By Ty Schmidt – Supervised by Professor Maharaj
What is to be done with profits that are discovered to have been secretly accrued and withheld from a partnership? In McKnight v. Hutchison, 2022 BCCA 27, the British Columbia Court of Appeal (BCCA) confirmed an earlier trial decision that had determined that the appropriate remedy in the circumstances of the case was to require the earnings to be accounted for as partnership income and then dealt with in accordance with the terms of the partnership agreement.
The dramatis personae of the decision were Donald McKnight and Michael Hutchison, who had been partners in a law practice from 1994 until 1999, when McKnight discovered that Hutchison had received fees from clients of the firm that had not then been reported or treated as income of the partnership. This revelation resulted in a protracted series of litigation that involved two actions, three trials, and now its third appeal in the form of this decision.
The most contentious issue in the case before the BCCA was Hutchison’s appeal from Chief Justice Hinkson’s order in the second action that Hutchison repay $476,258 as a set-off award for equitable compensation for the secret profits. The BCCA determined that this order must be set aside because a remedy had already been determined by Justice Grist in the first action, and thus it was not open for another remedy to be adopted. Further, even if it had been possible for the Chief Justice to re-visit this remedy in the second action, the BCCA held that it was an error to do so by set-off.
In sum, this case serves as a cautionary tale of what can happen when partnership accounting is not conducted in a transparent manner. Even if any irregularities uncovered with a firm’s books are not in fact evidence of fraud, there is a high likelihood that an action will be brought against the offending party, and – as this case has shown – has the potential to become a decades-long legal battle.
The views and opinions expressed in the blogs and case reporter are the views of their authors, and do not represent the views of the Desautels Centre for Private Enterprise and the Law, the Faculty of Law, or the University of Manitoba. Academic Members of the University of Manitoba are entitled to academic freedom in the context of a respectful working and learning environment.