Business Law in Canada, Canadian Edition with MyBusLawLab, 10 E Richard A Yates Solution Manual

INSTRUCTOR’S RESOURCE MANUAL Richard A. Yates Simon Fraser University Douglas L. Kennedy The Northern Alberta Institute of Technology

BUSINESS LAW IN CANADA Tenth Edition Richard A. Yates, Teresa Bereznicki-Korol, Trevor Clarke

Contents Preface Part 1: Introduction 1 Managing Your Legal Affairs 2 Introduction to the Legal System 3 The Resolution of Disputes—The Courts and Alternatives to Litigation

1 6 14

Part 2: Torts 4 Intentional Torts and Torts Impacting Business 5 Negligence, Professional Liability, and Insurance

22 30

Part 3: Contracts 6 The Elements of a Contract—Consensus and Consideration 7 The Elements of a Contract—Capacity, Legality, and Intention 8 Factors Affecting the Contractual Relationship 9 The End of the Contractual Relationship

38 47 54 60

Part 4: Methods of Carrying On Business 10 Employment 11 Agency and Partnership 12 Corporations

66 75 84

Part 5: Property and Information Technology 13 Real, Personal, and Intellectual Property 14 Information Technology and the Internet

94 103

Part 6: Commercial Transactions 15 Sales and Consumer Protection 16 Priority of Creditors

108 117

Appendices Introductory Comments 1 Recommendations for Teaching Business Law in Canada 2 The Yates Cases 3 Comments with Respect to the Yates Cases

129 130 154 173

A Note on the Appendices The first appendix to this manual consists of a research paper by Richard A. Yates on teaching business law. It summarizes trends and focuses on a teaching approach that is modeled on the case study method of the Harvard School of Business. This research provided the impetus for the creation of the “Yates Cases,” which are included in the second appendix. The third appendix provides commentary on how they might be used in a business law course. . ii

Chapter 1 Managing Your Legal Affairs Learning Objectives • • • • • • • • •

Explain the meaning of “sophisticated client” Describe the role of the lawyer Identify when to hire a lawyer and when to represent yourself Explain how to find a good lawyer Review how lawyers bill their clients Describe legal aid Outline the procedure to follow to complain about your lawyer Discuss the ethics of lawyers and of clients Describe a code of business conduct

Discussion EXPLAIN THE MEANING OF “SOPHISTICATED CLIENT”

A “sophisticated client” understands the role of the lawyer, and their own role as client. This involves knowing when and how to hire a lawyer, the costs involved and what can be done if the lawyer is not meeting your expectations.

Good business decisions can only be made with consideration of appropriate laws, whether the client is able to access that information for themselves, or through the services of a lawyer. A sophisticated client also understands the importance of evidence, and may change their procedures and those of the business in order to make sure the evidence is there in the event of a dispute.

DESCRIBE THE

The client is the ultimate decision maker, but makes those decisions with the advice of a number of experts, of which the lawyer is one. If the business person deems other business factors to be of greater importance, he or she may choose to accept some legal risk, but it is an informed decision. Lawyers must follow the instructions of their clients unless they are illegal or unprofessional (although a lawyer may always resign).

ROLE OF THE LAWYER

IDENTIFY WHEN TO HIRE A LAWYER AND WHEN TO REPRESENT YOURSELF

The decision as to when to hire a lawyer starts when decisions need to be made as to how the business will be organized, whether it is to create to a new business or buy an existing one. It allows business owners to minimize their risks and make sure they are in compliance with all laws. This would also apply to decisions about the premises, financing, existing or new contracts, intellectual property and, finally, selling the business. For less significant decisions, the client may choose to inform themselves, through the internet and the resources listed throughout this textbook and in MyBusLawLab. A sophisticated client will know when to do research themselves and, if unable to obtain the information or understand the information found, to seek legal advice. Small claims court trials are often conducted by clients, due to the low monetary limits, unless the legal issues are too complex for the client to handle themselves. Criminal matters should nearly always be handled by legal counsel.

.

1

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition EXPLAIN HOW TO FIND A GOOD LAWYER

REVIEW HOW LAWYERS BILL THEIR CLIENTS

Finding an appropriate lawyer is difficult. Referrals from trusted friends or associates with the same type of legal problems are good. Some provincial law societies or branches of the Canadian Bar Association also have lawyer referral services that provide names of lawyers who practice in specific areas of law.

You may have an initial consultation for little or no cost, and then decide if you wish to pursue the matter and hire one of them. If not going through one of those services, initial consultation costs will vary and should be confirmed with the lawyer in advance. The lawyer you choose should be someone who you think may be suitable to establish an ongoing relationship with your business.

Lawyers bill their clients for services either by a fixed fee, an hourly rate or by a contingency fee based on a percentage of the money recovered on behalf of the client. Clients are also responsible for paying disbursements, the lawyer’s out-of-pocket expenses incurred, such as filing fees, long-distance telephone charges, etc. Sometimes a lawyer will require a financial retainer to start a file, which operates as a deposit against legal work performed.

DESCRIBE LEGAL AID

Legal aid may be available for people with low income, but the eligibility varies from province to province, so it’s best to check with the administrators of the program in your province. What types of legal services are covered also varies, and it is generally not available for business issues. Duty counsel is often available at no charge in criminal court to provide advice, but not representation.

OUTLINE THE

Law is a self-governing profession, with provincial law societies that serve this function. Fee complaints are dealt with differently from province to province.

Complaints about a lawyer’s conduct are dealt with through the law society, which will have a resolution process that could include mediation, investigation and formal hearings, with penalties for wrongdoing. Claims for compensation are subject to limitation periods, as is any other action.

PROCEDURE TO FOLLOW TO COMPLAIN ABOUT YOUR LAWYER

DISCUSS THE ETHICS OF LAWYERS

DESCRIBE A CODE OF BUSINESS CONDUCT

Professional and ethical obligations of lawyers are set out in rules of professional conduct established by each province’s law society. The vast majority of lawyers meet these standards, but as with any profession, there are a few that do not. If this occurs, the client needs to take appropriate action on a timely basis.

There is no code of conduct for business people, and there have recently been a number of well publicized examples of breaches of ethical conduct by high profile business people. This affects the public’s perception of the integrity of enterprises in our country and the advisability of doing business here. Each business should make a commitment to ethical behaviour by preparing a code of conduct for their employees. It needs to include issues such as conflicts of interest, use of corporate assets and opportunities, confidentiality, fair dealing, compliance with laws and reporting of unethical or illegal behaviour within the business. It needs to reflect the business’ core ethical values and principles, in order to encourage ethical behaviour on the part of all those associated with the business. This, in turn, can enhance the long term success of the business.

.

2

Chapter 1: Managing Your Legal Affairs Answers to Questions 1. Explain the meaning of “sophisticated client”.

Sophisticated clients are confident, knowledgeable, up-to-date and understand the role of a lawyer. As well, they know when to represent themselves and when to hire a lawyer, and the costs involved when a lawyer is hired.

2. Why should the owner of a small business have a lawyer on “the team”?

A lawyer is an expert, providing relevant advice to the client, which allows the client to make an informed decision.

3. Distinguish the role of the client from the role of the lawyer.

The client is the decision maker, who consults a number of experts, including lawyers, in order to make decisions. Lawyers are experts in their field who provide advice, and who must follow the instructions of the client.

4. “The elimination of ‘solicitor–client privilege’ would significantly undermine the integrity of the Canadian legal system.” True or false? Explain your answer.

True. Solicitor-client privilege ensures full and frank disclosure between clients and their lawyers. The value of the lawyer’s advice will be greatly reduced if it is based on incomplete information.

5. What are some examples of decisions that owners of small businesses make? What role can a lawyer play with respect to the making of these decisions?

The legal form of the business, whether to buy an existing business or create a new one, what are the relevant laws and regulations affecting the business and what constitutes compliance, issues with regard to purchase or lease of business premises, funding of the business, contracts with employees, suppliers and customers, intellectual property and, finally, sale of the business.

6. What role has the computer played with respect to the solicitor-client relationship?

Computers allow clients to research easily accessible legal information online, rather than having to consult a lawyer for every decision.

7. “It is a good idea to hire a lawyer when you have been charged with a crime.” True or false? Explain your answer.

True. The stakes are high. If convicted, you will be punished and have a criminal record.

8. When you are trying to find a lawyer to help you, what are some sources of lawyer’s names?

Sources include referrals from friends or relatives, provincial law societies, lawyer referral services, provincial branches of the Canadian Bar Association, advertisements and the Yellow pages.

.

3

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 9. What is the primary purpose of an initial consultation with a lawyer?

To decide whether the lawyer is suitable for you to retain. If so, then the lawyer will decide if it is agreeable to represent you.

10. “Legal aid is available to anybody with a legal problem.” True or false? Explain your answer.

False. There are financial limitations and limitations on the types of disputes legal aid will deal with. This also varies from province to province.

11. Briefly explain three ways lawyers bill their clients. Which of the three is most commonly used?

Fixed fees – for specific tasks such as will preparation, purchasing a house or incorporation.

Hourly rate – billing for time spent on the client’s file. This is the most common method of billing a business.

Contingency fee – charging a percentage of the amount the client collects. Most appropriate for personal injury or product liability cases. If the client does not collect, the lawyer does not get a fee. The types of cases covered and allowable percentages vary from province to province.

12. What can a client do if she is unhappy with the bill she received from her lawyer?

Attempt to resolve the dispute directly with the lawyer. If not successful, mediation may be an option. If mediation is not available or successful, the bill could be reviewed by court officials. The method of review varies from province to province.

13. “If a client loses money because of the carelessness of his lawyer, he will be compensated for his losses if he makes a complaint to the law society.” True or false? Explain your answer.

False. The Law Society deals with disciplinary matters only in respect of the carelessness.

Compensation would have to result from settlement or, if unable to reach an agreement, through a legal suit by the client against the lawyer. The Law Society will likely require the lawyer to have errors and omissions insurance which will assist with recovery of the loss after settlement or judgment.

14. When will a lawyer be disbarred?

Lawyers who fail to follow the rules of conduct of the Law Society they belong to are subject to disciplinary investigations and hearings. If the conduct complained of is a serious breach, such as misuse of client funds, they may be disbarred.

15. “When a person acts unethically, she will also have broken the law.” True or false?

Explain your answer.

False. Ethics tells us what we should do; the law tells us what we must do. Generally speaking, every person breaking the law in Canada is acting unethically, but a breach of ethics is not necessarily breaking the law.

.

4

Chapter 1: Managing Your Legal Affairs 16. What is a code of business conduct? Should such a code be used by a small business?

A code of business conduct is a statement of values and principles of ethical behaviour that establishes a code of conduct which all employees, officers and directors of the business would be expected to follow. If created when a small business is first established, it is probably the best way to ensure the long-term adoption of these principles as the business grows.

Solution to the Case Ontario (Public Safety and Security) v. Criminal Lawyers’ Association, [2010] 1 S.C.R. 815, 2010 SCC 23 The Supreme Court unanimously reversed the decision of the Court of Appeal. Section 2(b) of the Charter does not guarantee access to all government documents. The documents protected by the Ontario FIPPA dealing with solicitor-client privilege were excluded from being disclosed. Lawyers required to register as lobbyists may have to disclose client names and the nature of the lobbying activity. Some banking records of lawyers regarding client names and information may be accessible under money laundering and state security legislation.

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

5

Chapter 2 Introduction to the Legal System Learning Objectives • • • • • • • • •

Determine a functional definition of “law” Identify the types of law that exist in Canada Distinguish between common law and civil law Identify the sources of Canadian law Identify the three elements of Canada’s Constitution Explain how legislative power is divided in the Constitution Detail how legislation is created in the parliamentary system Describe the rights and freedoms protected by the Charter of Rights and Freedoms List the areas and grounds upon which human rights legislation prohibits discrimination

Discussion DETERMINE A FUNCTIONAL DEFINITION OF “LAW”

IDENTIFY THE TYPES OF LAW THAT EXIST IN CANADA

DISTINGUISH BETWEEN COMMON LAW AND CIVIL LAW

Although creating a comprehensive definition of the law is difficult, a workable definition for our purposes is: “Law is that body of rules which can be enforced by the courts or by other government agencies.” An essential aspect of rules being considered as law is that they can be enforced by the judicial system or through administrative process.

Substantive Law – rules that establish rights and place limits on individual conduct Procedural Law – rules governing how the substantive law will be enforced Public Law – rules that govern an individual’s relationship with government (e.g. the Constitution) Private Law – rules that govern personal, social and business relationships which can be enforced by one person suing another The two main legal systems in place in the western world are civil law and common law. The civil law originated with the Romans and finds its modern place in the Napoleonic Code of France and other civil codes, including the Quebec Civil Code. The Common law is used in England and other jurisdictions where the English conquered and colonized. In a civil law jurisdiction, the basic rules and general principles are embodied in a central code and the function of judges is to apply the code to the specific cases that come before them. In such a system prior cases or precedents are merely persuasive and play a much less significant role than in the common law system, which has as its main characteristic the principle of stare decisis or the application of precedent cases. In the common law system, prior cases in the same court system with similar facts are binding on subsequent decision makers. Both the civil law and common law system provide predictability, which facilitates stability in a society.

.

6

Chapter 2: Introduction to the Legal System IDENTIFY THE SOURCES OF CANADIAN LAW

IDENTIFY THE THREE ELEMENTS OF CANADA’S CONSTITUTION

As judges created the body of laws known as the common law, they borrowed from several sources including the traditions of communities where court was conducted, including canon (Church) law, the law merchant, and the civil law of Rome. Due to the strictures of stare decisis, there was extreme difficulty modifying common law precedents. As a result the courts of equity were separately developed to provide relief from the inadequacies of the common law system. A considerable amount of conflict developed between the two courts until they were eventually merged by the Judicature Acts in 1873-1875. However the two bodies of law remain distinct, and each can be applied by a single judge in a case.. The principle of supremacy of Parliament, developed in England and brought into Canada, means acts of Parliament or of a Provincial Legislature e will override any conflicting rule developed by either the common law, rules of equity, or a prior statute. Today in Canada, in order to determine what law should be applied to a particular situation, we must look to common law, to equity, and to statutes.

1.

2.

3.

EXPLAIN HOW LEGISLATIVE POWER IS DIVIDED IN THE CONSTITUTION

Statutes, such as the Constitution Act, 1982, the Statute of Westminster and the statutes creating various provinces.

Conventions, which are unwritten customs and rules dictating how the government is to operate. They include the rule of law, the office of Prime Minister and political parties.

Case law on constitutional issues, such as whether the federal or provincial government has jurisdiction to create certain statutes.

It was often necessary to turn to the U.K. Parliament to amend or change the Constitution Act, 1867 until 1982. It was then that the Canada Act was enacted in the U.K. (called the Constitution Act, 1982 in Canada). It gave Canada the power to always amend its own constitution and contained the Charter of Rights and Freedoms. Until this time the principle of supremacy of Parliament prevailed and while a court could determine which level of government had the power to pass particular legislation, the court could not say the legislation was beyond the power of both levels of government. With the Charter of Rights and Freedoms, however, that power is now given to the court.

The Constitution Act, 1867 assigned different legislative powers to the federal and provincial governments. The powers of the federal government are set out primarily in section 91 of the Constitution Act, 1867, and those of the provincial governments in section 92. The federal government has power over matters of broader national concern such as banking, currency, the postal service, criminal law (although not its administration and enforcement), and the appointment of judges in the federal and higher-level courts of the provinces. The provinces have jurisdiction over such matters as hospitals, education, the administration of the justices, and commercial activities carried on at the provincial level.

DETAIL HOW LEGISLATION IS CREATED IN THE PARLIAMENTARY SYSTEM

Legislation is created by both the federal and provincial governments. The process involves the drafting and presentation of a Bill in either the federal House of Commons or the provincial Legislative Assembly. When introduced, a Bill will be given a first reading and is normally passed with

.

7

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition little debate. If there is a will among the members to move the Bill forward, it will then be presented to the legislature for a second reading.

There it is debated by the members of the house and either approved or rejected. If the Bill is approved it will generally go to a committee of members for review for possible amendment. When the Bill is in final form, it is presented to the legislature for Third Reading which involves a final debate and a vote. If the Bill passes all the votes, it is submitted to either the Governor General or the Lieutenant Governor for Royal Assent.

Once assent is given the new legislation will either come into effect immediately or more commonly now, later upon further proclamation

by Cabinet.

DESCRIBE THE RIGHTS AND FREEDOMS PROTECTED BY THE CHARTER OF RIGHTS AND FREEDOMS

The Canadian Bill of Rights was a largely ineffective attempt to protect the basic rights of citizens from interference by government. However, the Charter of Rights and Freedoms, being constitutionally entrenched, is very effective. The Charter sets out certain basic rights, privileges and freedoms possessed variously by Canadians, non-Canadians in Canada, and corporations that cannot be interfered with by any level of government or government official without a constitutional amendment. The Charter is applicable to any relationships existing between individuals and governments or government agencies and covers personal freedoms (freedom of speech), democratic rights (the right to vote), mobility rights, legal rights (a fair trial), equality rights (racial discrimination) and language rights (French and English).

There are three important qualifications on the operation of the Charter of Rights and Freedoms. First the operation of the charter is restricted to an individual’s dealings with governments and government agencies. The second allows the provinces or the federal government in many areas to opt out of the operation of the Charter and the third allows exceptions where “reasonable” in a free and democratic society. The effect of the Charter is to transfer the burden of protecting our basic rights and freedoms from our parliamentarians to our courts. These last two exceptions shift the burden back to a degree and restore some supremacy of Parliament. The Charter does not protect an individual’s rights from violation by other individuals or non-government institutions. Such human rights disputes between individuals are handled by human rights commissions created under comprehensive provincial and federal human rights statutes. That is, the Charter protects us from government, and human rights legislation protects us from each other.

LIST THE AREAS AND GROUNDS UPON WHICH HUMAN RIGHTS LEGISLATION PROHIBITS DISCRIMINATION

Not all discrimination is illegal. Human rights legislation prohibits discrimination on certain grounds, such as gender, religion, ethnic origin, race, age and disabilities. The legislation only prohibits this discrimination in certain areas, such as employment, tenancies, public facilities, services, and signs. Outside of these grounds and areas, discrimination can still legally occur. Sometimes positive action must be taken to avoid discrimination.

That is there is a duty to accommodate different genders, the disabled and etc. when there is not undue hardship to do so.

.

8

Chapter 2: Introduction to the Legal System Answers to Questions l.

Why is it difficult to come up with a satisfactory definition of law?

The main point that students should raise is that a definition of “law” varies with the perception and preferences of the person being asked the question. Someone committed to an empirical approach might adopt the definition of the legal positivist. That is, law is determined by the authority of the body that passed it. A pragmatist would lean toward the American legal realist’s definition. That is, law is whatever a judge is willing to enforce. The point is that the student should understand that the definition of law cannot be separated from the philosophical stance of the person responding to the question.

2. Where do we look to predict the outcome of a legal dispute? (a) In a common law system?

Predictability of the law is determined by precedent-making cases. (b) In a civil law system?

Predictability of the law is determined by the central civil code.

3. Explain how the use of previous decisions differs in civil law and common law jurisdictions.

In a civil law jurisdiction only the code is binding on the judge. Cases decided by other judges are merely persuasive. They can be turned to for guidance but the judge is not bound by them. However, cases in a common law jurisdiction are the binding aspect of the law and, therefore, if a particular case qualifies as a precedent the judge faced with that precedent must follow it.

