2003 BCSC 1891 Hughes v. Baldwin

Before: The Honourable Madam Justice Allan

In Chambers

Reasons for Judgment

Counsel for the appellant:	William G. Hopkins K. Bridge
Counsel for the respondent:	Kerry A. Short
Date and place of appeal:	November 18 & 19, 2003
	Vancouver, B.C.

[1] The appellant Hughes appeals from an arbitration award issued by George Macintosh, Q.C., on June 12, 2003 (the “Award”) pursuant to section 31 of the Commercial Arbitration Act, R.S.B.C. 1996, c. 55. Leave to appeal was granted by this Court on August 22, 2003. Section 31(4) of the Commercial Arbitration Act authorizes the Court hearing the appeal to confirm, amend or set aside the award, or remit the award to the arbitrator together with the Court’s opinion on the question of law that was the subject of the appeal.

[2] Counsel agree that the appeal must be on a question of law and that the standard of review of an arbitrator’s decision is “correctness”.

[3] The issue on this appeal is whether a non-negligent partner is entitled to indemnification from a negligent partner where the former’s vicarious liability to a third party arises solely from the latter’s professional negligence.

Background

[4] The parties agreed to arbitration on the basis of the following agreed statement of facts:

· In or about 1981, the Appellant, Roger Hughes (“Hughes”) and the Respondent, Nigel Baldwin (“Baldwin”) entered into a written agreement pursuant to which they agreed to form a partnership under the firm name and style of Roger Hughes Architects.

· In February 1988, Hughes and Baldwin agreed to form professional corporations and to continue their practice as a partnership of professional corporations under the name Hughes Baldwin Architects (“HBA”).

· On March 21, 1988, Hughes incorporated Roger Hughes Inc. The name of the corporation was changed to Roger Hughes Architects Inc. (“RHAI”) on October 18, 1996.

On March 22, 1988, Baldwin incorporated Nigel Baldwin Inc. The name of the corporation was changed to Nigel Baldwin Architects Ltd. (“NBAL”) on April 10, 1995.
On May 20, 1988, Roger Hughes Inc. and Nigel Baldwin Inc. filed a declaration of partnership with Corporate and Central Registry in relation to HBA.
Although no new written partnership agreement was ever signed by RHAI and NBAL in relation to HBA, Hughes and Baldwin continued to carry on their architectural practice as a partnership through professional corporations as though the 1981 agreement still applied.
During the period 1981 to 1995 the business of HBA was providing professional services in the field of architecture. Design and field review services are within HBA’s ordinary course of business. At all times each partner of HBA had authority to act for HBA with respect to the business of the partnership.
During the period 1981 to 1995 the profits and losses of HBA were divided between the partners. Projects were not accounted for separately and profits or losses from individual projects were not assigned differently between the partner in charge of a particular project and the other project.
In or about July 1993 HBA entered into a contract with a developer for the design and field review services for a residential condominium project in south Vancouver commonly known as Tugboat Landing, Phase I (the “Project”).
During the period from March 1993 to September 1994 architectural design and architectural field reviews were performed by HBA in relation to the Project.
Baldwin or NBAL prepared, signed and sealed the working drawings and specifications issued by HBA in connection with the Project which is the subject matter of the claims by The Owners, Strata Plan LMS 1220 (the “Owners”) as described in paragraph 16 herein. Baldwin or NBAL performed the on-site architectural inspections and signed certificates which were given to the City of Vancouver in connection with the Project.
Neither Hughes nor RHAI were involved in the design, supervision or certification of the Project.
HBA was dissolved pursuant to an oral agreement on April 30, 1995.
RHAI and NBAL filed a declaration of dissolution of HBA with Corporate and Central Registry on July 6, 1995.
On the dissolution of HBA, RHAI and NBAL divided the records pertaining to all projects undertaken by the partnership in accordance with a list of projects dated 7/24/95. NBAL took all records relating to the Project and the three remaining phases of Tugboat Landing.
On or about November 10, 1999, the Owners commenced an action against North Fraser Holdings Ltd. and others including HBA, RHAI, NBAL, Baldwin and Hughes claiming damages for the cost of repairing deficiencies arising from negligent design and construction.
RHAI would not have faced any potential liability to the Owners but for the fact that it was a partner with NBAL in HBA when the Project was designed and constructed.
The Owners’ claims were settled on February 21, 2003, with RHAI’s and NBAL’s insurers agreeing to contribute equally to the contribution that was made on behalf of HBA in relation to the settlement, on the basis that the question of whether RHAI is entitled to be indemnified by NBAL in respect of the amount contributed to the settlement by or on behalf of RHAI would be determined later by agreement or, if necessary, by arbitration.

