Recently, the Court of Appeal considered limitation periods and discoverability in the context of profits shared under a partnership agreement. This case is significant as it deals with a common scenario in which the terms of a business agreement are not followed in a manner which is insignificant and difficult to detect in the initial stages which, over time, has a more significant effect.
The Court considered the responsibility of the parties to discover that the precise terms of the contract were not being followed.
In Van Allen v. Vos, the parties carried on business as partners in a dental practice for over twenty years. The parties entered into an agreement in 2004 which set out the distribution of profits as between them. Each partner would receive 100% of the profits on the work that he performed. At the heart of the dispute was the work performed by an associate dentist who was the daughter of the appellant. The 2004 agreement set out that the associate would be remunerated for 40% of the value of the work that she did whether that work was performed on her own patients or on patients of either partner. The expenses associated with the associate’s work would be apportioned according to whose patient she was working on. If the associate worked on a patient for one of the partners, that partner would receive credit for the associate’s billings minus the expense associated with the work.
Four years after the profit sharing agreement was entered into, the parties decided to dissolve their relationship. In the course of winding up their relationship, it was discovered that the formula set out in the agreement, by which the profits would be shared, had not been adhered to; The associate’s expenses had been treated as shared expenses, which benefitted the appellant, who referred more clients to the associate. The respondent had borne a disproportionate share of the associates expenses.
One of the points considered on appeal was whether the plaintiff’s action to recover the funds set out under the agreement was barred by either a statutory limitation period or the principles of laches and/or estoppel. The appellant argued that the respondent knew or ought to have known that the funds were not being shared as set out in the agreement, at an earlier date.
The Court of Appeal upheld the trial finding that the respondent did not know that the 2004 agreement was not being followed. It was not apparent, from reviewing the accounting statements, that the formula set out for sharing profits in the agreement was not being followed (the financial statements only showed the net figures for each partners allocation). The Court held that the respondent had no reason to believe that the agreement was not being followed and therefore, the respondent was entitled to rely on the clear wording of the agreement between the parties. The Court stated that “it is reasonable discovery – rather than the mere possibility of discovery – that triggers a limitation period”. The Court applied this reasoning equally to defeat the appellants claims with respect to laches and estoppel.
In an ideal world, parties to business relationships are fully aware of whether or not their contracts are being adhered to, however, this decision is helpful in addressing the issue that arises when there is a minor and undetected deviation from the agreement, which, if not detected at the outset, leads to a significant departure from the intentions of the parties to the agreement.