4. Describe what is meant by the statement, “Common law judges did not make the law, they found it.”

When the common law was originally introduced in England it was the legal structure that was imposed, not the rules of law themselves. The judges merely applied the law or rules that were already in place with the “common people” in the local jurisdictions. From this arose the concept that the common law was not imposed but merely found. In reality this can only be applied to a small portion of the common law. In fact, as the common law developed, judges borrowed from many different sources, such as civil law, canon law, the law merchant, etc. As well, statutes have been passed which considerably alter judge made law.

5. Describe the advantages and disadvantages of the system of stare decisis.

The main advantage to stare decisis (or the process of following precedent) is the stability and predictability that it provides for the legal system. It is not always necessary for someone to go to court to find out how the law will be applied in a given situation. Precedent cases can supply that information, and the parties may avoid the cost and difficulties associated with a court action by settling the dispute. Another advantage to the system is that where there is no precedent covering a particular situation before the court, the court then is free to make such precedent. The main disadvantage of the stare decisis process is that, as the number of precedents grows, the courts are unable to change and adapt as the attitudes of society alter. The courts often find themselves applying rules established centuries earlier

.

9

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition which (other than the fact that they form a precedent) may have no justification for being applied in a modern situation. Happily statutes have altered many laws set by precedent and which no longer have a modern use.

6. Describe the problems with the common law system that led to the development of the law of equity.

Because of stare decisis among other things the common law became rigid in its procedure and inflexible in the rules that were applied. Similarly, the remedies that were applied were limited. The problems were not corrected internally and, therefore, the courts of chancery developed to provide relief in those situations where it was warranted.

7. Detail what was accomplished by the Judicature Acts of l873-75.

The Judicature Acts (1873-75) rationalized the various different court structures in place in England before this time into one central court system called the English High Court of Justice. Thus the separate courts of chancery and common law ceased to exist, although the separate bodies of law developed by them continued to exist.

8. Explain what is meant by the phrase, “the supremacy of Parliament.”

In the English and Canadian legal system Parliament is supreme. A statute enacted by Parliament becomes the definitive law of the land overriding any other rule or law, such as common law, precedent, etc. This must be contrasted to the American system which has a system of checks and balances between the executive, legislative and judicial branches of government and under various circumstances each branch of government can override what the other does. In Canada the supremacy of Parliament is now subject to the operation of the Charter of Rights and Freedoms.

9. What effect will a properly passed statute have on inconsistent judge-made law (case law)?

Because of the principle of supremacy of Parliament such a “properly passed” statute will override any inconsistent judge-made law.

10. Outline how a parliamentary bill becomes law.

A new law goes through a process of introduction in the form of a bill, debate, modification, and approval referred to as first, second and third reading and then receives royal assent from the Governor General or Lieutenant Governors.

11. Using the principles of stare decisis, explain how judges determine whether or not they are bound by another judge’s decision in a similar case.

Judges are bound by the precedent-making decision of other judges who are in the same judicial system at the same or a higher rank.. Thus a Supreme Court of Canada decision is binding on the Ontario Superior Court of Justice and an Alberta Court of Appeal decision is binding on a Court of Queen’s Bench of Alberta judge. However an Ontario Superior Court of Justice decision is not binding on a judge in the courts of any other province. Secondly, the judge must determine whether the case presented as a precedent covers essentially the same facts or whether it can be distinguished. If the facts can be distinguished or differentiated the case is not a binding precedent.

.

10

Chapter 2: Introduction to the Legal System 12.

What is included in Canada’s Constitution?

Legislation, conventions and court decisions considering the constitution form Canada’s Constitution. The British North America Act (now Constitution Act, 1867) is part of the legislation in the Canadian constitution. The legislation in the Canadian constitution also contains many subsequent important documents, such as: the Statute of Westminster (1931), the Constitution Act (1982) including the Charter of Rights and Freedoms, plus any amendments that have taken place. The various statutes having constitutional standing in Canada are now listed in an appendix to the Constitution Act (1982). In addition to these, the Canadian constitution contains all of the great provisions of England’s constitution, such as: the Magna Carta, the English Bill of Rights, and the many unwritten constitutional conventions, such as the principle of the rule of law. Court decisions considering the constitution form binding precedents that become part of the Canada’s constitution.

13. What is the effect of sections 91 and 92 of the Constitution Act, 1867 formerly the British North America Act? Sections 91 and 92 of the Constitution Act, 1867 divide powers between the federal and provincial governments. Section 91 assigns certain areas of legislative power to the federal government and Section 92 assigns other powers to the provincial governments. It is this separation of powers between the federal and provincial governments that is the foundation of our federal system.

14. How did the Constitution Act, 1867 limit the power of the federal and provincial governments? How is it possible, given that division of powers, to have identical provisions in both federal and provincial legislation and have both be valid?

The Constitution Act, 1867 originally referred to as the British North America Act, assigns certain areas of governmental control to either the federal or provincial governments for their exclusive jurisdiction. Since the Act deals with types of legislation there may be overlap between the powers of the two levels of government. For example, the provincial government can pass legislation making a particular type of activity illegal because it interferes with health and the federal government can make that same activity illegal because it is a crime.

15. Explain what is meant by the doctrine of paramountcy. When does the doctrine apply?

Since it is possible to have valid federal and valid provincial legislation dealing with the same activity, it is also possible to have conflict. When it is not possible for a person to obey both laws the doctrine of paramountcy declares that the federal legislation must be obeyed and that the provincial legislation is inoperative to the extent of the conflict.

16. Describe the limitations on the federal or provincial governments’ power to delegate their authority to make laws.

The federal and provincial governments cannot delegate their power to make laws. They can delegate the administration of the laws to another body, such as an administrative tribunal.

17. Identify the limitations of human rights legislation. Does it address all discrimination?

It only addresses the grounds for discrimination in the areas of society which are described in the legislation. For example, in most jurisdictions a restaurant is legally able to only hire

.

11

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition attractive servers, so long as they do not discriminate against any applicants on any of the prohibited grounds such as age or physical disability..

18. Explain how the Constitution Act, l982, including the Charter of Rights and Freedoms affects the doctrine of supremacy of Parliament.

The Constitution Act, 1982, including the Charter of Rights and Freedoms, places many areas beyond the power of either the provincial or federal governments. Many important rights and freedoms as set out in the Charter cannot be changed or modified without a constitutional amendment, so in those areas Parliament is no longer supreme. The courts now have the power to declare legislation passed by either the provincial or federal governments as unconstitutional, not because it encroaches on the other’s jurisdiction but simply because it is inconsistent with the Charter of Rights and Freedoms.

19. Explain any limitations that apply to the rights and freedoms listed in the Charter.

Section 1 limits our rights when reasonable to do so in a free and democratic society. Section 33 allows government to pass legislation contrary to certain sections of the Charter as long as they state they are doing so at the time. The exemption lasts for only five years but may be renewed at the end of that period.

20. Give examples of democratic rights, mobility rights, legal rights, and equality rights as protected under the Charter. Give examples of three other types of rights protected under the Charter.

Democratic rights - right to vote, that elections be held. Mobility rights - the right for citizens to live, work and travel freely in Canada. Legal rights - right to life, liberty, security. Equality rights - the right not to be discriminated against on the basis of sex, religion, race, national origin, etc. Personal freedoms - freedom of conscience, religion, belief, opinion, expression.

Language rights - French and English are guaranteed as the official languages of Canada.

21. How do human rights codes differ in their application from the Charter of Rights and Freedoms.

The Charter only deals with our relationships with government and government institutions.

The human rights codes govern our relationships with each other and non governmental institutions such as corporations.

Solutions to Cases 1. B. (R.) v. Children’s Aid Society of Metropolitan Toronto, [1995] 1 S.C.R. 315 (or H.[T.] v.

Children’s Aid Society of Metropolitan Toronto); 1995 CanLII 115 (SCC).

The parents argued that their rights under Section 2 (a) of the Charter of Rights and Freedoms guaranteeing freedom of religion and Section 7 which guarantees the right to life, liberty and the security of person were infringed. The decision of the court was that the interference with the parents’ decision as to how to treat the child did violate their parental liberty, but it was done pursuant to the fundamental principles of justice, and therefore there was no violation of Section 7. The Charter does not give any inherent protection to allow parents to determine how their children will be medically treated. As far as Section 2 (a) is concerned, there was interference with their rights to determine the medical treatment for

.

12

Chapter 2: Introduction to the Legal System their children, but it was justified under the closing words of Section 1. The state’s interest in protecting children overrides the religious protection.

2. Dartmouth/Halifax (County) Regional Housing Authority v. Sparks, [1993] N.S.J. No. 97 (C.A.); 1993 CanLII 3176 (NS CA).

The decision in this case was that these specific provisions did discriminate against this group of people, and therefore it was invalid under the Charter of Rights and Freedoms.

Mrs. Sparks had the right to stay there. Her eviction amounted to discrimination on the basis of race, sex and income. Generally, people who qualify for public housing are economically disadvantaged because of their age or their position as single, female parents on social assistance, many of whom are black. The group of public housing tenants as a whole is historically disadvantaged as a result of the combined effect of several personal characteristics listed in Section 15 (1) of the Charter and as a result this provision of the Residential Tenancy Act was overturned.

3. R. v. Spratt, [2008] B.C.J. No. 1669 (B.C.C.A.), 2008 BCCA 340 (CanLII); application for leave to appeal to S.C.C. dismissed June 18, 2009.

The British Columbia Court of Appeal held that the intent of the Access to Abortion Services Act to allow safe access to health care services justified a limitation on the freedom of expression protected under Section 2 of the Charter. The court pointed out it was only small limitation and therefore the rights of the patients were found to be paramount.

4. McKay-Panos v. Air Canada, [2006] F.C.J. No. 28; 2006 FCA 8, [2006] 4 FCR 3 (CanLII).

The Federal Court of Appeal held that the seat is an “obstacle” under the Canada Transportation Act. The obese appellant was found to have a disability under the Act. This finding of a “disability” would be a precedent to be argued if an accommodation is sought under the Canada Human Rights Act.

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

13

Chapter 3 The Resolution of Disputes The Courts and Alternatives to Litigation Learning Objectives • • • •

Describe the court system in Canada Outline the process of civil litigation Explain the nature and function of regulatory bodies Examine the alternative dispute resolution (ADR) methods—negotiation, mediation, arbitration

Discussion DESCRIPTION OF COURT SYSTEM

The structure of the court hierarchy in each province is determined by the province. Most provinces have two levels of trial courts: a lower level or provincial court, and a senior level, Supreme Court or Court of Queen’s Bench. Within these two levels are many specialized courts. Above these courts each province has a court which hears appeals from the lower courts.

The Supreme Court of Canada has been established to hear appeals from the appeal courts of the provinces but can also hear references from the federal government. In addition, a Federal Court, Federal Court of Appeal and the Tax Court of Canada deal with matters that directly involves the federal government or matters that have been specifically assigned to their jurisdiction.

Courts are usually divided into trial and appeal courts and are usually open to the public. The function of the appeal court is to deal with disputes between the parties about the decision reached in a lower court. Such challenges are usually limited to questions of law, as opposed to questions of fact. A person may be faced with both a civil and a criminal trial over the same event.

The Court System is constantly changing to reflect changes in Canadian society. Recent examples include: Drug Treatment Court, Structured Outpatient Programs, Domestic Violence Court Programs, Mental Health Courts, Single Level Courts (Nunavut), Sentencing Circles. These innovations can assist in the resolution of disputes and the rehabilitation of offenders but caution is required so that the process of reform does not erode the foundation on which our judiciary rests.

CIVIL LITIGATION PROCESS

A complicated procedure comes into play when one person sues another. The seriousness of the matter being tried, the amount of funds involved, and where the conduct complained of arose will determine which level of court and in what jurisdiction the parties will bring their action. The process consists of: the issuing of a writ of summons (in some provinces), an appearance,

.

14

Chapter 3: The Resolution of Disputes: The Courts and Alternatives to Litigation a statement of claim, a statement of defence, and possibly a counterclaim with a defence to counterclaim.

The discovery process, involving the disclosure of documents and examinations (or questioning) under oath, is designed to get as much information as possible into the hands of the disputing parties so that the parties can prepare for trial and assess their positions with respect to settlement. Several provinces have introduced initiatives that streamline the process. These include trial by affidavit, fast track litigation where lesser amounts are involved, summary trials, and mandatory mediation.

At the trial, complex rules are followed to control the presentation of evidence. First the plaintiff calls witnesses, whom the defendant may cross examine. Then the defendant calls witnesses, whom the plaintiff may cross examine. The lawyers then summarize their cases, first for the plaintiff and then the defendant. If a jury is involved, the judge makes the findings of law and will instruct the jury on the correct manner in making findings of fact.

The jury then meets privately and will announce a decision when they return.

If a judge alone is presiding, the decision will likely be reserved and provided in writing at some later time.

When a judgment is obtained, the winning party must enforce that judgment against the other party. Merely obtaining the judgment does not assure payment. Normally the judgment will include an award for costs where the losing party will be required to pay some or all of the legal costs of the winner. To determine the ability of the debtor to pay and to assess the value of any assets or claims he has and where they are located, the creditor can examine the judgment debtor under oath. Where the judgment debtor has tangible property, this can be seized and sold. The creditor can also pursue the judgment debtor’s intangible assets such as wages, rents due, bank accounts, etc., through garnishee. Again, a complicated system is in place to assist the judgment holder to obtain the assets of the defendant to satisfy the judgment.

Limitation Periods have been established in each province to ensure that claims are advanced in a timely way. In most provinces claims in tort and contract must be initiated within 2 years of the event occurring or the discovery of damage. Failure to file a Writ of Summons or Statement of Claim within the limitation period will result in the claim being barred.

In addition, there are time limits placed on litigants once legal action has been commenced. For example, defendants must respond to a claim within a prescribed time frame (typically 7 to 20 days) or default judgment may be taken against them.

NATURE AND FUNCTION OF REGULATORY BODIES

Government can be divided into the Executive Branch (Cabinet and public service), the Legislative Branch (Parliament and the provincial legislative assemblies) and the Judicial Branch (the courts).

Government legislative power is limited by the Constitution Act, 1867 and the Charter. That power is exercised in many ways, one of which is through government regulatory or administrative bodies. When these administrators make decisions that affect individuals and corporations, certain standards of fairness must be maintained and rights respected.

.

15

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition In determining when the decision of such an administrative body can be challenged the courts will first look at the decision maker’s authority to make the decision. The authority of the decision maker is established by the rule of law and is found in a statute or the regulations passed under the statute. There are definitions set out in the statutes themselves and other statutes establish rules of statutory interpretation. There are also more general rules of interpretation that are applied such as the rule of strict interpretation, the golden rule, or the mischief rule. If the decision is authorized in the statute, then the constitutional validity of the statute should be examined under the Constitution Act,1867 and under the Charter of Rights and Freedoms.

Also, the process itself has to meet certain standards. The rules of natural justice require that the administrator must act fairly by being unbiased, giving the person reasonable notice of the hearing, an opportunity to cross examine and for the decision to be made by the administrators who heard all the evidence.

If the decision maker makes some sort of error of law on the record, the courts will overturn the decision and usually send the matter back for rehearing with directions about legal issues. The historical method of court supervision in these circumstances is through the prerogative writs. The most significant of these are (1) certiorari (declaring the decision of no effect) (2) prohibition (ordering a decision not to be made), and (3) mandamus (ordering a decision maker to decide). In addition to the prerogative writs, the courts have developed the established the right to make a declaration which allows the courts to declare the law in other areas normally not available when a prerogative writ is used. Many jurisdictions have passed legislation simplifying the process of judicial review. In addition to these unique remedies, the more standard remedy of injunction may also be available.

Some statutes contain privative clauses that prohibit judicial review.

However, the Courts interpret and apply these clauses extremely narrowly.

Also note that where Charter rights are involved such privative clauses would be ineffective to keep the court from reviewing the decision. The Supreme Court of Canada has given instruction that the decisions of administrative tribunals should be treated with deference and only be reviewed where the decision appears unreasonable.

ALTERNATIVE DISPUTE RESOLUTION (ADR) METHODS —NEGOTIATION, MEDIATION, ARBITRATION

ADR (Alternate Dispute Resolution) is an important alternative to the litigation process and should be considered for the following reasons. The parties remain in control of the problem. They can customize the process to suit their needs. It is less costly and time consuming than court action and the matters remain private. Although ADR has some advantages, and there are some situations where it would not be appropriate. Where a legal precedent needs to be established it is best to use the courts. ADR should not be relied on when there is not a reasonable balance of power between the disputing parties. The parties should be willing to cooperate and bring all necessary information to the table. They must be willing to make concessions and must be looking for a solution that will satisfy both parties. They must have good communication skills or agree to a neutral third party facilitating communications. The major categories of ADR are negotiation where the

.

16

Chapter 3: The Resolution of Disputes: The Courts and Alternatives to Litigation parties discuss the matter directly or through lawyers and come to a solution on their own. The second is mediation where a neutral third party facilitates the path toward agreement. The third is arbitration where both parties agree or are bound by a pre-existing contract to select a third party who will hear the evidence and will make a binding decision in the matter. This is a more formal process that will take on many of the procedures of a court but the decision cannot be reviewed by a court unless the process has been seriously flawed. ADR awards and settlements often result in a higher level of compliance because the parties agreed to the process. They also increase the chance of the disputing parties resuming their normal business or social relationships because the process is less adversarial.

Answer to Questions 1. Describe the court hierarchy in Canada, including provincial and federal courts.

Each province normally would have a provincial court consisting of small claims, family, criminal and young offenders’ functions. Each province then has a Supreme Court (sometimes called the Court of Queens Bench). At the highest level each province has an appeal court either as an independent court or as a division of their superior court. There is also a Federal Court, a Federal Court of Appeal and the Tax Court of Canada to deal with matters directly involving the federal government. Finally the highest court in Canada is the Supreme Court of Canada.

2. Distinguish between questions of law and questions of fact, and explain why this distinction is significant.

A question of fact is a question regarding the details of an event. Did a particular thing happen? When? Where? And what was the result? A question of law deals with the rules that are applied by the courts to the particular situation. Is a pedestrian permitted to cross on a red light? Is a pedestrian permitted to cross in the middle of the street? Is a director required to disclose conflict of interest? As a general rule it is only questions of law or disputes over a legal question (as opposed to a question of fact) that can be appealed to a court of appeal.

3. Who appoints provincial superior court judges? Provincial court judges?

Superior court judges are appointed by the federal government (initially usually from a list of lawyers supplied by a panel made up of representatives of the bar, bench, federal government, provincial government and police.) The provincial government appoints provincial court judges.

4. How would the expiration of a limitation period affect the rights of parties to litigate a matter in dispute?

If the time limitation for commencing action expires before the plaintiff commences their action, they are barred from ever commencing it.

5. What are the pleadings used to commence an action in the superior trial court in your jurisdiction?

Either a Writ of Summons or a Statement of Claim is used to commence an action depending on the jurisdiction.

.

17

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 6. How does the discovery process take place, and what is its significance in civil litigation?

The discovery of documents and verbal examination for discovery are essential in the litigation process. Information is disclosed to both parties so that there are no surprises later.

This disclosure makes settlement of the dispute more attractive to the parties, thereby considerably reducing costs and the demand for court services. Discovery of documents involves each party to the litigation being permitted to inspect and copy the relevant documents of the other party. Examination for discovery takes place when, through a lawyer, one party to the litigation is permitted to question under oath the other party on matters relevant to the litigation.

