A recent decision of the Ontario Superior Court of Justice reminds us, once again, that it can be costly if you fail to consider an important question when writing a contract; a problem that can even, as this case shows, befall lawyers writing contracts for their own law firms. In the decision of Djurdjevac v. Deacon, Spears, Justice D.L. Corbett was tasked with deciding the legal result when a law firm’s partnership agreement was silent on an important financial issue.
The Applicant, Mr. Djurdjevac, articled at the Respondent law firm Deacon, Spears, joined the firm as an associate thereafter and was invited to become a partner in 2008. As is the case with most law firms, the agreement required Mr. Djurdjevac to make a capital contribution (payment of money) to the firm. The capital contribution would be returned when the Applicant left the firm. Less typically, he was also required to make a payment on account of “goodwill”, in the amount of $25,000 per year for 5 years. The agreement did not say what would happen to the obligation to make the payments if Mr. Djurdjevac left the partnership within that 5 year period. And that is exactly what happened.Mr. Djurdjevac left the partnership in 2010 and the firm deducted from funds he was owed the amount of $75,000, representing the $25,000 goodwill payments that he would otherwise have made in 2010, 2011 and 2012. Mr. Djurdjevac brought his Application, seeking judicial interpretation of the contract and a return of the funds withheld.The Judge determined that there had been no discussion on this point and there was nothing in the partnership agreement to determine the matter. The Application Judge found:“It is clear that no one expressly raised the question of what obligations Mr Djurdjevac would have if, for any reason, he left the partnership in less than five years.The inference I draw from the evidence is that the parties did not put their minds to Mr Djurdjevac leaving the partnership in less than five years. The evidence of both sides casting shades of meaning on their discussions six years ago that would bear on this question is patently self-serving and not entitled to any weight. If either side had put its mind to the issue, the issue would have been discussed expressly. All involved are reputable and competent legal professionals, who acted in good faith around Mr Djurdjevac joining the partnership. They would have been clear and direct about this issue if they had put their minds to it”.The Judge therefore looked to all of the documents provided to Mr. Djurdjevac when he was offered partnership. Noting that those documents were all provided by the firm, Justice Corbett held that “any ambiguity arising from the failure to document to terms of the goodwill payments out to be resolved against the firm”.The Judge then noted that a financial “Projections” document provided to Mr. Djurdjevac included the following note: “Marko Djurdjevac is expected to pay for his partnership share directly out of his earnings over the next 5 years”.Giving meaning to this notation, and resolving any ambiguity against the law firm that prepared the documents, Justice Corbett concluded:“I conclude that the obligations to pay goodwill were contingent on Mr Djurdjevac having ‘partnership earnings’ [in] a given year from which to make the goodwill payments. Since Mr Djurdjevac withdrew from the partnership at the end of a partnership year, I do not have to consider whether the annual goodwill payments should be pro-rated for a partial year, or whether they are payable to $25,000 from any partnership income earned in a particular year. In the result, I find that Deacon Spears was not entitled to deduct $75,000 from the amounts it owed Mr Djurdjevac on account of goodwill payments for 2011, 2012 and 2013”.