The grounds of appeal

[5] The grounds of appeal are (1) that the arbitrator erred in law in failing to find that the appellant has a common law and equitable right to indemnification; (2) that the arbitrator erred in law in failing to find that an implied contract of indemnification applies in the present case; and (3) that the arbitrator erred in law in not applying the principles of the Negligence Act R.S.B.C. 1996, c. 333, s. 4 in favour of the appellant’s position.

Does the appellant have a right to indemnification?

[6] This analysis must begin with a consideration of the relevant sections of the Partnership Act, R.S.B.C. 1996, c. 348.

[7] Section 7 describes the principles of agency in a partnership:

7 (1) A partner is an agent of the firm and the other partners for the purpose of the business of the partnership.

(2) The acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he or she is a member bind the firm and his or her partners, unless

(a) the partner so acting has in fact no authority to act for the firm in the particular matter, and

(b) the person with whom he or she is dealing either knows that the partner has no authority, or does not know or believe him or her to be a partner.

[8] Section 12 sets out the liability of the firm where the wrongful act or omission of a partner acting in the ordinary course of business causes damage to third parties:

12 If, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his or her partners, loss or injury is caused to any person who is not a partner in the firm or any penalty is incurred, the firm is liable for that loss, injury or penalty to the same extent as the partner so acting or omitting to act.

[emphasis added]

[9] Section 14 establishes the joint and several liability of partners when a firm is liable under section 12:

14 A partner is jointly and severally liable with his or her partners for everything for which the firm, while he or she is a partner in it, becomes liable under … section 12 ...

[10] Section 27 establishes rules for determining the rights and duties of partners in relation to the partnership:

27 Subject to any agreement express or implied between the partners, the interests of partners in the partnership property and their rights and duties in relation to the partnership must be determined by the following rules:

(a) all the partners are entitled to share equally in the capital and profits of the business and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm;

(b) the firm must indemnify every partner in respect of payments made and personal liabilities incurred by him or her

(i) in the ordinary and proper conduct of the business of the firm, or

(ii) in or about anything necessarily done for the preservation of the business or property of the firm; …

[emphasis added]

[11] The respondent concedes that the appellant would be entitled to be indemnified by the firm for any amount paid over his relative interest in the firm. However, because Hughes and Baldwin were the only partners and their interests were equal, that issue does not arise in this case.

[12] In their submissions, counsel agreed that there was no Canadian or Commonwealth case directly on point on the issue of whether a non-negligent partner is entitled to indemnification from a negligent partner where the former’s vicarious liability to a third party arises solely from the latter’s professional negligence raised on the appeal. Following the hearing of the appeal, it came to my attention that a pair of cases decided in 1991 and 1992 by this Court address the issue of indemnification between partners under the Partnership Act.

[13] In MacDonald v. Schmidt (No.1), [1991] B.C.J. No. 3377 (Q.L.) (S.C.), Mr. Justice Holmes held a chartered accountant 25% liable for negligent misrepresentation (the plaintiffs were 75% contributorily negligent). The partnership was found vicariously liable for his negligence. The work was done in the ordinary course of business for a partnership client.

[14] In MacDonald v. Schmidt (No.2), [1992] B.C.J. No. 230 (Q.L.) (S.C.), the other partners sought indemnity against the negligent accountant. The case was argued in the context of agency principles arising from section 7 of the Partnership Act.

[15] Holmes J. found that the agency relationship in section 7 of the Partnership Act governs affairs between the partnership and a third party, but not as between the partners inter se. He held:

Responsibility for damages occasioned through the negligence of a partner acting within the course of the business of the partnership parallel the principle that partners who share in the profits of the firm are also obliged to share in its losses. Work performed in the ordinary course of the partnership business bestows both a benefit and a burden on individual partners. All partners of the [partnership firm] should bear their share of the losses as governed by their partnership agreement. The applicants claim for indemnity for the vicarious liability they incurred by reason of the negligence of the [defendant accountant] is dismissed…

[16] By memorandum dated December 1, 2003, I invited counsel to file written submissions with respect to the applicability of the latter case to the appeal. Counsel filed their submissions on December 10, 2003.

[17] The respondent submitted that the principles in MacDonald were applicable and determinative of the issue on appeal. The appellant submitted that the MacDonald decisions were not binding authorities on the issues raised on the appeal. Mr. Hopkins argued that Holmes J. did not consider the relevant case law and statutory provisions or the arguments raised by the appellant in the present case. The submissions in MacDonald were based on the principle of agency, which is not raised by the appellant.

[18] With respect to the issue of whether this Court is bound by the decisions in MacDonald, Mr. Hopkins submits that, based on the principles of Re Hansard Spruce Mills, [1954] 4 D.L.R. 590, 13 W.W.R. 285 (B.C.S.C.), those decisions are not binding in this case.