7. Explain how an offer to settle can affect the judgment award made by the court to the plaintiff.

The defendant or plaintiff can make a formal offer to settle to the party. The party receiving the offer then has the option of accepting that offer to settle, which ends the litigation process, or refusing it. If it is refused and the eventual judgment awarded by the court differs from the offer, then the party who made the wrong decision on the offer is punished by the award of costs by the court. For example if the plaintiff made the offer and judgment is less than the amount offered, the plaintiff will not receive compensation for legal costs that have been incurred after the formal offer to settle.

8. Describe the recent initiatives taken in your jurisdiction to “speed up” the litigation process.

This will vary with the jurisdiction but may involve summary trials based on affidavit evidence, streamlined or simplified procedures for cases involving lesser amounts, or mandatory mediation.

9. Explain the trial process.

The plaintiff first presents their witnesses (direct examination) and exhibits. The defendant cross examines. The defendant then presents his witnesses (the plaintiff cross examines) and exhibits. The plaintiff’s lawyer and then the defendant’s lawyer summarize and if a jury is involved the judge gives instruction to the jury. The jury meets privately, then returns and delivers judgment. When there is a judge alone, written judgment may be delivered some time later.

10. Compare party–party costs to solicitor–client costs. To whom are these costs generally awarded?

Either solicitor-client or party-party costs are awarded to the victor and paid by the loser in a civil action. Party-party (or taxable costs) are based on a schedule of costs set out in the Rules of Court and are normally not enough to the cover the actual legal costs incurred.

Solicitor-client costs are the amount that lawyers are expected to charge a client for the services provided and are normally in excess of party-party costs.

11. Distinguish among the various remedies available to a successful plaintiff in a civil action.

Damages (money award) which are usually compensatory but may be punitive or exemplary Accounting where the wrongdoer must account for an amount and pay it to the victim

.

18

Chapter 3: The Resolution of Disputes: The Courts and Alternatives to Litigation Replevin or restoration of personal property Injunction is an order to stop doing some inappropriate activity.

Specific Performance is an order to do what was agreed to in the contract Declaration is where the court makes a declaration as to the law and this is usually combined with other remedies.

12. Explain the role of the examination in aid of execution in enforcing those remedies (from Question 11) and indicate what other methods are available to enforce a judgment against a debtor who is trying to avoid payment.

Once judgment has been obtained it is possible for the judgment creditor to have an examination held before a judicial officer to question, under oath, the debtor as to the amount and location of all assets. After the hearing the judgment creditor can ask that the sheriff or civil enforcement agent to seize the various assets which will be sold to pay off the debt.

Bank accounts and wages owing to the judgment debtor can be garnisheed to satisfy the judgment.

13. Explain the value of an injunction as a pre-judgment remedy. Discuss other prejudgment remedies available to aid in the collection of debt.

Some provinces allow garnishment before judgment. Most provinces will permit, with a court order, the seizure of assets that might be used or destroyed before the judgment is obtained.

An injunction can be obtained against an institution holding funds for the debtor to prevent the funds being surrendered to the debtor. While this does not make the funds available to the creditor, it does keep the debtor from otherwise disposing of them.

14. Under what circumstances will the courts review a decision made by a government bureaucrat or administrative tribunal?

1. Judicial review will be available where administrative agencies have no authority to make a decision or have stepped outside their authority. 2. Judicial review is also available when the rules of natural justice have not been followed. 3. In very limited circumstances the merits of the decision itself can be reviewed, but as a general rule courts are reluctant to interfere with a decision unless some procedural or jurisdictional defect is present. 4. Judicial review is available when an error of law on the face of the record has taken place.

15. What must be examined to determine whether a decision maker has acted within his or her authority?

There must be a valid statute or regulation that empowers the decision maker.

16. What are the requirements for a fair hearing and what is necessary to satisfy the rules of natural justice?

The person affected must be given notice of the hearing including an indication of the nature of the matter to be decided. The parties must be given an equal opportunity to state their positions, which may include the right to produce and cross-examine witnesses. All other information that is relevant to the decision must be disclosed in the hearing. The decision maker does not have to follow the strict rules of evidence. The evidence in the case must be heard by the decision maker. The decision maker must be impartial.

.

19

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 17. Distinguish between certiorari, prohibition, mandamus and a declaration.

Certiorari is an order by the court declaring the decision of the administrator to be null and void. Prohibition is an order by the court to the administrative tribunal not to make a decision.

Mandamus is an order by the court to the administrative tribunal to make a decision.

A declaration is simply the court declaring the law in a particular situation and is not an order to the administrative body.

18. What is a privative clause? How do the courts usually react to them?

A privative clause is a provision in a statute which prevents the courts from reviewing the decision of an administrative tribunal, such as a labour relations board. This is an attempt to exclude judicial review of the administrator’s decision and the court usually interprets such statutory provisions very strictly. They will not give effect to the provision unless there is no way to avoid it.

19. List and describe the principal advantages of alternative dispute resolution.

• • • • • • • •

Control: The parties involved remain in control of the problem and its solution.

Delay: The parties can determine the time and place of the process.

Lost productivity: Managers can devote less time and resources to the dispute allowing them to continue their work.

Costs: Legal and court costs are reduced and avoided.

Privacy: The matter does not become a public record. Only the immediate parties need be involved.

Goodwill: Because both parties agree to the resolution process it is a less adversarial process where concessions and compromise are encouraged.

International disputes: Jurisdictional rules are less of a problem since the parties can set their own terms for resolving the matter. There is no need to turn to the courts of either nation.

Flexibility: The parties select the kinds of processes they use, customize it to their needs and then set the time and place of the hearing and who needs to be involved.

20. Distinguish between negotiation, mediation and arbitration and discuss the advantages of each of them.

In negotiation both parties communicate directly to each other or through their lawyers. In mediation the disputing parties agree on a neutral third party to facilitate the communication.

The mediator hears the positions of both sides, has some power to gain the necessary information, suggests areas of agreement and possible compromise, encourages concessions and helps the parties come to agreement. Mediators do not impose a decision on the parties.

In arbitration the disputing parties agree to be bound by the decision of a neutral third party.

Often they select the arbitrator but the person may be determined by a pre-existing contract between the parties. Parties present all of the information to the arbitrator, who is usually an expert in the matter in dispute, and who then makes a decision. The parties are bound by the decision and usually cannot appeal it. They essentially give control of the matter to the arbitrator.

.

20

Chapter 3: The Resolution of Disputes: The Courts and Alternatives to Litigation Negotiation is the simplest form of ADR, but requires a willingness to compromise, not compete. Either side can withdraw at any time as a result until a final settlement agreement may be reached. Skill and experience is an asset, and may compromise the outcome if a party lacks these. Mediation is very flexible, but again, relies on cooperation of the parties. There is no power to compel disclosure of evidence, and may emphasize the weaker party’s lack of power. It is helpful when dealing with confidential information, and also lends itself to a speedier and less costly resolution of disputes. Arbitration often involves the use of an expert in the field, who is trained in the process. There are more formal rules of conduct, and the decision is binding on the parties. It loses the flexibility found with the other two forms of ADR, and is far more adversarial in nature, takes longer and is consequently more expensive as well. However, it is still better than litigation for all these aspects.

Solutions to Cases 1. C.M.G. v. R.G., 2012 ONSC 2496 (CanLII).

The court held that the information that was not sealed was likely publicly available. The parts sealed were of a sensitive nature which posed a risk to vulnerable children of the marriage. We have a transparency principal that court proceedings are normally conducted in public so that “not only will justice be done, it must be seen to be done.” The interests of the children in this case outweighed this principal for some of the evidence and submissions in the court file.

2. Angelo’s Gold Factory Inc. v. Anthony Pipolo Incorporated, 2007 CanLII 80119 (ON SC).

After judgment was entered by default, enforcement proceedings commenced. The defendants did not even know of the existence of the law suit. The court set aside the enforcement steps and the default judgment, but ordered the defendants to file and serve a statement of defence within 20 days. Practically speaking, the defendants did not have any opportunity to file a statement of defence before default judgment so procedural fairness dictates a new procedure to now permit them to do so. In both court and administrative processes, reasonable notice is an important part of the administration of justice.

3. Community Panel of the Adams Lake Indian Band v. Adams Lake Band, 2011 FCA 37 (CanLII).

A week after the trial judge released the decision, the Supreme Court of Canada issued a decision providing guidance on when an administrative decision should not be quashed by a court even when there are grounds to quash it. Legal error or non-compliance should not be given undue weight and a very broad consideration of practicalities must be considered by the court. The Federal Court of Appeal held that the trial judge did not consider enough practical matters, and upheld the election result.

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

21

Chapter 4 Intentional Torts and Torts Impacting Business Learning Objectives • • • • • • • • •

•

Describe the role of tort law Distinguish torts from crimes and breaches of contract Identify remedies awarded to redress torts Explain vicarious liability indicating when it may be imposed Distinguish the torts of assault, battery, and trespass to land, listing the relevant defences Describe three torts that deal with wrongful interference with goods (chattels) Contrast the torts of false imprisonment, malicious prosecution and private and public nuisance Compare defamation with the tort of injurious falsehood Describe the following torts: ■ Inducing breach of contract ■ Interference with economic relations ■ Conspiracy to injure ■ Intimidation ■ Deceit (fraudulent misrepresentation) ■ Passing-off ■ Misuse of confidential information ■ Invasion of privacy Identify torts frequently committed in the online environment

Discussion DESCRIBE THE ROLE OF TORT LAW

DISTINGUISH TORTS FROM CRIMES AND BREACHES OF CONTRACT

IDENTIFY REMEDIES AWARDED TO REDRESS TORTS

The primary objective of tort law is to compensate people who have been harmed by the wrongful conduct of others. What constitutes “wrongful” conduct is determined by the application of social norms and public policy.

A crime like a tort is an act that is inherently wrong. A crime is detrimental to society as a whole and is prosecuted through the courts. Torts on the other hand provide a method for an individual to be compensated for the harm suffered from the unacceptable conduct. As a result a person might be prosecuted for a crime and sued civilly for tort arising out of the same conduct or event. The commission of a tort must also be distinguished from a breach of contract where the failure to act is only wrong because of an agreement between the parties.

General damages compensate for estimated future losses, including both future pecuniary losses (such as loss of earning capacity) and non-pecuniary losses (such as pain and suffering). Special damages are awarded to cover

.

22

Chapter 4: Intentional Torts and Torts Impacting Business actual expenses and calculable pretrial losses. Punitive or exemplary damages are designed to punish the wrongdoer and do not relate to the injury suffered. To avoid excessive awards, the Supreme Court of Canada has placed an upper limit of approximately $332,000 on damages that can be awarded to compensate for pain and suffering and loss of enjoyment of life.

EXPLAIN VICARIOUS LIABILITY INDICATING WHEN IT MAY BE IMPOSED

DISTINGUISH THE TORTS OF ASSAULT, BATTERY, AND TRESPASS TO LAND, LISTING THE RELEVANT DEFENCES

DESCRIBE THREE TORTS THAT DEAL WITH WRONGFUL INTERFERENCE WITH GOODS (CHATTELS)

An employer can be held liable for the tortious act an employee commits while at work. This liability is limited to torts committed while carrying out employment duties. The employer usually will not be vicariously liable when the employee is not involved in employment related activities, even if done during working hours.

Assault and battery is intentional physical interference with another. Battery is the actual physical contact. Assault takes place when the person fears imminent physical contact. People being attacked are entitled to defend themselves, so long as only reasonable force is used in the process. Consent is a defense to an action for assault and battery and often is given for participation in sports. Trespass to land is entering onto another’s property without permission. This action can also take place by someone throwing something on another’s property or may take the form of a continuing trespass.

Any direct intentional interference causing damage to the goods of another is a trespass to chattels. Generally, the remedy for trespass to chattels is compensatory damages.

Conversion consists of interference with the plaintiff’s chattels in such a way as to deprive the owner of the use of the chattels. For example stealing a chattel. In such circumstances the person converting the goods is forced to purchase them. In exchange for payment, the defendant acquires the property. The courts also have the power to order the return of the goods if that is a more appropriate remedy.

Detinue, like conversion, involves the wrongful possession of someone else’s goods. But where conversion requires wrongfully taking control of the goods through some intentional act, detinue deals with situations where the person is wrongfully retaining the goods. Like conversion, the calculation of damages essentially amounts to a forced sale of the goods, but since detinue is a continuing tort, damages are calculated as at the date of the trial.

CONTRAST THE TORTS OF FALSE IMPRISONMENT, MALICIOUS PROSECUTION, AND PUBLIC AND PRIVATE NUISANCE

False imprisonment occurs when people are intentionally restrained against their will, without lawful authority. Complete restraint is not required.

Section 494 of the Criminal Code sets forth the limited scope of a Citizen’s Arrest.

Malicious prosecution involves the improper use of the criminal justice system. Such a claim arises when a person initiates or causes a criminal or quasi-criminal prosecution against another and the accused is acquitted. The acquitted person can then successfully sue for malicious prosecution if it can be proven that the criminal proceeding was motivated by malice.

.

23

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition The tort of private nuisance is committed when an individuals or businesses use property in such a way that it interferes with neighbours’ use or enjoyment of their property. Such interference is usually required to be ongoing and continuous to be actionable.

A public nuisance takes place when there is interference with some public property. Protesters blocking a road or park, or a mill polluting a river, would be examples. Only rarely is an action for public nuisance brought and then usually by the government.

COMPARE DEFAMATION WITH THE TORT OF INJURIOUS FALSEHOOD

Defamation is a published false statement that is to a person’s detriment.

It is a primary concern for businesses involved in media communications, but all commercial enterprises face some risk over defamation, even if it is only from a carelessly worded letter of reference or an offhand written comment about an acquaintance. For the statement to be an actionable defamation, it must be derogatory, false, and published, and must refer to the plaintiff.

At common law, defamation can be either slander, which is spoken defamation, or libel, which is usually written defamation. The significance of finding a defamatory remark to be libelous rather than slanderous is that libel is easier to prove because there is no requirement to show that special damages have been sustained.

Truth is an absolute defence to defamation. Other defences include: absolute privilege, qualified privilege, fair comment and public interest responsible journalism.

Injurious falsehood occurs when one person attacks the reputation of another’s product or business. This tort is also known as trade slander or product defamation. It must be distinguished from the tort of defamation that involves injury to the personal reputation of the injured party. Injurious falsehood deals with the reputation and value of a person’s property.

OTHER BUSINESS TORTS

Other business torts include inducing breach of contract, either with employees, suppliers or customers. Intentional interference with economic relations will often be dealt with under the Competition Act. Conspiracy to injure will involve price fixing and supply chain interference by two or more people. Intimidation would involve a threat that forces someone to do something that harms their business. The tort of deceit is the civil claim for fraud. Passing-off occurs when someone attempts to pass off a business or product as their own, when it in fact belongs to someone else. Misuse of confidential information occurs when parties use another parties’ valuable information without their consent and use it to either harm that party or benefit themselves. Invasion of privacy is a developing tort most recently seeing the Ontario Court of Appeal adopt the U.S. concept of “intrusion upon seclusion” to deal with the unauthorized access to banking information.

Statutes dealing with privacy include the federal Privacy Act and the Personal Information Protection and Electronics Documents Act. Under these statutes consent is required to both collect and disclose personal information.

.

24

Chapter 4: Intentional Torts and Torts Impacting Business IDENTIFY TORTS FREQUENTLY COMMITTED IN THE ONLINE ENVIRONMENT

The widespread use of the internet allows for easy dissemination of confidential information. Defamation and injurious falsehood may also take place, privacy may be invaded, fraud may be perpetrated. Negligent misrepresentations are also frequent.

Answers to Questions 1. Explain what is meant by the statement, “A tort is a civil wrong.”

This means that the action or conduct itself is considered unacceptable behaviour, and gives rise to a private action between individuals whereby a plaintiff can sue a defendant for compensation. This should be contrasted with a breach of contract, or a criminal act.

2. Distinguish between an assault and a battery.

An assault is an intentional interference with another party creating fear or apprehension of imminent physical contact. A battery is when actual physical contact actually takes place. A battery may be preceded by an assault but an assault may not be a battery.

3. How do doctors avoid liability for the tort of assault and battery when operating on or otherwise treating, people?

The doctor avoids liability because the patient has “consented” to the physical interference.

4. What limitations are there on the right of self-defense when people are defending themselves against an attack?

People being physically attacked are only permitted to use as much force as is necessary or reasonable force, to defend themselves. If excessive force is used it constitutes an assault or battery.

5. Describe the situations in which battery may be justified.

(1) When there is consent, (2) when reasonable force is being used to eject a trespasser, (3) when defending themselves and using reasonable force, (4) though not mentioned, when the power to arrest is present, the arresting party may use reasonable force to do so.

6. What are the necessary elements that must be present for a person to be classified as a trespasser?

The person must intentionally be on land or premises that belong to another and be there without authority. Note that this presence can be in the form of physical presence or some object that has been placed or thrown on the property.

7. What may the proprietor of a business do when faced with an unruly patron?

The proprietor can ask the patron to leave. If he fails to leave he becomes a trespasser and the proprietor can use as much force as is necessary to eject the patron.

.

25

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 8. Distinguish between trespass to chattels, conversion, and detinue.

Any direct intentional interference causing damage to the goods of another is a trespass to chattels.

Conversion consists of interference with the plaintiff’s chattels in such a way that it interferes with the plaintiff’s use of the chattel.

Detinue, like conversion, involves the wrongful possession of someone else’s goods. But where conversion requires wrongfully taking control of the goods through some intentional act, detinue deals with situations where the person is wrongfully retaining the goods.

9. Imprisonment can take the form of confinement, arrest or submission to authority.

Explain.

The classic definition of imprisonment is when a person is confined in a specific place.

People can also be imprisoned when they are physically restrained and subdued. When someone purports to arrest someone and insists, in such a way that the person thinks there is no option but to accompany the arresting person or stay in a particular location, that submission to authority can qualify as imprisonment even though there is no physical confinement and no physical restraint.

10. What must be established in order to successfully sue for false imprisonment?

(1) That an imprisonment of has taken place and (2) that it took place without the necessary authority.

11. How is malice typically established by a plaintiff who sues in malicious prosecution?

Evidence of malice can be established by prosecutors who have chosen to ignore important evidence or by complainants who have lied or manufactured evidence used to improperly support the charges.

12. Distinguish between libel and slander and explain the significance of the distinction.

Libel, as a general rule, is written. Slander is spoken defamation. It is easier to succeed in a libel action because libel is actionable without proof of special damages whereas slander must be supported by some indication of actual loss before an action can be successful. Note that certain types of slander are actionable without proof of special damages as well, such as: statements indicating incompetence in relationship to work, immoral activity, noxious disease, and unchaste conduct.

13. Define the terms “innuendo” and “qualified privilege”.

An innuendo is a hidden meaning in a statement. Usually it takes place when a statement appears perfectly innocent but, when combined with special information possessed by those hearing it, assumes a different meaning that could be defamatory. Qualified privilege is a defense available in a defamation action when the person making the defamatory statement had a duty or obligation to do so (for example, as part of an employment responsibility). This defense is qualified in that if there is any malicious intent, or if the statement is published more broadly than required by the duty, the protection is lost.

.

26

Chapter 4: Intentional Torts and Torts Impacting Business 14. Distinguish between defamation, trade slander, and deceit, indicating in what situations each would be used.

