Liability for negligent misrepresentation or breach of fiduciary duty ousted by contractual relationship?

Limited partners who sign agreements for financing directly with financial institutions for partnership projects generally must rely upon the general partner to keep them informed.

Sometimes that does not happen or other miscommunications occur.
In Empire Life Insurance Company v. Arnold, 2010 ONCA 3, released today, a lender to a partnership provided information to limited partners that turned out to be wrong. There was no issue of fraud but limited partners attempted to claim negligent misrepresentation or breach of fiduciary duty in defence of claims by the lender for payment.

The Court of Appeal found that the relationship was contractual only and there was no breach of fiduciary duty or duty respecting negligent misrepresentation. The case is essential reading for financing/litigation counsel.

The Court writes:

[20]         Here Colonia and the limited partners relationship is defined between the contracts between them and the general partner. Absent the contracts they are strangers in law. The limited partners granted mortgages as security to Colonia for the loans advanced by Colonia to financially facilitate the limited partners' acquisition of their partnership units. In consenting to fracture the original mortgage Colonia made it clear that the administration in relation to the 147 fractured mortgages was for the general partner and not Colonia. Indeed the record discloses that when, on one occasion, the general partner requested of Colonia that it provide certain information to the individual limited partners, Colonia refused to do so. In fact, Colonia never communicated with the limited partners for any reason. The mortgage assumption agreements that the limited partners signed were sent by Colonia to the general partner for execution and return. There can be no doubt on this record that the only party the limited partners relied on in relation to the Colonia mortgages was the general partner. There was no reason for Colonia to have the limited partners in its contemplation when it had specifically refused to have any relationship with them. Colonia's relationship of proximity was with the general partner and on this record the general partner was in full possession of all the facts long before the loan was ever renewed- it just did not pass the information along to the limited partners.

James Morton
1100-5255 Yonge Street
Toronto, Ontario
M2N 6P4

416 225 2777

www.jmortonmusings.blogspot.com