.
Duty of care – the Alberta Business Corporations Act states that directors are "to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances."[10] This duty is applied broadly and can include individuals outside the corporation, such as creditors – however, the exact scope is still unclear. However, courts have acknowledged that this duty of care is a higher standard than the common law duty found between individuals.[11]
Fiduciary duties – similar to the elements mentioned above, directors have a duty to act honestly, in good faith, and in the corporation's best interests.[12] Since this duty is owed to the corporation (a separate legal entity), it includes all of the corporation's stakeholders and is owed to them equally.[13] However, this duty was also found to be extendable to employees, creditors, consumers, governments, and even the environment.[14]
One difference to note between the duties owed between partners and those owed by directors to corporations is that, unlike partners, directors cannot take an opportunity that a corporation might accept without giving notice or approval to the corporation because this would provide directors with an unfair business advantage and is contrary to good faith.[15] Unlike partners, this duty does not end even after the business relationship ends.[16]
Conclusion
Similar to how good business practices often go unspoken, there are also underlying legal standards that courts expect business individuals to follow regardless of whether or not they are found on paper. While these duties are often missing from documents, courts still expect these statutory requirements and expectations to be met.
Endnotes
[1] Partnership Act, RSA 2000, c P-3 [APA].
[2] Swift v Tomecek Roney Little & Associate Ltd, 2014 ABCA 49.
[3] Watson v Holyoake, [1986] OJ No 541 [Watson].
[4] Ibid.
[5] Groom, Lecky, Noonan v MacFarlane, 2000 PESCTD 61 at para 15.
[6] APA, supra note 1.
[7] Watson, supra note 3.
[8] Ibid.
[9] Business Corporations Act, RSA 2000, c B-9.
[10] Ibid, s 122(1)(b).
[11] Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68.
[12] Ibid.
[13] BCE Inc v 1976 Debentureholders, 2008 SCC 69.
[14] Ibid.
[15] Canadian Aero Service Ltd v O'Malley et al, [1974] SCR 592.
[16] Ibid.