Defamation is harmful to an individual’s reputation, and may arise in the course of media communication, or employment. Trade slander is harmful to the reputation of a business or a product. If one business attacks another by stating that their products are contaminated or inferior, or the business is struggling and it is not, this gives rise to a claim of trade slander.

Deceit is the civil action for fraud, or intentionally misleading another that causes them damage. The deliberateness of the act may also result in punitive damages.

15. Explain the nature of the tort of inducing breach of contract and what circumstances would give rise to such an action.

Inducing breach of contract usually involves an employer persuading an employee of another business to leave that employment and work for him or her without properly leaving the current employment contract. Inducing breach of contract can also be committed when one business induces severance of contractual relations with someone else, as when a supplier is persuaded to abandon one customer in favour of another or a customer is persuaded to breach its contract with a competing supplier.

16. How does the tort of interference with economic relations differ from the tort of inducing breach of contract?

When dealing the tort of interference with economic relations, there is no need to prove a breach of contract. However, there must be some other unlawful conduct associated with the complaint, such as bribery or defamation. That unlawful conduct must have been intended to cause harm and, in fact, harm must have resulted.

17. Differentiate between conspiracy and intimidation.

A conspiracy to injure takes place when two or more persons act together use unlawful means to injure the business interests of another. Intimidation occurs when the threat of violence or some other illegal activity, such as an illegal strike, is used to force a businessperson to do something that harms the business.

18. List the remedies that may be appropriate to redress misuse of confidential information.

The most common remedy is monetary damages. However, equitable remedies such as injunctions and an accounting may also be ordered.

19. Privacy concerns are becoming more problematic in the technological age. What statutes protect the rights of individuals in this area?

Federal and Provincial Privacy Acts; the Personal Information Protection and Electronics Documents Act; and Human Rights Acts.

20. How do the Courts determine if they have jurisdiction over a tort action where the Internet is the means of communicating a defamatory message?

Jurisdictional problems are one of the most difficult raised by the use of the internet. Where an action for defamation can be brought and who can be sued are examples. Essentially what

.

27

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition is necessary is to establish that there is a sufficient link between the action complained of and the province where you wish to bring the action. As a general rule you must seek out your defendant or sue where the offensive conduct took place. This is very difficult to establish where the internet is involved. It also depends on the type of communication involved. If the defamation took place in a private communication such as email to only the potential plaintiff, there may be the problem of publication. Where the comment is made on a web page for all to read the defamation is more clearly established, but still there is the problem of determining where to sue and who should be included as defendants.

Solutions to the Cases 1. Chopra v. Eaton (T.) Co. (1999), 240 A.R. 201 (Q.B.); 1999 ABQB 201 (CanLII).

Mr. Chopra’s push on Mr. Frauenfeld was a criminal assault and justified a citizen’s arrest.

However since Mr. Chopra was not promptly delivered to the police, the detention became a false imprisonment. In addition to suing for false imprisonment there is an action for battery because Mr. Frauenfeld used unreasonable force in carrying out the arrest. Mr. Chopra also successfully complained to the Alberta Human Rights Commission because of the racial slurs. Eaton’s was also found vicariously liable for its employee’s conduct.

2. Banfai v. Formula Fun Center Inc. (1984), 19 D.L.R. (4th) 683 (Ont. H.C.) The owner of the motel sued the owner of the neighbouring land, who leased the land to the racing car amusement ride operator. The noise, fumes and smoke from the track were out of keeping with the other activities in the area and were found to be an unreasonable and undue material interference with the plaintiff’s enjoyment of their property. Although the owner is generally not liable for the actions of a tenant, in this case Ontario Hydro knew and authorized the use of the land for these purposes and was therefore liable as well.

3. 369413 Alberta Ltd. v. Pocklington (2000), 194 D.L.R. (4th) 109, 271 A.R. 280 (Alta. C.A.); 2000ABCA 307 (CanLII) The creditor claimed that Pocklington had induced a breach of contract on the part of Gainers. The court held there were seven requirements for the tort: the existence of a contract, knowledge on the part of the defendant of the contract, a breach of that contract, the defendant induced the breach, intended to induce the breach, it was without justification and the plaintiff suffered damages. There were no issues with regard to the first two elements and the case revolved around whether disposal of the shares was a breach of the financing arrangements. It was held that Pocklington should have known it was a breach, and was willfully blind to the consequences of his actions, which is enough to establish intent. There was no justification for his act, as it was not in the best interests of Gainers and the creditor suffered damages as a result of the breach.

4. Duke v. Puts (2004), 21 C.C.L.T. (3d) 181, 241 Sask. R. 187, 313 W.A.C. 187, [2004] 6 W.W.R. 208 (Sask. C.A.); 2000 ABCA 307 (CanLII).

The trial court held Dr. Puts liable in defamation, unlawful interference with contractual relations, and interference with the economic interests of Mr. Duke. The Court of Appeal found that some of the defamatory statements were covered by absolute privilege, but the rest were not. The defence of qualified privilege was defeated by the malicious intent of Dr. Puts.

Dr. Puts knew of the contract to sell the pharmacy business and intentionally interfered with the completion of that transaction. He also encouraged a Mr. Rowein to leave his

.

28

Chapter 4: Intentional Torts and Torts Impacting Business employment with Mr. Dukes. Proof of interference in Mr. Duke’s economic interests was established on the same evidence as the claims of defamation and interference with his contractual relations. The Court of Appeal agreed with the trial judge’s award of $400,000 in damages.

5. Burke v. NYP Holdings, Inc., 2005 BCSC 1287 (CanLII).

The court held that the defendant chose to broadcast the article worldwide and the plaintiff satisfied the court that the most convenient forum for the case to be heard is British Columbia. The court noted the chances of success for the plaintiff would be lower in New York State because of the First Amendment to the U.S Constitution regarding freedom of expression. The court also cited authority that the First Amendment could not be imported into a British Columbia court.

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

29

Chapter 5 Negligence, Professional Liability, and Insurance Learning Objectives • • • • • • • • • • • •

Identify the four elements of a negligence claim State when a duty of care arises, explaining how courts determine whether it is owed Describe breach of the standard of care, identifying the test used to determine if a breach has occurred Explain how both physical and legal causation are proven Identify the types of damage or loss that the courts have recognized and deemed compensable Distinguish the defences applicable to the tort of negligence Clarify when product liability may be imposed Describe the circumstances where professional liability may arise Describe four types of insurance businesses commonly need Identify when an insurable interest exists Explain the significance of insurance being a contract of utmost good faith Identify the duties imposed on the insured and insurer

Discussion IDENTIFY THE FOUR ELEMENTS OF A NEGLIGENCE CLAIM

STATE WHEN A DUTY OF CARE ARISES, EXPLAINING HOW COURTS DETERMINE WHETHER IT IS OWED

DESCRIBE BREACH OF THE STANDARD OF CARE,

Negligence refers to inadvertent wrongful conduct that causes injury to another. To succeed in a claim for negligence, a claimant must establish: 1.

2.

3.

4.

A duty of care.

Breach of that duty.

Causation.

Damages.

To succeed in a negligence action the person bringing the action must first show that a duty was owed to be careful. The reasonable forseeability test is used to determine whether such a duty existed. The question that is asked is whether the conduct that is called into question could have been reasonably foreseen to cause the damage which occurred. (This is now supplemented by the rules set out in the Anns case, which allows the court to reduce the scope of the duty if there is public policy reason to do so.) Liability for negligence will be imposed where there is improper conduct (misfeasance). Only rarely will a duty to act be imposed (nonfeasance).

Once the existence of duty has been established, the plaintiff must then show that the conduct complained of is below the standard of what a reasonable person would have done in the circumstances. What constitutes reasonable

.

30

Chapter 5: Negligence, Professional Liability, and Insurance

IDENTIFYING THE TEST USED TO DETERMINE IF A BREACH HAS OCCURRED

EXPLAIN HOW BOTH PHYSICAL AND LEGAL CAUSATION ARE PROVEN

conduct will depend on such factors as the risk of danger and the costs of avoidance.

The standard used to determine if there has been a breach of the duty of care is the reasonable person test. The reasonable person test is not what would be expected of an average person. A reasonable person is expected to be “prudent” or particularly careful, demonstrating a level of observation considerably better than average. On the other hand, the conduct is not required to be perfect. What constitutes reasonable behaviour will also vary with the expertise of the person being sued in a profession, trade or other calling.

For negligence to apply, not only must there be damage, but also that damage must be a result of the careless conduct. The ‘but for’ test is the general test for physical causation (i.e. the damage would have been avoided but for the behaviour of the defendant).

The courts apply a slightly different test to establish legal causation. There, liability will only be imposed if the defendant could have reasonably anticipated the general nature of the injury or damage suffered. Liability is avoided if the injury is too remote, or too unforeseeable. The “remoteness” test is often confused with the test to determine whether a duty of care exists, since both are based on reasonable foreseeability. However, with duty of care, the test is used to determine whether danger to the plaintiff should have been anticipated, whereas with remoteness it is the type of injury itself that must have been foreseen.

IDENTIFY THE TYPES OF DAMAGE OR LOSS THAT THE COURTS HAVE RECOGNIZED AND DEEMED COMPENSABLE

DISTINGUISH THE DEFENCES APPLICABLE TO THE TORT OF NEGLIGENCE

Traditionally, the Courts only provided compensation if the Plaintiff suffered actual physical damage or bodily injury. However, the Courts have gradually expanded the scope of compensable wrongs to include pure economic loss and mental distress.

Contributory negligence can now provide a partial defence to a claim in negligence. Such a defence arises when the defendant can show that the carelessness of the plaintiff or a third party contributed to the loss.

Legislation in most jurisdictions now allows for an apportionment of responsibility for loss.

Voluntary assumption of risk is another potential defence to a claim in negligence but its application is now restricted to situations where the defendant can show that the plaintiff knowingly assumed both the physical risk and the legal risk of waiving a dame claim. In many cases the voluntary assumption of risk is subsumed by the defence of contributory negligence.

Illegality is a further defence to negligence. That defence arises where the plaintiff was harmed while acting illegally or immorally. The application of this defence is quite rare.

.

31

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition DESCRIBE THE CIRCUMSTANCES WHERE PROFESSIONAL LIABILITY MAY ARISE

CLARIFY WHEN PRODUCT LIABILITY MAY BE IMPOSED

DESCRIBE FOUR TYPES OF INSURANCE BUSINESSES COMMONLY NEED

Professionally liability will arise where the plaintiff suffers loss due to the negligence of a professional such as a doctor, lawyer, accountant or other expert such as a plumber. The claim may be based on breach of contract, breach of a fiduciary duty or in negligence. The significance of professional liability in tort law is that the scope of potential claimants is larger than the immediate parties to a contract. This includes claims based on negligent misstatement.

Manufactured products are often dangerous, either because of some inherent defect or because of their nature, such as in the case of chemicals, tools, or explosives. A claimant must establish fault when suing manufacturers for some injury or loss caused by their product. Once the plaintiff establishes the manufacturer failed in its duty to be careful which may be by circumstantial evidence, the onus reverses onto the defendant to establish they are not responsible. It is not just the purchaser of the product that is owed a duty of care, it is the ultimate consumer of the product.

Liability insurance (including professional liability insurance) provides coverage for the negligence of the business owner and employees. Property insurance provides coverage for the land, buildings and personal property utilized in the operation of the business. Business interruption insurance provides coverage for lost profits that are sustained while a business is unable to operate due to damage to real or personal property of the business.

Life insurance provides security against losses to the business resulting from the death of key business personnel. Health insurance is usually part of a benefits package and may include dental, prescription drug, vision care types of coverage for employees.

IDENTIFY WHEN

An insured must be able to demonstrate an insurable interest in what is

AN INSURABLE INTEREST EXISTS

insured. That means that when the insured against event happens, the insured must suffer a loss for which the insurance payout provides compensation.

The contract for insurance is a contract of indemnity. Consequently, except in the case of life insurance, the insured can recover only what was actually lost, up to the monetary limit set out in the policy.

EXPLAIN THE

A relationship of trust exists between the insured and insurer, creating an obligation to act in good faith. An important aspect of that obligation is the duty on the part of the insured to disclose pertinent information, especially where it affects the risk assumed by the insurer. The correct information is used to set premiums and if the insurance industry is deluged with inaccurate information, the industry may fail. Just as the insured has a duty to be honest in its dealings with the insurer, the insurer has a duty to process claims fairly. Where insurers have withheld payments without justification, damages, punitive damages, and solicitor-client costs have been awarded to the insured.

SIGNIFICANCE OF INSURANCE BEING A CONTRACT OF UTMOST GOOD FAITH

IDENTIFY THE DUTIES IMPOSED ON THE INSURED AND INSURER

Insurance agents act on behalf of their principal (the insurance corporation) but also owe a duty of good faith to their customer. Any ambiguities in the standard form contracts used by insurance companies are interpreted in favour of the insured. The parties must also act in good faith to each other,

.

32

Chapter 5: Negligence, Professional Liability, and Insurance which includes the disclosure of all pertinent information. The insurance company, when paying out to an insured, obtains the right from the insured to seek payment from any third party that caused the loss through the principle of subrogation. They also have the right to the damaged property, which is called the right of salvage.

Answers to Questions 1. List and explain what a plaintiff must establish to succeed in a negligence action.

It must be demonstrated through a reasonable foreseeability test that there was a duty to be careful, and secondly, that there was a failure to live up to that duty. Thirdly, it must be demonstrated that damages or injuries are present and that those injuries were caused by the careless conduct complained of. It must also be clear that the injury was not too remote from the conduct complained of. It should also be noted that the presence of contributory negligence or other unacceptable conduct on the part of the victim, such as voluntarily assuming the risk, may reduce or eliminate any award.

2. When a tort is committed intentionally, what remedies are available that may not be available when the conduct is unintentional?

The remedy that is usually available when serious intentional wrongdoing is involved is punitive damages. This remedy may not be available for negligence.

3. Explain what is meant by the reasonable person test?

It is a test used by the courts to establish whether a duty is owed by someone to another or others. The court would ask “What would a reasonably prudent person, in possession of all the facts of the case have done?”

4. What test do courts use to determine whether the defendant owed to the plaintiff a duty to be careful?

Because of the Anns case (still followed in Canada) the test for determining duty consists of two questions. First, was injury or harm reasonably foreseeable? And secondly, is there a public policy reason that the duty should not be imposed, that the scope of the duty be reduced, that the class to whom the duty is owed be limited or that the damages be reduced?

5. Explain how the adoption of the Anns case test by the Supreme Court of Canada modified the approach to duty of care established by Donoghue v. Stevenson.

The Anns case added a second part to the test. The first part is a re-statement of the test from Donoghue v. Stevenson. The second part asks if there is a public policy reason the duty should not be imposed, or should it be reduced or restricted in some way? The courts are trying to avoid indeterminate liability for new areas of negligence.

6. Distinguish between misfeasance and nonfeasance and explain the significance of the difference in tort law.

Misfeasance involves wrongful conduct; nonfeasance is the failure to act. Generally the law will not impose an obligation to do something unless some duty can be shown because of the

.

33

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition unique relationship between the two parties. Misfeasance is wrongful conduct that is usually controlled by the law of negligence.

7. Describe the test used in determining the appropriate standard of care required of the defendant in a negligence action.

The reasonable person test is used to determine what the appropriate standard of care is for negligence. What would the reasonably prudent person, in possession of all the facts do? The courts also take into account the costs of the taking action and the risks.

8. How has an occupier’s liability to persons using the property changed in recent years?

The most significant change is that occupiers’ liability has been codified in many provinces by legislation. In common law in the past it was thought that the standard of care demanded from an occupier varied with the status of the person on the property. An invitee was owed a different duty than a licensee and very little duty was owed to a trespasser. It is likely that the effect of recent court decisions has been to abolish the difference between an invitee and a licensee.

9. How does the “but for” test help to satisfy the requirements of causation?

It is necessary to establish that the action complained of actually caused the injury. The ‘but for’ test is simply a way of applying that principle. To determine the cause of an automobile accident, the question is posed, “But for the careless conduct of the driver, would the injury have been avoided?”

10. Distinguish between the “thin skull rule” and the “crumbling skull rule” and explain how they relate to the question of remoteness.

With the thin skull rule, as long as the defendant could have foreseen the possibility of injury, the fact that the plaintiff was more susceptible to injury than the average person is not significant. The defendant must “take the victim as he lies”. In a crumbling skull situation, the plaintiff had a pre-existing condition that would have affected them, even if the defendant had never caused anything to happen to the plaintiff. The defendant will therefore be responsible for part of the plaintiff’s injuries, but not all.

11. Explain how the effect of contributory negligence has been modified in recent years.

Historically at common law where there was contributory negligence on the part of the plaintiff, victims were entitled to no compensation from the tortfeasor because of their own negligent conduct. The significant change has been the legislation now permitting the courts to apportion the loss between the parties.

12. Explain why the defence of volenti non fit injuria is difficult to establish.

To be successful, the defendant must show the plaintiff assumed not only the physical risk, but also the legal risk of undertaking the action, which is very rarely done.

13. Explain the obligations that are imposed on the producer of a product and to whom the obligation is owed.

The producer must exercise reasonable care in the manufacture of a product. The duty is owed to the ultimate consumer as long there has been no intermediate inspection or modification.

.

34

Chapter 5: Negligence, Professional Liability, and Insurance 14. Why is the case of Haig v. Bamford considered important in the recent development of tort law?

It was thought prior to this decision that a careless statement that resulted in economic loss was not actionable unless some special fiduciary duty could be demonstrated. This case clearly demonstrated that the House of Lords was willing to impose such a duty in broader circumstances. There is still some question as to whether the duty imposed for careless words is as broad as the duty imposed for careless conduct (determined by the reasonable foreseeability test). But in any case, there is no doubt that the liability for careless words has been expanded much beyond the direct relationships where it existed before. The result is that professionals and other experts now face liability for the careless things they say in the course of their professional activities even to those with whom they have no direct relationship.

Today the principles developed in this case must be further qualified by the application of the principles of the Anns case.

15. Describe how the Anns case test can impact the establishment of a duty of care in cases involving professional liability.

The rules in the Anns case determining the existence of duty of care consist of 2 parts. The first question to ask is whether there was a degree of proximity between the parties such that if the person being sued had thought of it he or she would have realized that his or her actions posed a risk of danger to the other. This is a restatement of the reasonable foreseeability test developed in Donoghue v. Stevenson. The second part is to determine whether this duty should be modified. Is there any reason that the duty should not be imposed? Should the scope of the duty be reduced? Should the class to whom the duty is owed be limited or should the damages be reduced? This allows the court to apply other non-legal factors such as public policy to the case. In cases such as Hercules Management Ltd. v. Ernst & Young, the Supreme Court applied the Anns case to limit the liability of the accounting firm when faced with a claim for investor losses based on flawed financial statements.

16. Identify the Rylands v. Fletcher principle. When will it be applied?

If the defendant chooses to have or store inherently dangerous items on their land, according to the principle of strict liability in this case, the owner will be liable for any damage that results from the escape of the items, no matter how it happened.

17. Explain vicarious liability. Are there any restrictions on its availability?

This is a form of strict liability that imposes liability on one person for the actions of another, such as in the employment relationship. Employee must be acting in the course of their employment for the employer to be found liable.

18. How does the standard of care required from professionals or other experts differ from the test used to determine the standard of care required generally?