[19] In Hansard, Mr. Justice Wilson, as he then was, at 592, described the circumstances under which this Court could properly decide not to follow a previous judgment of the Court:

(a) Subsequent decisions have affected the validity of the impugned judgment;

(b) it is demonstrated that some binding authority in case law, or some relevant statute was not considered;

(c) the judgment was unconsidered, a nisi prius judgment given in circumstances familiar to all trial Judges, where the exigencies of the trial require an immediate decision without opportunity to fully consult authority.

If none of these situations exist I think a trial Judge should follow the decisions of his brother Judges.

[20] Mr. Hopkins submits that MacDonald is inconsistent with authority relied upon by the appellant that was not considered by Holmes J. With the exception of certain American authorities, I do not agree that there are other decisions, binding or not, in conflict with MacDonald. Further, that judgment was carefully considered.

[21] Certainly, many of the facts and the arguments made in MacDonald differed from those raised on this appeal. I do not consider the fact that the issue in MacDonald was negligent misrepresentation rather than negligence to be significant. It is true that Holmes J. was only asked to consider section 7 of the Partnership Act and determine liability on the principles of agency. However, in my view, Holmes J. concluded, on the basis of the principles that underlie the Partnership Act, that where negligence occurs in the ordinary course of the partnership business, an innocent partner is not entitled to indemnification from a negligent partner; those who reap the benefits of partnership must also bear its burdens. Nevertheless, I will consider the submissions made by the appellant.

[22] Section 27 of the Partnership Act provides that partners must share equally in the profits and contribute equally to the losses of their business but provides a default position in the event of an express or implied agreement between the partners. It is common ground that there is no express agreement of indemnification in this case.

[23] The appellant submits that an “implied” contract of indemnification arose between Baldwin and Hughes. He relies on the case of McFee v. Joss (1925), 56 O.L.R. 578, [1925] O.J. No. 202 (Q.L.) (C.A.) for that proposition. In that case, the defendant, for the purpose of his father’s business, hired the plaintiff's car. While driving it upon a highway in the ordinary course of business, he ran into a car owned and driven by a third party. By operation of the relevant statute, the plaintiff was liable to pay damages to the third party. The plaintiff then claimed indemnity from the defendant son and father. The Court held that the defendants were liable to indemnify the plaintiff. The ratio is succinctly stated by Mr. Justice Ferguson for a unanimous five-member panel at ¶ 24:

…[A]n implied contract of indemnity arises in favour of a person who, without fault on his part, is exposed to liability and compelled to pay damages on account of the negligence or tortious act of another, provided the parties were not joint tort-feasors in such a sense as to prevent recovery… [S]uch right of indemnity exists independently of the statute [the then Motor Vehicle Act which deemed a master-servant relationship between owners and drivers], and whether or not contractual relations exist between the parties, and whether or not the negligent person owed the other a special or particular duty not to be negligent.

[24] The appellant also cites McFee as authority for the proposition that the principle of indemnity is not limited to a statutory relationship. That submission was raised before the Arbitrator and rejected. Mr. McIntosh held that the principles in McFee did not apply to determining the responsibilities as between partners.

[25] The appellant cites two further cases, Allen v. Nolet (1967), 61 D.L.R. (2d) 743, 60 W.W.R. 247 (B.C. C.A.) and Sainas v. Sainas (1968), 66 D.L.R. (2d) 753 (B.C. S.C.), which found a deemed master-servant relationship between owners and authorized drivers, resulting in a relationship of statutory vicarious liability.

[26] In my opinion, the appellant erroneously presumes an analogy between partnerships and owner-driver relationships. There is no Canadian or Commonwealth authority for implying a contract of indemnification into a partnership relationship, the fundamental characteristic of which is mutual agency: see Cox v. Hickman (1860), 8 H.L. Cas. 268. Actions taken by one partner in the ordinary course of business are imputably taken by all other partners, who must share in the profits and losses alike.

[27] Further, there are no unique or unusual circumstances in this case that would justify imputing an indemnification term. Accordingly, reading such a term into this relationship would be tantamount to reading such a term into every partnership agreement. To do so would defeat the obvious purpose of section 27 which governs the rights and duties of partners in relation to their partnership.

[28] In Rossmo v. Vancouver Police Board, 2003 BCCA 677, the Court of Appeal recently considered the principles relating to implied terms. Mr. Justice Donald for the Court adopted the statement of Mr. Justice Lambert in London Drugs Ltd. v. Kuehne and Nagel International Ltd. (1990), 45 B.C.L.R. (2d) 1 at 64:

There is a useful restatement of the relevant principles in the reasons of Lord Simon of Glaisdale, for the Privy Council, in B.P. Refinery (Westernport) Pty Ltd. v. Shire of Hastings (1977), 16 A.L.R. 363 (P.C.) at p. 376:

Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.

