Enforcing The Unenforceable: Limited Partners May Be Bound By Unauthorized Conduct Of General Partner

• Published date: 07 July 2021
• Subject Matter: Litigation, Mediation & Arbitration, Trials & Appeals & Compensation
• Law Firm: McCarthy Tétrault LLP
• Author: Canadian Appeals Monitor, Cassidy Bishop, Nicole Fitz-Simon and Megan Pryor

In a limited partnership, a general partner runs the business of a limited partnership, with little to no oversight by the limited partners. Thus, limited partnerships are often governed by carefully drafted partnership agreements that set out the general partner's authority.

But what happens when the general partner goes beyond their authority and enters into agreements it ought not to have? Can the limited partners escape the contractual arrangements? What recourse does the other contracting party have when the partnership refuses to proceed with the contract?

The Saskatchewan Court of Appeal answered these questions in ADAG Corporation Canada Ltd v SaskEnergy Incorporated, 2021 SKCA 74. The Court of Appeal held that despite the protections provided under the The Partnership Act (Saskatchewan) (the "Act"), limited partners may be bound by the unauthorized conduct of the general partner and the contracting party can enforce the contract.¹

Background

ADAG Corporation Canada Ltd. ("ADAG"), was the general partner of a limited partnership, Geschlossene Grundstücksgesellschaft GGG 10 ("GGG 10", ADAG and GGG 10 are collectively referred to as the "Appellant"). The limited partnership owned an office building located in Regina, Saskatchewan. The general partner was only permitted to sell the office building upon a two-third majority vote by the limited partners.

In its role as general partner, ADAG entered into several agreements with SaskEnergy Incorporated ("SaskEnergy"). SaskEnergy agreed to lease the building from GGG 10, and ADAG granted SaskEnergy an unconditional option to purchase the building (the "Unconditional Option"). The Unconditional Option was not contingent upon approval by the limited partners of GGG 10, and accordingly, was outside ADAG's authority to grant. When SaskEnergy sought to exercise the Unconditional Option, ADAG asserted that the Unconditional Option was unenforceable since SaskEnergy was aware that it did not have the authority to bind GGG 10 to a sale of the building without approval from two-thirds of the limited partnership. SaskEnergy then sued ADAG and GGG 10 for breach of contract. An initial trial court decision in favour of SaskEnergy was overturned on appeal because the Unconditional Option was unenforceable under certain provisions of the Act, as the appellate court found that SaskEnergy had notice and knowledge of ADAG's limited authority when it entered into the agreements.² The matter was remitted to trial to...