The standard imposed is more correctly stated as the standard of care expected from a reasonable person in the same circumstances. That is, where the person is a professional, it is the reasonable doctor, lawyer, accountant, etc. When a standard is set by a professional governing body and it falls below what the judge considers appropriate from a reasonably prudent professional, the higher standard will be required.

.

35

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 19. Explain the nature of a fiduciary duty and under what circumstances it arises.

Fiduciary duty arises where two parties are in a trust relationship. One may be an employee, a partner, a director and as such owes a duty to act always in the best interests of the person, business or company to whom they owe the duty.

20. Explain the source and nature of the powers of a professional organization. List the rights a member of that organization has when facing disciplinary proceedings.

Most professionals are members of self-governing disciplinary bodies. These are created under provincial legislation which allows them to grant practice licenses, suspend or expel members and set standards of conduct, education and training. When a member is being disciplined, the body must follow the rules of natural justice, any statutory requirements and the provisions of human rights legislation.

21. Distinguish between business interruption insurance and fire insurance. Why might a businessperson want to have both forms of coverage?

Fire insurance is designed to cover loss to property through fire. To obtain compensation for lost profits during a close down caused by fire, the insured would require business interruption insurance as well.

22. What is meant by an insurable interest and how does it apply to the various types of insurance discussed in the chapter?

An insurable interest is some relationship that the insured has with the subject matter of the insurance so that if the insured against event takes place the insured will suffer a loss. With property insurance it is the insured’s equity in the property. With life insurance it is based on the relationship or involvement with the person whose life is insured. With liability insurance or business interruption insurance it is the risk of paying a damage judgment and the potential loss of profits.

23. What remedies does an insurer have if the insured misrepresented material facts when applying for insurance coverage?

Failure to disclose information material to the loss may result in the losses being unrecoverable from the insurance company. Even where it is not relevant to the loss, if it is a material misrepresentation it may cause the entire policy to be void. Legislation in some provinces upholds the insurance where the misrepresentation was innocent; but even in those jurisdictions, the policy will be unenforceable if the misrepresentation or failure to disclose was done knowingly.

24. Explain what is meant by the right of subrogation and how this may affect not only the insured but the person who has caused the injury or damage. Also indicate what other means the insurance corporations have to keep their damages as low as possible.

When an insured suffers a loss caused by another, the insurance company will compensate the insured but acquire from him the right to sue the person causing the loss. This is called the right of subrogation. The insured then can only collect once, not from both the insurance company and the person causing the injury. Also the person causing the injury is not protected by the insurance carried by the victim because his insurance company can and will

.

36

Chapter 5: Negligence, Professional Liability, and Insurance turn around and sue in the place of the victim. The insurance company steps into the shoes of the insured upon paying compensation. Insurance companies will often re-insure their coverage if the risk or the magnitude of the potential loss warrants it. This spreads the risk of loss among several insurance companies.

Solutions to Cases 1. Roper v. Gosling. [2002] 5 W.W.R. 79, (Alta C.A.); 2002 ABCA 71 (CanLII) The plaintiff and the defendant had both been drinking, but the evidence indicated that Roper was not displaying any outward signs of inebriation. Gosling admitted to being drunk, but asked Roper if he was capable of driving before getting in the car. In the suit, Roper defended on the basis of contributory negligence on the part of Gosling. The trial judge held, and the Court of Appeal affirmed that Gosling did not encourage Roper to drink, there was no evidence of impairment and therefore there was no reasonable foreseeability. As a result there was no finding of contributory negligence on the part of Gosling.

2. Dixon v. Deacon Morgan McEwan Easson et al. (1989) 62 D.L.R. (4th) 441 (B.C.S.C.); 1989 CanLII 2786 (BC SC) In this case the court held that although it was foreseeable that someone might rely on certain statements, the necessary degree of proximity was missing. The auditors were not aware of the plaintiff as an individual or a member of a limited class of people who would rely on them when they prepared the statements. Rather the plaintiff was a member of an unlimited, open-ended class and therefore no duty was owed and the action was dismissed. Had they known that the statement was to be used to attract investors the plaintiff would have belonged to a limited class of which they had knowledge, and a duty would have been owed. Compare this case to Haig v. Bamford discussed in the text.

5. Schoff v. Royal Insurance Company of Canada, [2004] A.J. No. 592 (C.A.); 2004ABCA 180 (CanLII) All insurance policies involve a duty of utmost good faith on the part of the party requesting the insurance. There is a duty to disclose any information that may affect the decision of the insurer as to whether to insure. In this case, there were many misrepresentations on the part of Mrs. Goyan when she obtained the contract of insurance, however it was third parties who were making the claim. The Insurance Act of Alberta required minimum coverage of $200,000 which was not affected for third parties, even in the face of fraud by the policy holder. The Schoffs received $200,000 under the Royal insurance policy and additional money under the underinsured clause of their own insurance policy.

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

37

Chapter 6 The Elements of a Contract— Consensus and Consideration Learning Objectives • • • • • • • • •

Discuss the fundamentals of the contractual relationship Explain consensus and the significance of a “meeting of the minds” Describe a valid offer Describe an effective acceptance Define consideration Discuss the irrelevance of the adequacy of consideration Consider why gratuitous promises are not consideration Present some examples of valid consideration Outline two exceptions to the general rule that consideration is required if a promise is to be enforceable

Discussion DISCUSS THE FUNDAMENTALS OF THE CONTRACTUAL RELATIONSHIP

A contract as a voluntary exchange of promises, creating obligations that, if defaulted on, can be enforced and remedied by the courts. Most of the operation of business and enterprise is defined by contractual relationships.

The common law of contract law has evolved over centuries to provide a great deal of predictability and stability in business.

Creativity is also enhanced by contract law since the parties have freedom of contract. Also unlike tort or criminal law, the parties are willing participants.

There are five elements to a legally binding contract, all of which must be present or there is not an enforceable agreement: Consensus, Consideration, Capacity, Legality and Intention. Consideration is difficult for many students to comprehend. The use of the following sentence might ease the difficulty.

“In consideration of me paying you $5.00, you will transfer title of your calculator to me.” As well, many students have the misconception that all contracts have to be in writing to be enforceable.

Formal and Simple Contracts: A formal contract is one that is sealed by the party to be bound. Simple contracts, sometimes called parol contracts, may be verbal or written, but are not under seal.

Express and Implied Contracts: An express contract is one in which the parties have expressly stated their agreement, either verbally or in writing.

An implied contract is inferred from the conduct of the parties.

Valid, Void, and Voidable Contracts: A valid contract is one that is legally binding on both parties. A void contract does not qualify as a legally binding

.

38

Chapter 6: The Elements of a Contract—Consensus and Consideration contract because an essential element is missing. A voidable contract exists and has legal effect, but one of the parties has the option to end the contract.

Unenforceable and Illegal Contracts: An example of an unenforceable contract is one that is required to be in writing under the Statute of Frauds and is not. An illegal contract is one that involves the performance of an unlawful act or involves illegal consideration. An illegal contract is void.

Bilateral and Unilateral Contracts: A bilateral contract is one in which both parties make commitments and assume obligations. There is no exchange of promises in a unilateral contract. This type of contract comes into effect when one party actually performs what has been requested by the other.

EXPLAIN CONSENSUS AND “MEETING OF THE MINDS”

There must be mutual agreement to be bound to particular courses of action.

One party must not be talking about an exchange of money for apples when the other is thinking of oranges. Such an agreement regarding fruit would be unenforceable and for lack of consensus. The common will in respect of what is to be carried out in the agreement is sometimes called a “meeting of the minds”.

DESCRIBE A

A contract is formed through the process of offer and acceptance. The offer contains all the significant terms of the contract and is often referred to incorrectly as “the contract.” It is in fact a tentative promise on the part of the offeror to honour the terms set out in the offer if there is a similar commitment on the part of the offeree. When the agreement reached anticipates further negotiation, there is no binding contract. An offer must be distinguished from an invitation to treat which is merely an invitation on the part of a seller to come to the place of business and negotiate a deal. “Treat” is the root word for treaty and this difficult concept may be comprehended by a student by also calling the concept invitation to “agree”.

VALID OFFER

An offer can be accepted providing it hasn’t lapsed for some reason. An offer will come to an end at the expiration of a specific time, and when no time limit is stated, at the end of a reasonable time. An offer will end at the death or insanity of the offeror. Further negotiations can also bring an offer to an end as in the case of revocation, counteroffer or rejection. Once one of these events takes place it is too late to accept the offer unless an option is present.

DESCRIBE AN EFFECTIVE ACCEPTANCE

The acceptance is an indication of a commitment on the part of the person receiving the offer. Therefore such commitment must be unqualified and unconditional. Any new condition added to what purports to be an acceptance, in forms a rejection and counteroffer. An effective acceptance must be communicated and it becomes effective when and where the offeror is informed of the acceptance. The “when” can be important for pricing, and the “where” can set the legal jurisdiction to interpret the contract. When it is appropriate to respond by mail, however, the acceptance is effective when and where it is dropped in the mail box. This can result in the unusual circumstance of a contract being in existence before the offeror is aware of it. The postbox rule is an exception to the rule requiring communication of acceptance and does not apply to counteroffers, revocations, etc.

.

39

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition DEFINE CONSIDERATION

DISCUSS THE IRRELEVANCE OF THE ADEQUACY OF CONSIDERATION

Consideration is the price one is willing to pay.” refers to the concept of consideration which is central tenant of contract law. Contracts are formed as a result of bargaining between the parties. The process involves an exchange of promises such that all parties derive some benefit from the deal. The benefits received by each party are the consideration they have received. It is not restricted to an exchange of money but can involve anything that the parties think is of value.

Consideration need not be fair. The court will not interfere with the bargain struck, even when it is a bad deal for one of the parties. The law presumes freedom of contract and the opportunity to negotiate between equal bargaining parties. In fact, this may not always be true and when unequal parties bargain together and the resulting contract has terms in it bestowing particular advantage to one side or the other (such as exculpatory or exemption clauses which are designed to reduce the liability of one of the parties) the courts interpret those clauses very restrictively.

When businesses deal with consumers, the courts are much more concerned with fairness. They are therefore sometimes willing to assist consumers who have been taken advantage of by merchants. They have developed such concepts as unconscionability, fraud, and mistake (to be discussed in Chapter 8), which give them power to review these transactions. The courts will also examine the fairness of consideration when insanity, drunkenness, or undue influence may have affected the transaction.

EXPLAIN WHY GRATUITOUS PROMISES ARE NOT CONSIDERATION

PRESENT SOME EXAMPLES OF VALID CONSIDERATION

OUTLINE TWO EXCEPTIONS TO THE GENERAL RULE THAT CONSIDERATION IS REQUIRED

If the agreement is one-sided, and only one of the parties is getting something from the deal, it is called a gratuitous promise, or a gift, and the courts will not enforce it. There has to be an exchange of consideration. It may well be that such gratuitous promises ought to be honoured from an ethical point of view, but there is no legal obligation to do so. An example of a gratuitous promise would be a promise to pay extra for work that was already required under an existing duty. Similarly, past consideration will not support a new bargain.

A settlement of a court action will be binding even in the absence of fresh consideration. Similarly, the courts rely on the concept of quantum meruit to establish consideration when dealing with contracts for services (such as those provided by a lawyer or mechanic).

Promissory Estoppel is the first exception. When a person makes a gratuitous promise and the person to whom it is directed relies on the promise in such a way that if the promise is not kept he will suffer damages, the person making the promise may be bound to it. In Canada such a promise can only be used as a defense and not as a cause of action.

The second exception to the requirement of consideration arises when a contract is executed under seal. The seal normally takes the form of a paper wafer, although almost any form of marking on the document that the parties have identified as a seal can be used. A sealed contract is a formal contract, or a deed.

.

40

Chapter 6: The Elements of a Contract—Consensus and Consideration Answers to Questions 1. What is meant by “freedom of contract?” Explain the impact of this principle on the development of contract law. What are two types of restrictions on this principle?

Freedom to contract assumes that both parties are in an equal position to bargain the terms of their contract. From this principle the courts have developed a hands-off approach to the contractual relationship allowing the parties to determine the nature of their own agreement and refusing to protect either party from a bad deal. This has not been a fair reflection of the relationships that have been created in modern times because of the relative power of large retail organizations over consumers, and so today a considerable body of consumer protection legislation has been created to cover these situations.

2. List and explain the elements that must be present for an agreement to qualify as a contract.

There must be offer and acceptance leading to consensus. Consideration is the price to be paid. Each party must have the legal capacity to contract. The contractual relations must not only be legal, but not against public policy and the parties must have an intention to be legally bound.

3. Explain the difference between a formal contract and a parol contract.

A formal contract is on that is sealed by the party to be bound. Parol contracts may be verbal or written but are not under seal.

4. Explain the difference between void and voidable. What is the practical result of this difference?

A void contract is missing an essential element and is not enforceable. A voidable contract exists, but one party has the option of ending the contract. The implications of each choice differ for third parties. If the contract is void, title to any subject matter must be returned to the vendor. If voidable, the third party retains title.

5. Distinguish between unenforceable and illegal contracts.

An illegal contract is void, as it involves the performance of an illegal act or payment of illegal consideration. An unenforceable contract is lacking in some requirement, such as consideration.

6. Explain the difference between a bilateral contract and a unilateral contract.

A bilateral contract is one in which both parties make commitments and assume obligations.

A unilateral contract involves the performance of an act or service as the consideration for whatever is promised. The contract becomes binding when the act or service is performed.

An example is the offer of a reward for the finding and return of an item. Once returned there is a binding contract for payment of the reward.

7. What practical concepts does contract law use to determine if “a meeting of the minds” has happened?

Consensus occurs when one party states its position in the form of an offer and the other party, through acceptance, makes a similar commitment to be bound by the terms of that offer.

.

41

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 8. At what stage in the process of forming a contract are the terms of the contract clearly set out?

The terms of the contract are clearly set out when a complete offer is made by one party.

9. Explain the role of implied terms in a contract. Who has the power to imply terms into a contract? When will the power be used?

In order for a contract to be binding the parties must have set out the major provisions of their agreement. There are many minor technical aspects to the agreement, however, which the parties may not have put their minds to. These can be implied into the contract and, therefore, form part of the contract. One of the main functions of the Sale of Goods Act is to set out a number of terms that can be implied into any agreement for the sale of goods when the parties to the sale have not dealt with that particular aspect of the matter.

The court can imply terms into a contract to enforce the intention of the parties but the court will not do so when the term would be clearly inconsistent with what has been agreed.

The court will not make the bargain on behalf of the parties. When all the important terms have been agreed to, however, the court will generally be willing to supply missing peripheral elements of the agreement, usually following the accepted practice of the industry involved, rather than see the agreement become ineffective because of its incompleteness.

10. Is an “agreement to agree” binding? Explain your answer.

If the terms have been agreed upon, and there are no further negotiations contemplated, then an agreement is valid, even if it is to be put into a more formal document later. If the parties have just reached an agreement to negotiate further, that is not a binding contract.

11. Distinguish between an offer and an invitation to treat.

Invitations in the form of advertisements and displays are designed to encourage the customer to enter into negotiations in relationship to the particular product being advertised and are not intended to be an offer on the part of the vendor. An offer is when one of the parties commits themselves to the particular terms of the agreement in such a way that it is clear that the other party merely has to accept in order for the agreement to be binding. For example, by going to a store advertising an item, selecting one, and taking it to the cashier.

12. Can you accept an offer that was made to someone else? Explain your answer.

No. An offer must be communicated to you as an individual in order to be capable of acceptance.

The naming of the parties is an essential term of an offer in a bilateral contract.

13. List and explain the various ways an offer can come to an end.

An offer will come to an end: (1) at the end of a specified time, (2) at a reasonable time if no time is specified, (3) at the death or insanity of the offeror, (4) when there is a revocation of the offer, (5) if the offer is rejected (6) if there is a counteroffer (7) if the subject of the offer becomes illegal (8) if the subject matter of the offer is destroyed.

.

42

Chapter 6: The Elements of a Contract—Consensus and Consideration 14. What is the effect of the offeror stating in an offer that the offer will remain open for acceptance until a specific date? What can offerees do to protect themselves from the offer being revoked?

Stating that the offer will remain open for acceptance until a specific date does not commit the offeror to keep the offer open until that time unless some consideration has been paid for that commitment (option). In the absence of such consideration, the offer can be revoked by the offeror. The effect of the specified date merely determines a point beyond which the offer will no longer be open.

15. What risks are faced when a person offers to sell certain goods to A and then sells them to B? How can this problem be avoided?

When an offer is made to sell goods or commodities to a particular person, and then they are sold to another, that sale does not revoke the original offer. Thus the person making the offer may find himself in the difficult position of having sold the goods but still obligated to the original offeree if that offer is accepted. To protect from this eventuality, the offeror should either make sure that the original offer is revoked before the sale goes through, or make the sale conditional on the lapsing of the original offer.

16. Explain the two types of contracts that result from the tendering process.

A tendering contract consists of a contract A and a contract B. Contract A comes into existence when the party presenting a bid responds to the request for tender and submits a bid. That contract carries specific terms that are distinct from the ultimate construction contract that is awarded when the successful bid is chosen. The construction contract is contract B. 17. What do the courts do, when interpreting standard form contracts, to correct the imbalance in bargaining power between the parties?

The courts attempt to correct an imbalance in bargaining power by interpreting standard form contracts strictly against the drafter of the contract. That normally results in ambiguity being resolved in favour of the less powerful party. This is particularly important when dealing with exemption clauses.

18. What qualities must an acceptance demonstrate to be effective?

The acceptance of the offer must be a complete, unqualified commitment to the original offer and as a general rule must be communicated to the offeror to be effective. (But note postbox rule.)

19. When is a contract formed?

The contract is formed when acceptance of an offer is communicated to the offeror.

20. When will silence be considered an acceptance of an offer?

Silence, as a general rule, does not constitute acceptance. An important exception to this rule occurs when there is an ongoing business relationship between the parties that has an established norm of not saying “no” being an acceptance.

.

43

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 21. What is the general rule regarding acceptance? What is the practical result of this rule?

The general rule is that the contract is formed when and where the offeror learns of the acceptance. This would then determine the jurisdiction and law governing the contract.

22. Explain the effect of the postbox rule on the principles governing acceptance.

The general rule of acceptance is that it must be communicated to the offeror before it is effective, and it is effective when and where communicated. The postbox rule is an exception and states that when it is appropriate to respond by mail, an acceptance is effective when and where posted. This can be very important to the parties since the time of acceptance can be considerably earlier, and the place of acceptance may determine what jurisdiction’s law will apply to the contract.

23. Discuss the role the postbox rule plays when modern communication methods are used.

The postbox rule is limited to the use of the postal mail. Where fax and email are used, the acceptance will not be effective until received by the offeror.

24. Define consideration and explain what is meant by the term “the exchange of consideration.”

Consideration is the price paid by each party for what they obtain in the agreement. Each party must make some sort of legal commitment to the other, and the benefit derived therefrom is referred to as consideration. This is in keeping with the bargaining nature of the agreement and, therefore, the term “the exchange of consideration” simply refers to the fact that a bargain has been struck with both sides committing to give the other some benefit or advantage.

25. Explain under what circumstances a person who fails to properly perform a gratuitous promise can be held liable for that failure.

A person failing to perform a gratuitous promise may be liable through promissory estoppel if the other party incurred some cost in reliance upon the promise. Promissory estoppel may only be used as a defense, not as a cause of action. Secondly where the person promising has started to do something and does it improperly which causes injury or loss to the other party, there may be a cause of action based on the tort of negligence.

