The Sky’s the Limit—But Not for Limited Partners

The word “limit” carries many connotations, depending on the context. In inspirational quotes, it is used to evoke images that are actually the opposite of its literal meaning: Don’t limit your challenges, challenge your limits; you are your only limit; the limit is not in the sky—it is in the mind; and so on.

In law and, unfortunately, in life this word has the same unimaginative, uninspiring and claustrophobic meaning Mr. Webster has given it: “something that bounds, restrains or confines.” So it is with limited partnerships—the vehicle of choice for a wide array of business investments, including real estate development and construction projects.

Where limited partnerships are concerned, “limit” means the same thing for two different purposes: limited liability and limited participation in the business.

Unlike a partner in an ordinary partnership, a limited partner is liable to the extent of its capital contribution to the partnership but, as a trade-off, it must not participate in the management of the partnership. According to the Partnership Act in British Columbia, the management function should belong solely to the general partner.

Other jurisdictions, including Alberta, Saskatchewan and Ontario, apply a control test, which appears to be a more stringent standard than the management test as indicated in a Saskatchewan decision discussed below. Manitoba takes the middle ground and permits the limited partner to advise the partnership on the management of the business.

This article focuses on the management standard in B.C. Unfortunately, because of the limited (no pun intended) case law on the matter reference to cases in other jurisdictions is necessary.

Ironically, a court decision that helpfully defines what constitutes management activity is from Saskatchewan. In Stillwater Forest Inc. v. Clearwater Forest Products Ltd. Partnership, a limited partner that accepted an offer of financing without consulting the partnership’s board was deemed to have participated in the management of the business. However, the limited partner was not liable as a general partner because of Saskatchewan’s control standard. The financing was subject to the general partner’s approval and was, in any event, incidental to the partnership’s business. Under similar circumstances, a limited partner in B.C. would have likely lost its limited liability protection.

There are no hard and fast rules regarding the nature and extent of activity that results in the loss of limited liability protection. Decisions across Canada are consistent in holding that each case must be determined on its own facts, including the nature of the partnership’s business, the actions of the limited partner, and the terms of the limited partnership agreement.

Decisions across Canada are consistent in holding that each case must be determined on its own facts, including the nature of the partnership’s business, the actions of the limited partner, and the terms of the limited partnership agreement.

The unpredictable, factually driven nature of the law in this area is seen in the differing results reached in Haughton Graphics Ltd. v. Zivot et. al. (an Ontario High Court decision), and Nordile Holdings Ltd. v. Breckenridge (a British Columbia Court of Appeal decision).

Both cases considered a common occurrence in limited partnerships, namely, dual roles occupied by limited partners. For instance, this happens when limited partners are concurrently directors of the general partner. The issue before the courts was whether, in such circumstances, the limited partners ought to be held liable as general partners.

Haughton Graphics involved a claim for payment of a debt for printing services supplied by the plaintiff to a limited partnership acting through two individuals who were concurrently limited partners and president and vice-president of the general partner. The plaintiff knew it was dealing with a limited partnership but was not aware of its structure or legal significance. The Ontario court determined the two limited partners were liable for the debt based on the control test. They made managerial decisions, dealt directly with the plaintiff, and acted as operating minds of the partnership. No doubt a similar result would have been reached in B.C.

In Nordile Holdings, the limited partners were also directors and officers of the general partner. However, they were not held liable for the limited partnership’s financial obligations under a real property purchase agreement. A crucial distinction was that at trial, the parties entered into an agreed statement of facts whereby the plaintiff accepted that the limited partners had, at all material times, participated in the management of the limited partnership, but only in their capacities as directors and officers of the general partner.

In the face of such an admission, the Court was unwilling to find liability since the evidence did not disclose a sufficient degree of managerial control. It is difficult to say whether the result would have been the same if the agreed statement of facts had read differently.

However, one thing is clear, Persons considering a foray into the world of limited partnerships should consider carefully the risks associated with their activities that might be perceived as managerial by the courts.

Given the limited case law in this area and the fact-driven nature of the inquiry, clients are well advised to seek legal rather than inspirational advice before challenging the limits—at least in this area of the law.

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