[29] Indemnification clauses in partnership agreements are not uncommon and it is, in my view, reasonable to draw from the omission of such a clause in this case, the conclusion that these parties deliberately chose not to include one. In the complete absence of any indication of the parties’ intention to provide for indemnification between the parties inter se, it would be inappropriate for the Court to imply such a term.

The American jurisprudence

[30] The appellant cites numerous American authorities for the following proposition that is incorporated into the Corpus Juris Secundum, Vol. 68, p. 286, ¶ 84 (1998):

A partnership, liable to a third person for injuries, has a right of indemnity against the partner whose negligence caused the injuries.

[31] It does not appear that that principle has been adopted in all American jurisdictions. However, in view of the foregoing analysis, I do not consider it necessary to consider the American authorities.

Does the Negligence Act support the Appellant’s argument for indemnification?

[32] The appellant also submits that the arbitrator failed to consider the applicability of section 4 of the Negligence Act, supra. That section provides:

4 (1) If damage or loss has been caused by the fault of 2 or more persons, the court must determine the degree to which each person was at fault.

(2) Except as provided in section 5 [negligence of spouse in cause of action that arose before April 17, 1985] if 2 or more persons are found at fault

(a) they are jointly and severally liable to the person suffering the damage or loss, and

(b) as between themselves, in the absence of a contract express or implied, they are liable to contribute to and indemnify each other in the degree to which they are respectively found to have been at fault.

[emphasis added]

[33] The appellant argues that section 4 provides a clear right of indemnity, based on respective degrees of fault, where two or more persons (be they partners or otherwise) face liability to a third party. Mr. Hopkins also submits that, for that right of indemnification to take effect, the Legislature has set the applicable level of fault as one of ordinary negligence. He points out that it would be perverse if, being completely blameless, the innocent partner would be entitled to no indemnification, yet if he were 1% to blame, he would be entitled to 99% indemnification.

[34] In my view, the arbitrator correctly rejected Hughes’ submission that the Negligence Act applies. Section 4 of that Act establishes the law with respect to the joint and several liability of two or more defendants who have caused loss or damage to a blameless plaintiff. It does not apply to a situation where a defendant, who is vicariously liable to a negligent party, is not himself at fault.

[35] Again, the obvious recourse for partners who wish to avail themselves of indemnity in the event of the negligence of one or more of the partners is to incorporate an indemnity clause in their partnership agreement.

Is a partnership analogous to an employer-employee relationship?

[36] The appellant asserts that an employee’s obligations to indemnify an employer for vicarious liability should also apply to partnership situations. The respondent replies that a partnership is distinguishable from an employer-employee relationship; a partnership is a business relationship governed by the Partnership Act. Further, a partner, unlike an employee, has an ownership interest in the business and an entitlement to his or her share of the profits. I agree with the arbitrator’s conclusion at ¶ 36 that “it is within the law of partnership itself and not that of employer-employee relations where the answer to this issue must be found.”

[37] The Partnership Act itself draws a distinction between partners and employees. Section 4 provides:

In determining whether a partnership does or does not exist, regard must be had to the following rules: …

(c) the receipt by a person of a share of the profits of a business is proof in the absence of evidence to the contrary that he or she is a partner in the business, but the receipt of a share, or of a payment contingent on or varying with the profits of a business, does not of itself make him or her a partner in the business, and in particular …

(ii) a contract for the remuneration of an employee or agent of a person engaged in a business by a share of the profits of the business does not of itself make the employee or agent a partner in the business or liable as a partner, …

[38] Thus, there is an important distinction to be made between a relationship in which an employee receives a salary and a partnership in which the partners’ remuneration varies with the profits and losses of the partnership.

[39] In enacting the Partnership Act, the Legislature could have incorporated the common law principles of employer-employee indemnity. Instead, section 27 incorporates mandatory joint and several liability, subject to any express or implied agreement to the contrary.

[40] The appellant cites Dubai Aluminium Company Ltd. v. Salaam, [2002] H.L.J. No. 48, [2002] 3 W.L.R. 1913 (H.L.) for the proposition that the principles of vicarious liability underlying partnership and employment are indistinguishable, and thus the obligation of an employee to indemnify his or her employer for vicarious liability applies equally to partners who cause other partners vicarious liability.

[41] At ¶ 106, the Court in Dubai held that the criterion for vicarious liability is identical for partners and employers: the wrongful act or omission must be performed in the ordinary course of business. However, the Court addressed only the vicarious liability of innocent partners for the acts of negligent partners, as against third parties. The case did not discuss the subject of indemnity between innocent and negligent partners.

Conclusion

[42] The appeal is dismissed and the Award of the arbitrator is confirmed.

“M.J. Allan, J.”
The Honourable Madam Justice M.J. Allan

Citation:	*Hughes v. Baldwin,*
	2003 BCSC 1891