26. Does consideration have to be fair? Explain your answer.

Consideration does not have to be fair, it only has to have some value, in the absence of other factors such as fraud, unconscionability, etc. The court would only address the value of the consideration as evidence that one party was taken advantage of by the other through fraud, or other situations.

27. What difficulty might be faced by a person who has already agreed to do a specific job and then extracts a promise of more pay from the other party?

The person is already bound by contract and when he extracts a promise for more out of the other party, there may be no consideration to support the new promise.

.

44

Chapter 6: The Elements of a Contract—Consensus and Consideration 28. If a person who is rescued promises to pay the rescuer $1000 but doesn’t pay, will the rescued person be successful in suing for breach of contract? Explain your answer.

If the promise to pay is made after rescue, it is a gratuitous promise and is unenforceable.

If made before rescue, it is a unilateral contract. The contract becomes binding when the act or service is performed.

29. “A creditor is bound by her promise to take less in full satisfaction of the debt.” True or false? Explain your answer.

True. Many jurisdictions have passed legislation providing that when a creditor has agreed to take less in full satisfaction of a debt, and has actually received the lesser sum, the creditor is bound by the agreement and cannot sue for the difference.

30. Explain why a contract dispute settled out of court is considered binding even though one party would have obtained more if the action had been taken to court.

When it is relatively clear that a litigant who settled out of court for a compromised sum would have been fully successful had the court dealt with the matter, there is still consideration to support the settlement. What the two parties have each given up is their right to allow the court to determine the outcome. The right is of considerable value to both parties for saved time and costs. Therefore, giving it up amounts to valid consideration on both sides.

31. Explain a person’s obligation regarding payment when she has requested a service without specifying a particular fee.

Quantum meruit is one of the exceptions requiring consideration be established if a valid contract is to exist. Even though the consideration has not been specifically agreed to, there is an obligation to pay a “reasonable” amount for the services actually rendered.

32. Describe what is meant by promissory estoppel and the circumstances in which it will arise in contract disputes.

When it is clear that there is no consideration to support a promise made by one of the parties to an agreement, that promise is not enforceable as a general rule. It is only when the other person (promisee) is being sued by the promisor that it is permissible to use that promise as a defense.

Solutions to Cases 1. Wembley Marketing Ltd. v. ITEX Corp., [2008] O.J. No. 5194 (S.C.), 2008 CanLII 67425.

The Court concluded that “(i)n all of the circumstances, I find that there was a binding agreement between Wembley and ITEX and I see nothing unfair or unreasonable in giving effect to the terms of the Agreement…. I find no evidence of fraud or misrepresentation on the part of ITEX. Moreover, Mr. Fuss, an experienced businessman, signed his name to the same agreement on two occasions. This is enough to fall within the principles confirmed in Fraser Jewellers, supra. Moreover, according to his collective evidence on this point, Mr. Fuss either did not read the Agreement, read a specific part of it or merely glanced at the clause. Given how unsatisfactory his evidence was on this point, I am unable to find a basis upon which to conclude that it would be unfair or unconscionable to hold the plaintiffs to the Agreement.”

The Court then concluded that the desire to enforce the forum selection clause was genuine and that the plaintiff tendered no evidence that it would be prejudiced if it were forced to bring its claim in a foreign court. Accordingly, the forum selection clause was held to be binding.

.

45

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 2. Iverson v. Iverson, 2009 SKQB 246 (CanLII).

Parties are not bound to their agreements made while progressing to a settlement of a disagreement until all issues are satisfied and there is a final settlement agreement. The final settlement agreement is enforceable. There was nothing left for agreement between the litigants in this case, so no terms were left to form an agreement to agree. The change in the markets was the risk of the former wife.

3. Ayerswood Development Corp. v. Hydro One Networks Inc., [2004] O.J. No. 4926 (S.C.), 2004 CanLII 45463 (ON SC) This was a unilateral contract. Hydro One had made an offer through their program that was open to anyone. If the conditions of the offer were complied with, acceptance then occurred and the person accepting would be entitled to the incentive payments. The court held suspension of the program did not result in a revocation of the offer before acceptance and “(i)n a unilateral contract, the person making the offer is not entitled to withdraw it once a party is in the process of performance”. The court ordered the incentive payments to be made by the defendant.

4. IGM U.S.A. Inc. (Bucci Industries U.S.A. Inc.) v. Linamar Holdings Inc., 2007 CanLII 38942 (ON SC).

Generally an invoice cannot unilaterally impose terms on a customer. (There is a reason we are sometimes asked to sign an invoice. And you do not have to sign.) The court held that “(t)he stipulation on the back of the invoice did not form part of the contract agreed to between the parties, which had already been formed.” The court established that the Ontario courts do have jurisdiction to deal with the litigation using the common law principles of jurisdiction simpliciter and forum non conveniens.

5. MacMillan Estate v. Hoffman, 2011 BCSC 141 (CanLII).

The court held “…that the Lease to Purchase document does not place any obligation on Mr. Hofmann to purchase the Property and therefore is not an agreement for sale.” Since rent was no longer being paid, the court declared the Lease to Purchase null and void. If a valid Lease to Purchase was in place there would be no need for it to be executed under seal since there would be an exchange of consideration.

6. M.(N.) v. A.(A.T.) (2003), 13 B.C.L.R. (4th) 73 (C.A.), 2003 BCCA 297 (CanLII).

The B.C. Court of Appeal dismissed the appeal. The defendant made a gratuitous promise and the plaintiff pleaded promissory estoppel. Further, the Court of Appeal held “…even if the trial judge can be said to have erred in requiring proof of an existing legal relationship as a necessary element of promissory estoppel. Whether he did err in that regard I prefer to leave for another case where the question requires to be answered.” The case would stand a greater chance of success in the United States because promissory estoppel may be used as a “sword” and not just as a “shield”.

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

46

Chapter 7 The Elements of a Contract— Capacity, Legality, and Intention Learning Objectives • • • • • • • •

Explain the capacity of minors Compare the capacity of the insane and the drunk Review the law for others of limited capacity Discuss the law relating to contracts performed illegally Discuss the law relating to contracts formed illegally Review the contractual element of intention Examine the requirement that contracts be in writing Explain the principle of part performance

Discussion EXPLAIN THE CAPACITY OF MINORS

COMPARE THE CAPACITY OF THE INSANE AND THE DRUNK

REVIEW THE LAW FOR OTHERS OF LIMITED CAPACITY

The courts have always recognized that some people must be protected in their contractual relations with others because they are more vulnerable. Over the years, several categories of people have had their freedom to enter into contracts limited or in some cases done away with altogether. The age of majority varies from province to province, but people under that age in all provinces are protected to some extent in their contractual relations.

Contracts with infants are voidable at the request of the infant unless they are for items or services that are classified as “necessaries”. The adult with whom the infant contracts, is bound. When necessities are involved, the infant must pay a reasonable price. If services beneficial to the infant are involved (e.g. apprenticeships) an infant is bound by that contract. In B.C. all contracts with infants are “unenforceable” except those made enforceable by statue. An infant who affirms a contract upon reaching the age of majority is bound by it. Parents are generally not responsible for their children’s conduct either in contract or tort, but infants are not protected by infancy when a tort is involved.

People who can be classified as insane are also protected in their contractual relations. This rule also applies to the intoxicated. Intoxicated or insane persons must not only demonstrate that they did not understand the nature and quality of the act performed, but also that the other person knew or ought to have known of the incapacity. They must also show that the contract was repudiated within a reasonable time of regaining their capacity.

“Indians” under the Indian Act, corporations, enemy aliens during wartime and bankrupts have had their freedom to contract restricted. Importantly an undischarged bankrupt often cannot act or continue to act as a director of a corporation.

.

47

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition DISCUSS THE LAW RELATING TO CONTRACTS PERFORMED ILLEGALLY

DISCUSS THE LAW RELATING TO CONTRACTS FORMED ILLEGALLY

When discussing legality, it is necessary to distinguish between illegality as to formation of the contract (the contract itself is illegal) and illegality as to performance (the contract is performed in an illegal way). An example of a lawful contract that is performed illegally is a renovation contract that is undertaken by contractors who are not properly licensed and who do not obtain the necessary permits.

A reference to an “illegal contract” is illegal at the time it was formed. An illegal contract will not be enforced. It is void. Usually, when faced with a void contract, the court will restore the parties to their original position, ordering them to return any deposits advanced and property that had been transferred. However, because an illegal contract involves unacceptable or immoral conduct the courts will not assist the parties by restoring them to their original position unless one of them is innocent of any wrongdoing.

There are many examples of illegal contracts, including those formed to commit a crime, to commit a tort or to restrain trade.

REVIEW THE CONTRACTUAL ELEMENT OF INTENTION

EXAMINE THE REQUIREMENT THAT CONTRACTS BE IN WRITING

EXPLAIN THE PRINCIPLE OF PART PERFORMANCE

The parties to a contract must have intended that serious obligations and rights would flow from their agreement. Where domestic relations are involved, the court assumes that there was no intention to be bound. In commercial relations the presumption is that there is an intention to be legally bound. In other situations the court will use a reasonable person test to determine whether intention is present.

Most contracts are verbal. There are, however, provisions in place that require some types of contracts to be evidenced in writing to be enforceable.

The Statute of Frauds requires that a contract be evidenced in writing if it cannot be performed within one year, if it deals with land, if guarantees are involved, if a promise is made in consideration of marriage, or if an executor of an estate promises to pay the debts of the estate out of personal funds.

The written document that records the details of a contract must contain all essential terms. It may arise after the agreement has been struck or be surmised from a compilation of documents.

The court will waive the requirement of writing if the parties can produce evidence to show that a contract dealing with an interest in land has been partially performed. There are some important limitations to this principle.

The part performance must be evidence of the existence of the contract and consistent only with the existence of the contract.

Answers to Questions 1. “In determining whether a child has contractual capacity, the court will attempt to determine if she actually understood the transaction.” True or false? Explain your answer.

False. For those under the age of capacity in your province, by law they lack the legal capacity to enter into a binding contract.

.

48

Chapter 7: The Elements of a Contract—Capacity, Legality, and Intention 2. Explain the circumstances in which an infant may escape liability for a contract and the circumstances in which an infant is bound by a contract.

Infants are not bound by the contracts they enter into unless they are for necessities or are beneficial contracts of service. But once an infant’s contract is completely performed or the infant has paid for the goods or services, the contract cannot be voided unless there is a complete failure of consideration.

3. What is the significance of an infant’s contract being designated as a beneficial contract of employment or for service?

It is binding on the infant in most provinces.

4. In addition to debts incurred for necessaries, when will a minor be liable for a debt he incurred?

This varies depending on the province. In B.C., there will be no liability other than for student loans. In other jurisdictions it may include contracts of employment, apprenticeship or service.

5. What are the three stages of a contractual relationship? Describe the legal situation of a minor in each of these stages.

First stage – executory contract – the parties have entered into the contract, but the minor has not yet received any benefit from it and has not yet paid. A minor is not bound to the contract.

Second stage – partially executed contract – the minor has received the goods but has not yet paid. The minor may not be bound, but must return the goods and is then entitled to a refund of any money already paid. If the goods have been destroyed or title passed to a third party, the vendor is still not entitled to payment, and cannot pursue the third party.

Third stage – executed contract – Minors have received benefit under the contract and have paid. In most provinces, minors will be bound unless what they received was of no value.

If the contract is prejudicial to the interests of the minor, it will be void.

6. If there is no relevant legislation, when will the parents of a minor be responsible for the minor’s contracts? When will they be liable for the torts of the minor?

In contract law parents are not responsible for the contracts of their children unless it can be demonstrated that an agency relationship existed between parent and child. Similarly, in tort law parents are not liable for the tortious conduct of their children unless it can be demonstrated that they were negligent in their own right.

7. When can an adult sue a minor in tort even though there is a contract between them?

When the minor uses the subject matter in some way that is not anticipated under the contract, (e.g. drag racing) and damages it, the adult can sue in tort and escape the limitations imposed by the infant’s lack of contractual capacity.

.

49

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 8. What must an insane or drunk person establish in order to escape liability under a contract?

Each must establish that they were unable to understand the nature of the contractual relationship and that the other person knew or should have known of that drunkenness or insanity as determined by the application of the reasonable person test.

9. Explain what care business people must exercise when entering into contracts with government corporations or bodies.

Crown corporations and government bodies are often empowered to enter into contracts generally but some may have that power specifically limited by the legislation or regulations authorizing their operations. Business people should be aware of statutory limitations to the capacity of these bodies when dealing with them.

10. Explain four other situations where business people must be careful that those they deal with have the capacity to contract.

Foreign governments and their representatives, bankrupts, “Indians” under the Indian Act, and government agencies.

11. Explain the difference between a contract that is performed illegally and an illegal contract.

An illegal contract is one that covered an illegal activity. It is unlawful and cannot be enforced. But if the contract itself is legal, and it was only in the performance that an illegal activity occurred, then innocent parties are entitled to the benefits of the contract.

12. What decisions can a court make if performance of a contract violates a regulatory statute?

The legislation itself may provide for the contract being void, or other mandated outcomes, which the courts must follow. If there are no such provisions, the court may treat the contract as being void, but not illegal and may grant rescission. If the illegal performance can be separated from the rest of the performance of the contract, the court may rule only that part void and enforce the rest of the contract.

13. What are the two reasons that can cause contracts to be illegal?

Commission of some prohibited conduct set out in a statute, or immoral conduct that is against public policy.

14. How has the law regarding the judicial treatment of illegal contracts changed?

The classic approach was that every illegal contract was deemed to be void. The court may now sever just the illegal portion of the contract, leaving the balance of the contract enforceable, even to the point of re-writing part of the contract.

.

50

Chapter 7: The Elements of a Contract—Capacity, Legality, and Intention 15. Give five examples of contracts deemed by the court to be against public policy and describe the effect of such a designation.

At common law, these are any contracts to commit a crime or a tort, to commit immoral acts, obstruct justice, injure the state, contracts that unduly restrain trade, restrict competition, contracts as bets and wagers, contracts to promote litigation, contracts to injure public service and contracts in restraint of marriage. Most of these types of contracts are void and the courts usually will not assist the parties to return to their original positions. Some, however, such as contracts that unduly restrain trade or restrict competition, may have only that portion of the contract that is tainted invalidated.

16. “All contracts that restrain trade are illegal.” True or false? Explain your answer.

False. Only those contracts which unduly or unreasonably restrain trade are against public policy. For example, when a business is sold it is often necessary to restrain the vendor’s freedom of activity through a restrictive covenant in order to protect the value of the goodwill in such a contract.

17. Describe the test the courts will use in determining whether the parties had an intention to be bound when they made an agreement.

With close family relationships there is a presumption of lack of intention and in commercial transactions there is a presumption of intention to be legally bound. In other situations a reasonable person test is applied and the courts will give effect to the stated intention of the parties.

18. With respect to the element of intention, explain how the courts’ treatment of domestic agreements differs from their response to commercial transactions when the question of intention arises.

When agreements involving close family relations or friendships are involved, the courts presume that there is no intention to be legally bound and, thus there is no contract. When a commercial contract is involved, however, the presumption is that there is an intention to be legally bound and this has to be disproved by the parties in order to escape a contract on the basis of lack of intention.

19. How will the court determine if there was a contractual intention when there is a dispute between a brother and his sister over how to operate their business?

The courts presume there is no intention to be bound if the contract is between family members. However, if the party wishing to enforce the contract can bring forth sufficient evidence to convince the court that they did intend to be bound, the presumption will be rebutted and the court would enforce the contract.

20. What is the significance of a written document in contractual relations?

(1) It has important practical evidentiary effects since it will be a permanent record as to what the parties have agreed. (2) Such a written record might be essential to satisfy the requirements of the Statute of Frauds in order to be enforceable.

.

51

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 21. Explain why some people have suggested that the Statute of Frauds has led to more frauds than it has prevented.

The Statute of Frauds imposes a technical requirement on the parties to a contract which must be satisfied for that contract to be enforceable. That can work to the disadvantage of either party, not just to the benefit of the victimized party. Therefore many verbal contracts that could be enforced between people allow one of the parties to escape because the Statute of Frauds is not satisfied.

22. Give examples of the types of contracts currently included under the Statute of Frauds?

The answer will vary based on jurisdiction and the relevant legislation i.e. B.C. Law and Equity Act. (1) Contracts not to be performed within one year. (2) Land dealings. (3) Guarantees and indemnities. (4) Promises in consideration of marriage. (5) The promise of an executor. (6) Other special statutory requirements such as the Sale of Goods Act. 23. What “evidence in writing” is required to satisfy the requirements of the Statute of Frauds?

This is usually identification of the parties, consideration, the description of the property involved, but may include other provisions as well.

24. “A contract that does not satisfy the Statute of Frauds is void.” True or false? Explain your answer.

False. The contract would merely be unenforceable. If the parties have already partially performed, or if there are other remedies that do not require the court’s involvement, the contract would still be binding. Further self-help is available, such as exercising set-off.

25. Under what circumstances will a contract falling under the jurisdiction of the Statute of Frauds be enforceable even though it is not evidenced by writing?

If a contract relating to land has been partially performed by the parties it is not necessary to have evidence in writing. Partial performance has to be consistent only with the existence of the contract and therefore the mere payment of money is not enough.

Solutions to Cases 1. National Money Mart Co. v. Tazmania Auto Sales Inc., 2001 ABPC 254.

The court held that the infant defendant lacked the capacity to endorse the cheques and therefore would not allow the cause of action against him. The court could not find an alternative course of action against the infant at common law (tort) or in equity.

2. Graham v. Capital Cabs Ltd., 2005 N.W.T.T.C. 6 (CanLII).

The court found that the company was contractually bound to pay Graham the sum of $2000 and would have also ordered that sum be paid on the principles of unjust enrichment and quantum meruit. However, the court found that the agreement to provide Graham shares in the company was unenforceable as it was not in writing as required by section 14(2) of the Business Corporations Act.

.

52

Chapter 7: The Elements of a Contract—Capacity, Legality, and Intention 3. Bursey v. Bursey (1999), 174 Nfld. & P.E.I.R. 291 (Nfld. C.A.), 1999 CanLII 19021 (NL CA).

This part of the separation agreement was held to be against public policy since it was done in connection with an illegal contract or for an illegal purpose. She did not have to pay anything for the sales tax.

4. McKnight v. Grant (2009), 340 N.B.R. (2d) 386 (C.A.), 2009 NBCA 4 (CanLII).

The Court of Appeal held that the agreement to re-convey the cottage was not subject to the Statute of Frauds. The court stated that “(a)lthough there are no cases in this Province on point, as a matter of policy, the application of the Statue of Frauds must be restricted to its original purpose (to prevent perjury and fraud) and not to be invoked as a tactical measure to avoid an otherwise enforceable bargain.”

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

53

Chapter 8 Factors Affecting the Contractual Relationship Learning Objectives • • • • • •

Distinguish innocent, negligent, and fraudulent misrepresentation Identify the remedies available for each type of misrepresentation Explain the implications of duress and undue influence Identify three types of mistake Describe the effect of mistake upon the enforceability of a contract Outline the rules governing privity and assignment

Discussion DISTINGUISH INNOCENT, NEGLIGENT, AND FRAUDULENT MISREPRESENTATION

IDENTIFY THE REMEDIES AVAILABLE FOR EACH TYPE OF

MISREPRESENTATION

EXPLAIN THE IMPLICATIONS OF DURESS AND UNDUE INFLUENCE

Misleading statements may give rise to a claim of misrepresentation.

These misleading statements must be false, statements of fact not opinion (except for an expert) or law, and if they induced the person to enter the contract and losses occur a remedy is provided. Innocent misrepresentation is made honestly and without carelessness. Negligent misrepresentations are made carelessly below the standard expected of the reasonable professional or expert in the area. Fraudulent misrepresentation is lying or deceitful conduct.

Rescission is available as a remedy when the misrepresentation has been innocent. It is only where fraud or negligence is involved that damages may be available as well. When the misrepresentation becomes a term of the contract, the remedies are those normally available for breach of contract.

When it can be shown that a person entered a contract because of inappropriate pressure such as duress or undue influence, the resulting contract may be declared voidable by the courts. Where persons are robbed of theirs free will because of the relationship involved, there is a presumption of undue influence and the contract will be voidable at the option of the victim. Where the pressure involves more direct threats of violence, imprisonment or the destruction of property, this amounts to duress and the contract will also be voidable. The courts can also interfere with a contract on the basis of unconscionability where one party has taken advantage of another’s situation, which may arise from desperation, weak intellect or lack of business experience.

Simple economic advantage will not be enough for a finding of unconscionability.

.

54

Chapter 8: Factors Affecting the Contractual Relationship IDENTIFY THREE TYPES OF MISTAKE

DESCRIBE THE EFFECT OF MISTAKE UPON THE ENFORCEABILITY OF A CONTRACT

Shared Mistakes – where both parties are making the same mistake about the object of the agreement.

Misunderstandings – when the parties have a misunderstanding about the terms of the contract and neither party is aware of the others’ different understanding.

Unilateral Mistakes – where only one of the parties is making a mistake with respect to the contract.

When the written document is an incorrect record of the agreement between the parties, this document may be rectified (corrected) by the court. When the misunderstanding between the parties can be resolved by the application of the reasonable person test or certain rules of interpretation, the court will impose the most reasonable interpretation of the contract on the parties. Only when it is impossible to choose between the two understandings, will the courts declare the contract void because the mistake is serious enough to eliminate consensus.

A unilateral or one-sided mistake will generally be the problem of the person making the mistake. The guiding principle is caveat emptor or let the buyer beware. People who sign a document that they think is of an entirely different nature than it is in reality, may be able to rely on the defense of non est factum if there was no negligence. The guiding principle seems to be that the courts will attempt to give effect to the reasonable expectations of the parties.

When there is a dispute between the parties about the meaning of the contract, there are a number of rules that can be applied in determining the appropriate interpretation of the contract. Generally, a reasonable person test will be used, but where specific terms are involved and those terms are clear and unambiguous, the court must apply their literal meaning. When they are vague, however, the court will generally interpret the words in such a way as to give effect to the contract.

The parol evidence rule states that where the words are not ambiguous, the parties cannot introduce outside evidence to contradict the contract.

The courts can imply terms into the contract when the parties have neglected to include them.

OUTLINE THE RULES GOVERNING PRIVITY AND ASSIGNMENT

The general principle of privity of contract establishes that an outsider or stranger to a contract cannot enforce any rights that have been obtained under that contractual agreement, nor can the contracting parties place any burden upon the third party except in the following situations. When all parties wish to substitute a new party for the old one, then such a novation is binding. When contracts dealing with land are involved, the obligations run with the land and are binding on subsequent holders of the land even though they were not party to the original contract. Agents acting on behalf of a principal can bind the third party principal. When a trust has been created, a trustee is bound

.

55

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition to honour the trust for the beneficiaries even though the beneficiary is not a party to the original contract. A beneficiary of an insurance contract between the insured and insurer can enforce it against the insurer. These are exceptions to the rule that the only parties affected by a contract are the immediate parties to it. In some jurisdictions, privity has been overruled by statute in third party liability cases.

Answers to Questions 1. Explain how fraudulent, negligent and innocent misrepresentations differ. Identify the remedies that are available for each type of misrepresentation.

Innocent misrepresentation occurs when individuals do not know that what they have said is false. Negligent misrepresentation is when people honestly thought that what they were saying was true, but should have known it was false. Fraudulent misrepresentation is when someone knowingly makes a false statement that induces another to enter into a contract. The importance of the distinction is in the remedies available. If the misrepresentation is innocent, only rescission is available. If the statement becomes a term of the contract, normal breach of contract remedies apply. If the representation was either negligent or fraudulent, rescission and damages are available to the victim.

2. What happens when a misrepresentation becomes a term of the contract?

The normal rules of breach of contract apply when a misrepresentation becomes a term of the contract. The remedy available depends on whether the false statement was made innocently, fraudulently or negligently.

3. Under what circumstances can silence or a statement of opinion become misrepresentation?

When there is a special duty to act in good faith, failure to inform a contracting party of certain facts can amount to misrepresentation. A statement of opinion is not actionable unless the opinion is that of an expert in the matter being dealt with.

4. What factors may affect the availability of the remedy of rescission?

The remedy of rescission is not available if the victim of the misrepresentation has affirmed the contract. Similarly, if it is impossible to return the parties to their original positions or where the granting of rescission will harm a third party, this remedy will not be granted by the courts.

5. Distinguish among duress, undue influence, and unconscionability and give examples of each.

Duress is the use of threats of violence or imprisonment to pressure another to enter into a contract. Undue influence may be present when people in a close social relationship contract with one another. Undue influence is assumed when people in certain specified relationships contract. In other circumstances it must be proven. When either of these elements is present the contract is voidable at the wish of the victim. Unconscionability involves one party taking advantage of the other party’s weakness such as desperation, or weak intellect which results in an unfair bargain.

.

56

Chapter 8: Factors Affecting the Contractual Relationship 6. A mistake may result in a contract being declared void or voidable. What difference does it make if a contract is merely voidable?

If a contract is found to be void it is not a contract at all. If a contract is voidable the contract does exist, but one of the parties has the option of getting out of it. Consequently, when an innocent third party has acquired goods that are the subject of a voidable contract, that party gets to keep the goods; but if the previous contract was void — that is, there never was a contract — the person who sold the goods to the third party never had title to them, and those goods must be returned to the original owner.

7. When will a misunderstanding as to the terms of a contract cause that contract to be void?

Only when the misunderstanding is serious enough to eliminate the consensus between the parties will the contract be void. It is not enough for the misunderstanding to have simply resulted in a bad bargain. Caveat emptor remains the guiding principle.

8. Distinguish shared mistakes, misunderstandings, and one-sided mistakes.

With a shared mistake, both parties make the same mistake. That is, they are of a common mind. A mutual mistake occurs when both parties make different mistakes, putting the parties are at cross-purposes. A unilateral or one sided mistake occurs when only one of the parties is making a mistake.

9. What approach will the courts usually take when the mistake involves disagreement about the meaning of the contract?

The court will impose a reasonable interpretation of the terms on the parties and if it is impossible to favour one interpretation over another, the contract will be void.

10. What must a party to a contract show to obtain rectification of a document?

When the parties incorrectly write down what they’ve agreed (make a clerical error) the court can correct the error to reflect what has been agreed. However, it must be shown that both parties intended something different than what was embodied in the written document.

11. How will the courts respond to ambiguous wording in a contract?

The courts will favour the interpretation that keeps the contract alive and will try to give effect to the reasonable expectations of the parties.

12. Explain what is meant by caveat emptor. What is the significance of this principle in relation to a one-sided mistake?

Caveat emptor requires a purchaser to be careful. That is, buyers beware! The seller cannot mislead a buyer, but has no obligation to correct assumptions that the buyer has made about the item being purchased. If buyers mislead themselves, that is a unilateral mistake and their problem.

.

57

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 13. Under what circumstances would a person raise a claim of non est factum? What restrictions are there on its availability?

Non est factum is a defense available when people think that they are signing a document of one nature when in fact the document is of a completely different nature. It is not available when it is only a mistake in the terms of the agreement or when there is negligence on the part of the person signing.

14. Explain the parol evidence rule.

The parol evidence rule states that when the term of a contract is clear and unambiguous, the parties will not be permitted to introduce evidence outside of the contract to contradict that clear meaning (whether that outside, extrinsic evidence is in writing or verbal).

15. What is meant by privity of contract?

Privity is a fundamental principle of contract law that the parties to a contract do not have the power to impose benefits or obligations on third parties or outsiders who are not parties to the contract. The contracting parties have created a private agreement, and outsiders to it can neither enforce it or be bound to perform its terms.

16. Explain what is meant by the term novation.

Novation occurs when the parties to a contract agree to substitute someone new for one of the original parties. Novation can also refer to the change of some important term of the agreement.

17. Explain the relationship of the privity principle to land transactions, agency, trusts, and assignment.

Land transactions - This is an exception to the privity rule. Many interests associated with land can run with the land instead of the parties.

Agency - when an agent acts on behalf of a principal the resulting contract is between the principal and the third party.

Trusts - A trust is a true exception to the privity rule since one person has a contract with another to hold property in trust for a third. The third can enforce the trust.

Assignment - Once an agreement has been entered into between two parties, it is possible for the parties to a contract to assign or sell the rights or benefits they are entitled to under that contract to some third party.

18. What qualifications must be realized before there can be a statutory assignment?

First, the assignment must be absolute, meaning that it must be both unconditional and complete. The full amount owed must be assigned without any strings attached. Second, the assignment must be in writing, and signed by the assignor. Third, the original party obligated to pay must be notified in writing of the assignment.

19. What limitations are placed on the rights and obligations of the assignee when a contract is assigned?

Only the benefits of a contract can be assigned – not the obligations. Some things cannot be assigned such as alimony or maintenance.

.

58

Chapter 8: Factors Affecting the Contractual Relationship 20. What is meant by “the assignee takes subject to the equities”?

This principle refers to the fact that an assignee is in no better position to enforce the contract than the assignor. Accordingly, if a debtor has a good defence against the assignor, it is also a good defence against the assignee.

21. Can a “holder in due course” obtain better rights than an assignee? Explain.

The principle that an “assignee takes subject to the equities” does not apply when dealing with an assignment of a negotiable instrument. The assignee of a negotiable instrument is known as a ‘holder in due course’ and as such is not bound by the equities that may exist between the original parties.

Solutions to Cases 1. Henderson v. Knogler, [2010] S.J. No. 572 (Sask. C.A.); 2010 SKCA 119 (CanLII).

The Court of Appeal found that this was clearly a case of mutual mistake and accordingly allowed rectification of the agreement. The court relied upon the trial judge’s finding of fact that “(n)either party, at the time the written contract was executed, was aware that the wrong land description had been used to describe the subject matter of the purchase.”

2. RF Real Estate Inc. v. Rogers Telecom Holdings Inc., [2008] O.J. No. 3314 (Ont. S.C.J.); 2008 CanLII 42598 (ON SC), aff’d 2009 ONCA 899 (CanLII) “When interpreting a contract, the court looks to the language used by he parties to give effect to their written agreements. The words in the agreement are understood to have their plain and ordinary meaning…. If there are several documents comprising the agreement, they must be read together to discover the intention of the parties.” Based on these principles, the court concluded that there was a binding contract between RF, Sprint and Callnet, and that Rogers assumed those obligations when it acquired Sprint. RF completed a number of the steps required under that agreement and was entitled to be compensated for the work performed. Rogers was ordered to pay RF $800,000.

3. Re Royal Bank of Canada and Gill (1988), 47 D.L.R. (4th) 466 (B.C.C.A.); 1988 CanLII 2970 (BC CA).

In this case the father is claiming non est factum but the court holds against him. The father, although clearly relying on his son, was aware of the general nature of the documents he signed, and certainly he was careless in signing them. These two factors prevent him from succeeding in a non est factum defense. There was no misrepresentation here on the part of the bank, and it cannot be demonstrated that he thought he was signing something fundamentally different from a guarantee. This is in fact what he signed. When the son told the father he had to sign with him he ought to have understood that it was a guarantee. His failure to properly understand English did not take away from his general understanding of the transaction. Nor did it justify less prudence on his part.

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

59

Chapter 9 The End of the Contractual Relationship Learning Objectives • • • • • •

Outline how a contract is discharged by performance Describe when a breach of contract will be sufficient to relieve the opposite party from its obligations Explain how a contract may be discharged by agreement Illustrate the consequences flowing from frustration of contract Describe how damages for breach of contract are assessed Differentiate the equitable remedies available for a breach of contract

Discussion OUTLINE HOW A CONTRACT IS DISCHARGED BY PERFORMANCE

DESCRIBE WHEN A BREACH OF CONTRACT WILL BE SUFFICIENT TO RELIEVE THE OPPOSITE PARTY FROM ITS OBLIGATIONS

A contract can come to an end when the parties properly perform their obligations or agree to end or modify their contract. As a general rule substantial performance tendered at the appropriate time and place is the equivalent of performance. However, where money is owed there is still an obligation to pay until payment is made in full in the proper currency. When parties do not live up to their contractual obligations they are said to breach the contract.

With the breach of a warranty (a minor term of the contract) victims of a breach must continue to perform their side of the contract, but can sue for damages to compensate for their losses. If a condition is breached, the victim can treat the contractual obligation as ended and sue for compensation or rescind the contract. If the choice is made not to end the contractual obligation, or there is neglect to treat the contract as discharged, the victim can still sue for breach of warranty. The parties can specifically designate specific terms as warranties or conditions as they wish.

An exemption or exculpatory clause is an attempt by one of the contracting parties to limit liability. Such clauses are binding on both parties providing they specifically set out the limited liability. Such clauses are strictly interpreted and if the breach can be said to be fundamental even the exemption clause will not protect the breaching party unless it is clear that the exemption clause was intended to cover that breach.

When a party to a contract repudiates the contract (refuses to perform), the other party’s contractual obligation is ended. Where the repudiation takes place before performance is due, it is referred to as an anticipatory breach.

The other party then has the choice of either ignoring the repudiation and insisting on performance or electing to treat the contract as at an end and suing immediately. Continuing to insist on performance runs the risk of some intervening event making the contract impossible to perform causing frustration of contract and the end of the damages claim.

.

60

Chapter 9: The End of the Contractual Relationship EXPLAIN HOW A CONTRACT MAY BE DISCHARGED

BY AGREEMENT

ILLUSTRATE THE CONSEQUENCES FLOWING FROM FRUSTRATION OF CONTRACT

DESCRIBE HOW DAMAGES FOR BREACH OF CONTRACT ARE ASSESSED

DIFFERENTIATE THE EQUITABLE REMEDIES AVAILABLE FOR A BREACH OF CONTRACT

Any contractual obligation that can be created by agreement can be ended, modified or changed by agreement, but there must be fresh consideration present on both sides. When both sides receive something, even if it’s merely being relieved of their contractual obligations under the existing contract, it is referred to as a bilateral discharge. When the change in the contract is one-sided it is a unilateral discharge. Before it is binding on the parties it must be demonstrated that the parties have reached an accord and some additional satisfaction or consideration is given. If the contract provides that some condition must be met before the obligation is manifested, this is a condition precedent. If the obligation ends because of some event, it is called a condition subsequent. Therefore the contract can be ended by agreement as a term of the original contract.

When performance of the contract is made impossible or when performance would amount to something substantially different than what the parties anticipated by the operation of some outside, unforeseen event, the contract will be discharged by frustration. The frequently unfair consequence of “let the loss fall where it lies” has been mitigated by the Fibrosa case and provincial statutes. Essentially, if a deposit has been paid, the costs incurred and benefits derived can be taken into consideration by the courts in determining whether that deposit is going to be all or partly returned. Where it is the fault of one of the parties that there is an impossibility of performance, it is referred to as self-induced frustration and is merely breach of contract.

When a breach has taken place the most common remedy is damages in the form of monetary compensation. Here the courts try to put the parties in the position they would have been in had the contract been properly performed.

There are limitations, however, on the amount of damages that can be claimed. The damages must have been reasonably within the contemplation of the original parties to the contract and the victim of the breach has a duty to mitigate losses. A term of the contract may provide for a specific amount to be paid in the event of a breach (liquidated damages).

When damages would not be an appropriate remedy, the victim can seek equitable remedies such as specific performance (an order to go through with the deal) an injunction (an order to stop breaching the agreement) or an accounting involving disclosing what has been earned by the breaching party as a result of that breach and turning over those sums to the victim. Such equitable remedies are only available when damages would not suffice and the victim is not guilty of any wrongdoing.

Answers to Questions l.

Describe the various ways in which a contractual relationship can come to an end.

The contractual relationship can come to an end by performance, by breach or failure to perform an agreement, and by frustration.

.

61

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 2. Under what circumstances would a breaching party who had partially performed the terms of the contract be entitled to receive part payment?

The breaching party can receive part payment if, according to the contract, the part payment was due and payable before the breach.

3. Describe the differences between a condition and a warranty. What is the distinction significant?

A condition is an important term of a contract. A warranty is a minor or peripheral term of a contract. If a condition is breached it allows the victim of the breach to discharge the contract. If a warranty is breached the victim must continue to perform but can sue for damages.

4. When may the victim of the breach of a condition lose the right to treat the contract as discharged?

The victim of the breach of a condition can lose the right to rescind by affirming the contract after becoming aware of the breach. It takes two people to breach a contract and if the victim of the breach chooses not to treat the contract as discharged, a breach of condition is treated like a breach of warranty.

5. What constitutes adequate tender of performance?

Proper tender of performance takes place where goods, services or money are delivered to the other party at a reasonable time and place. When money is involved, payment must be in legal tender.

6. What recourse is available to a party to a contract when performance is made impossible by the other party’s conduct?

When the impossibility of performance is caused by one of the parties, it is simply an example of breach of contract and all the remedies that are normally available for breach may be used. If performance is made impossible before actual performance is due, this is another example of anticipatory breach or repudiation and the victim has the choice of either suing immediately or waiting for performance and if there is no performance, suing then.

7. What options are available to the victim of an anticipatory breach? Explain the advantages, disadvantages and risks associated with these options.

Anticipatory breach takes place where one party refuses to perform before performance is actually due. When this happens the victim of the anticipatory breach has a choice of either ignoring the repudiation or insisting on performance at the appropriate date or treating the contract as discharged and suing immediately. If the victim of the breach sues immediately, damages can be kept to a minimum by making other arrangements. However, victims of an anticipatory breach might be in a better financial position by continuing to perform their obligations and waiting for the day of performance which may simply be payment by the other party. The disadvantage is that some other unanticipated, interfering event may take place in the interim which may frustrate the contract and cause a loss of the claim for damages.

.

62

Chapter 9: The End of the Contractual Relationship 8. What is an exemption clause? When might an exemption clause be unenforceable?

An exemption clause is designed to limit the liability of one of the parties in the event there is a breach of contract. The courts are generally reluctant to give effect to exemption clauses and, therefore, interpret them very strictly. The meaning set out in an exemption clause must be extremely clear for the court to give it effect. Any ambiguity will be interpreted in favour of the person disadvantaged by the exemption clause.

9. What is meant by fundamental breach? What remedy is available to the victim of a fundamental breach of contract?

The principle of fundamental breach means that there are some obligations in a contract which cannot be contracted out of by an exculpatory clause. There must be some basic, fundamental obligation that must be performed. The exemption clauses then will not apply to such a fundamental clause unless it is clear that the exemption clause was intended to cover the specific thing that happened. If the exemption does not apply, the victim of a fundamental breach will be relieved of obligations to perform and may also recover damages.

10. Assume the defendant claims that the contract was discharged or modified by agreement; the plaintiff challenges this conclusion and seeks to enforce the original contract. What will the defendant need to prove to avoid having the initial contract enforced?

The discharge or modification must be enforceable in law through a modified consensus and the exchange of fresh consideration.

11. Explain what happens when a creditor agrees to take less than is owed to settle a debt.

When a person pays less in full satisfaction of a debt, with nothing given in addition, there is no consideration to support the reduction and the full amount is still owing. Statutes in various provinces have modified this so that now when a person actually pays less in full satisfaction of a debt with the consent of the other party, that reduction in the debt will be binding on both parties.

12. How do conditions precedent differ from conditions subsequent?

Both conditions precedent and conditions subsequent determine whether a contractual obligation exists. A condition precedent is a condition that must be met before a contract comes into operation. For example, I will sell you my car if I can purchase car X from Jones.

A condition subsequent is a condition which causes an ongoing contractual relationship to come to an end. For example, I will pay you $50 a month until you graduate.

13. Define frustration. List three ways that frustration can take place.

Frustration allows for a contract to be treated as discharged when some outside, unforeseen event, beyond the control of either party, makes it impossible to perform a contract or causes the contractual relationship to become something essentially different in its nature than the parties anticipated. Such frustration can take place when performance becomes impossible because (1) the subject matter of the agreement has been destroyed (2) the event that forms the basis of the contract fails to take place or (3) acts of the government affect performance.

.

63

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 14. What is the significance of a court’s determination that a contract was frustrated through the fault of one of the parties?

Self-induced frustration is simply breach of contract.

15. Explain how the Fibrosa case and subsequent statute law have modified the previously accepted common law rule on the obligations of the parties in the face of a frustrating event.

Before Fibrosa, when frustration took place it was thought that the loss would lay where it had fallen. This case established the principle that when there has been a complete failure of consideration and a deposit has been paid (meaning that the person paying the deposit has received absolutely nothing from the other party) that deposit would be repaid. This also caused some unfair results and, therefore, has been modified by statute so that the courts are now permitted in most jurisdictions to apportion the prepayment to provide some compensation for both parties for the costs they have incurred.

16. Distinguish between a deposit and a down payment. What is the significance of this distinction?

A deposit is a prepayment designed to secure performance. If persons making the prepayment fail to perform their obligations that prepayment will be lost. Therefore, the prepaid deposit is a form of liquidated damages. A down payment, on the other hand, is merely the first payment of several under the contractual obligations and there is no intention that the down payment be forfeited upon breach. The significance of the difference, therefore, is that one will be forfeited and the other will not in the event of failure to perform.

17. What must be shown for the court to conclude that money paid ought to be categorized as a deposit?

It must be show that the parties intended that the prepayment is to be forfeited in the event of the breach or failure to perform by the prepaying party.

18. In light of the decision in Hadley v. Baxendale, how is the recovery of damages limited?

Generally, the principle developed in this case is that a breaching party is only responsible for those damages that could have been reasonably within contemplation at the time the parties entered into the contract (reasonably foreseeable damages). Therefore, when unusual damages are suffered from circumstances that the breaching party was unaware of, there will be no responsibility for those damages.

19. Describe what is meant by mitigation. Explain how the obligation to mitigate damages limits the ability of the victim of a breach to obtain damages.

Mitigation is the obligation on the victim of the breach to keep damages as low as possible.

Failure to do this means that the victim will only receive damages in the amount that would have been due had losses been properly mitigated.

20. Distinguish between specific performance and injunction. Explain the restrictions on their availability.

Specific performance is an equitable remedy by which an order of the court requires the breaching party to perform the contract. A negative injunction is an order to the breaching

.

64

Chapter 9: The End of the Contractual Relationship party to stop doing something that is in breach of the contract. These are equitable remedies and are only available when damages would be inappropriate, when there hasn’t been undue delay or fault on the part of one of the parties and, in the case of specific performance, when personal services are not involved. Similarly, when the awarding of an equitable remedy would work a hardship on some person or be otherwise inappropriate, it will not be granted.

Solutions to Cases 1. Betker v. Williams, [1991] B.C.J. No. 3724 (C.A.); 1991 CanLII 1160.

The defendants could have argued that the subject representation regarding the land was verbal and accordingly was not binding due to the Statute of Frauds. The court agreed with the plaintiff and held that since this exemption clause was not brought to the attention of the Betkers they were not bound by it. Therefore the negligent misrepresentation on the part of the realtors was actionable. Rescission is the appropriate remedy, but because of the delay, rescission was not granted and damages were awarded.

2. Teleflex Inc. v. I.M.P. Group Ltd., (1996), 149 N.S.R. (2d) 355 (NS CA); 1996 CanLII 5603.

There can be no frustration when the parties have anticipated the possibility of events in advance, and made provision for them in the contract. The contract specifically made provision for termination of the purchase order, which would then trigger payment to Teleflex for both completed and uncompleted work at that point. It is only unforeseen events that are covered under frustration.

3. Computer Workshops v. Banner Capital Market Brokers, (1988), 64 O.R. (2d) 266 (H.C.J.), affirmed (1990), 1 O.R. (3d) 398 (C.A.).

Computer Workshops could have argued for specific performance or damages equivalent to its lost profit, but the court dismissed the action in this case. Computer Workshops had used or attempted to use information that was confidential and, therefore, was in breach of an implied term in this contract. It was also in breach of its fiduciary duty and in breach of its duty of confidentiality. Since these were breaches going to the root of the contract, that is breaches of conditions rather than warranties, the defendants were entitled to terminate the contract and they were not obligated to perform under it.

4. 652013 B.C. Ltd. v. Kim, [2006] O.J. No. 423 (Ont. S.C.J.); 2006 CanLII 2892.

It would be helpful to know if the lack of illumination was the fault of the equipment supplied or the power supplier. The court rejected Kim’s argument that the failure of the signs to operate properly was fundamental breach of the lease agreement. Moreover, Kim had not properly terminated the lease agreement and as a result he was responsible for payment of the accelerated amount claimed. Although the contractual interest was high, it was not unconscionable.

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

65

Chapter 10 Employment Learning Objectives • • • •

Identify the distinctions among employees, agents, and independent contractors Explain the law of master and servant Outline the legislation affecting employment Describe collective bargaining and explain the role of labour unions

Discussion IDENTIFY THE DISTINCTIONS AMONG EMPLOYEES, AGENTS, AND INDEPENDENT CONTRACTORS

EXPLAIN THE LAW OF MASTER AND SERVANT

Employment law is concerned with the relationship where a person contracts to provide services to an employer. This relationship must be distinguished from a service being performed by an agent or an independent contractor.

One test for determining whether an employment relationship exists is the control test. If the employer can tell the worker not only what to do but how to do it, an employment relationship exists. A more recent test is the organization test which holds that if the person can be considered an integral part of the organization of the employer, an employment relationship exists.

A person can be an agent of the employer whether the individual is an independent contractor or an employee, but this does not mean that all employees or independent contractors are agents. It does not matter if someone is called an independent contractor if the control test or organization test determines it is in fact an employment relationship. The distinction between employee and independent contractor is an important consideration for vicarious liability, income tax, and salary withholdings.

Where the employment relationship does exist, the employer is obligated to provide not only payment for the services, but safe working conditions as well. The employee is obligated to give competent, careful, honest and loyal service. The employment relationship is created by contract and normal contract law applies. Such an employment contract, in the absence of any other provision to the contrary, can be terminated at will by either party simply by giving reasonable notice or payment in lieu of notice providing human rights and employment standards are not violated. If there is just cause such as dishonesty, incompetence, fraud, consistent tardiness disobedience or other serious misconduct, the employee can be terminated immediately without notice. When either party has breached the employment contract, notice is not required for the contract to be terminated immediately.

In the absence of just cause, an employer’s failure to give reasonable notice will give rise to a claim for wrongful dismissal.

Where disabled or ill workers are involved, every reasonable effort must be made to accommodate them. Many firms arrange for disability insurance to deal with this problem. Human rights legislation requires accommodation of

.

66

Chapter 10: Employment employees on other grounds as well, such as family status, religion and etc., when it would not place undue hardship on the employer. Since the relationship is primarily contractual, when the employer significantly changes the nature of the job, this amounts to a breach in the form of constructive dismissal and entitles employees to leave and sue for damages unless they consent to the change. It is also possible, although rare, to sue an employee for wrongful leaving. For example, by giving inadequate notice before leaving the job. It is more common for employees to be sued for breaching their duty to the employer by taking customer lists etc. when they do leave. Any restrictive convents imposed on the employee must be reasonable in time duration and geographic scope in order to be enforceable.

Otherwise they are void for breach of public policy.

Under the common law the amount of notice or pay in lieu of notice can be substantial, and in excess of 2 years in some circumstances. Some jurisdictions have passed legislation controlling the amount of notice that must be given but most of the legislation deals with minimum notice. The principle of vicarious liability applies, making an employer responsible for the tortious or wrongful acts of an employee committed during the course of employment.

OUTLINE THE LEGISLATION AFFECTING EMPLOYMENT

Of all the different kinds of contractual relationships, employment is one of the most regulated. Both federal and provincial legislation has been enacted to control such areas as minimum wages, hours of work, leaves, vacation and holiday pay, termination, and child labour. This is generally described as Employment Standards legislation. Also, usually as separate legislation, rules controlling discrimination, workers’ compensation, health and safety, payroll withholdings, and employment insurance.

Human rights legislation usually enforced by commissions or boards, finds its most significant application in the field of employment. Discrimination on the basis of race, national or ethnic origin, colour, religion, gender or sexual orientation are grounds of concern to such boards. Employers have an obligation to maintain a discrimination and harassment free workplace, along with a duty to accommodate disabilities and cultural or religious practices where reasonable. Workers’ compensation legislation is in place in all jurisdictions to provide compensation to workers who are injured or incur illness through their employment, and to limit the liability of employers.

Legislation also establishes a regulatory body to establish and enforce safety standards for work sites.

DESCRIBE COLLECTIVE BARGAINING AND EXPLAIN THE ROLE OF LABOUR

The most significant legislative supplement to the employment relationship deals with collective bargaining. Collective action on the part of employees to motivate employers to improve working conditions has a long history.

Over the years much legislation has been passed legitimizing such collective action and today complex legislation is in place designed to reduce the conflict between employers and employees by controlling confrontation, particularly at the recognition stage of the organization process. The Wagner Act passed in the United States became a model for Canadian labour legislation. It attempted to alleviate conflict by keeping the employer out of the union organization process and having the employees vote to determine

.

67

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition whether a union should be organized. If 50 per cent of the work force voted in favour of the union, it would be certified as the bargaining agent for those employees. The effect of this was to require the employer to negotiate in good faith with that union.

Collective bargaining rights have been acquired through the political process but may not be guaranteed in the Charter. Collective bargaining is overseen by labour boards set up in each jurisdiction. There are several different areas in the union/management relationship where disputes can arise that are controlled by this legislation. These are jurisdictional disputes, recognition disputes, interest disputes and rights disputes. Jurisdictional disputes deal with disputes between unions as to which body should represent workers doing a particular job. A recognition dispute is handled through the certification process. Once the trade union has become certified, it has the right to serve notice on the employer to commence bargaining. Some jurisdictions also provide for employers’ organizations.

In the bargaining process each side will put forth the interests and terms they wish to have incorporated into the collective agreement. If an impasse is reached in the negotiation process, it is usually referred to as an interest dispute. The process of conciliation/mediation has been introduced to assist the parties to rationally reach an agreement. If there is no resolution of the dispute at this stage, the employer may choose to lock out the employees.

That is, refuse them the right to continue work. On the other hand the employees may chose to go on strike. A strike vote must be held. In the event of either strike or lockout, notice has to be given to the other party.

When this notice is served and the time has expired, services are then withdrawn or the lock out commences. It is only during an interest dispute that a strike can take place and it is only during a lawful strike that the union members can picket.

Picketing is a process of trying to persuade people not to deal with the business which is subject to the strike. Violence or intimidation on picket lines is illegal. Picketing can take place at the job-site and, in some jurisdictions, in other locations as well. If the negotiations are successful, however, the result is a collective agreement that must contain several important terms, one of which is the method of solving rights disputes (arbitration). Such an agreement must be ratified by the membership, be in force for at least one year, and have provisions for dealing with technological change. It can also provide for union shops, a stipulation that requires anyone joining the workforce to join the union. Unions are democratic organizations with leadership chosen by vote and committed to fairly represent and to act in the best interests of those they serve.

These general provisions apply to private sector employment. Government or public employees are usually controlled by special legislation that often precludes the right to strike or withhold services.

.

68

Chapter 10: Employment Answers to Questions 1. Distinguish among an employee, an independent contractor and an agent.

An employee can be told not only what to do but how to do it by an employer. An independent contractor has agreed to do particular work. An agent is a person who enters into contractual relationships on behalf of a principal. Both the independent contractor and the employee can function as agents in different circumstances.

2. Explain how a court will determine whether a person is an employee rather than an independent contractor.

The traditional approach was to determine the degree of control exercised by an employer over an employee. Today the courts have also turned to the organization test to determine how involved the employee is in the organization. If the worker is an integral part of the employer’s organization and subject to group control, the person in that circumstance would be considered an employee.

3. Summarize the employer’s obligations to the employee and the employee’s obligations to the employer under common law.

An employer must provide a safe working place and conditions as well as work and direction.

In addition to the agreed upon wage, an employer must compensate the employee for reasonable expenses incurred. The employee must possess the skills claimed and exercise them in a reasonably competent and careful manner, follow reasonable orders, be honest and courteous, be loyal and not insubordinate, be punctual and not excessively absent.

4. Explain what is meant by a restrictive covenant and what factors determine whether it is enforceable.

A restrictive covenant is a term in an employment contract which prohibits the employee, upon leaving, from working for a competitor employer, in a particular area. To be enforceable such restrictive covenants must be reasonable in duration and geographic area.

5. What is the proper way to terminate an employment contract that is for an indefinite period of time?

A reasonable amount of notice must be given by either party to terminate a contract. This amount varies with the length of time employed and the nature of the job (e.g. an executive will require more notice or pay in lieu of notice than a labourer).

6. How is the appropriate notice period to terminate an employment relationship determined?

The appropriate notice is determined by the reasonable person test and taking into consideration such factors as length of service, nature of job, qualifications and nature of the job market.

.

69

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 7. Under what circumstances can an employee be dismissed without being given notice?

When can an employee leave employment without giving notice?

When an employee is terminated without notice, it is referred to as termination for just cause.

The employee can be dismissed without notice when there is serious absenteeism, consistent tardiness, open disobedience, habitual negligence, incompetence or immoral conduct. The employee can leave without notice when asked to do something that is immoral or dangerous and not part of the job.

8. What risk does an employer face who ignores an employee’s incompetence over a period of time?

If bonuses or wage increases are paid to an employee it indicates that an employer is pleased with the services being rendered or that any incompetence was not important to the job. The employer will not then be able to raise this incompetence as grounds for dismissing or disciplining the employee.

9. What is “constructive dismissal”? Be sure to explain it using a contractual perspective.

Constructive dismissal can occur when an employer unilaterally changes an employee’s job.

This is tantamount to a modification of the employment contract without the employee’s consent. In such circumstances the employee can treat the modification as a termination of the employment contract and sue for wrongful dismissal, claiming pay in lien of reasonable notice.

10. What factors will a court take into consideration when determining compensation in a wrongful dismissal action? Indicate the various types of remedies that may be available to the plaintiff.

Usually the damages that are awarded to the victim are the difference between the amount the employee was paid upon termination and what would have been earned had pay in place of reasonable notice been given. An employee who successful in the action will usually be entitled to costs as well. Damages may include claims for lost employment benefits and pension rights. If in the process of being dismissed damage was done to the person’s reputation, damages may be awarded for defamation, as well. Very rarely will a court order an employee to be reinstated.

11. Explain what is meant by “vicarious liability”. Describe the limitations on its application.

Vicarious liability is a principle whereby one person is responsible for the wrongful acts of another person. For example, an employer is liable for the tortious acts of an employee done in the course of the employment. When the employer is held vicariously liable, this does not relieve the employee from responsibility for tortious conduct both to the wronged party and the employer.

12. Describe how the Employment Standards legislation protects basic workers’ rights.

Minimum wage, minimum termination notice, maternity leave, child labour, and other such areas are controlled in this legislation.

.

70

Chapter 10: Employment 13. Explain how human rights legislation applies to areas of employment?

When employees are harassed or discriminated against because of age, gender, ethnic origin, religion, disability etc, by employers, managers or their fellow employees it can have a devastating effect on them and their career. The statutes provide recourse for such employees with remedies in the form of compensation and even in some circumstances, reinstatement.

14. Explain what is meant by a duty to accommodate in the field of human rights and how that can affect employers.

Employers have a duty to accommodate the religious practices and disabilities of their employees. This may mean rescheduling shifts to accommodate a day free for religious observance or simply moving the desks to provide for wheelchair access. But it may also require significant modification of job requirements to accommodate a disabled person, up to the point of undue hardship on the employer.

15. Explain the object and purpose of workers’ compensation legislation and how those objectives are accomplished. If a worker is injured on the job and is not covered by workers’ compensation, what course of action need he take to secure a remedy?

The object of workers’ compensation legislation is to provide compensation in case of on-thejob injury without any need to establish who was at fault. The employee loses the ability to sue the employer for the injury. Employers and sometimes employees pay into an insurance fund made available to compensate injured workers. The premiums vary with the risks inherent with the employment. For employees not covered by workers’ compensation, through the common law an employee hurt on the job would have to prove on the balance of probabilities that the employer was negligent or deliberately caused the injury. The employee may also be found contributorily negligent, thereby lessening the damage award.

16. What is the significance of the National Labour Relations Act (Wagner Act) in Canada?

The Wagner Act controlled the certification process (organization) which was the main point of conflict between employers and employees. A government body was established to determine when certification was accomplished thus eliminating the need for the employer to take part in the process. Similar legislation was adopted by Canada during the Second World War and subsequently adopted by most of the provinces.

17. Compare and contrast recognition disputes, jurisdiction disputes, interest disputes, and rights disputes.

A recognition dispute is a dispute between the trade union and the employer over whether or not the trade union has the right to represent the employees in the collective bargaining process. This is now covered by legislation dealing with certification. An interest dispute is a conflict between the trade union and the employer as to what terms ought to be included in a collective agreement. A rights dispute is a disagreement between the union and the employer as to the interpretation of rights agreed on in the collective agreement. This takes place only where a collective agreement is already in force. A jurisdictional dispute involves a conflict between two unions as to the kinds of workers to be represented by each union.

.

71

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 18. Once a collective agreement is in place, what effect will it have on the individual rights of employees? How will it affect the employer?

A collective agreement embodies the terms of the contract of employment between the employer and employees. There is no right to bargain separately with individual employees.

19. Explain the difference between mediation/conciliation and arbitration. Describe how these tools are used in Canadian labour disputes.

Conciliation or mediation involves a third party stepping into an interest dispute to act as a go-between or intermediary between the parties. An arbitrator is a third party appointed by the parties to the dispute or the government to rule on the dispute. The recommendation of a mediator or conciliator is merely persuasive, but the decisions of an arbitrator are binding on the parties. Arbitration is the appropriate method of settling rights disputes and provisions for such arbitration must be provided in the agreement.

20. Distinguish among a union shop, a closed shop, and an agency shop.

A union shop clause requires new employees to join the union within a specified period of time. A closed shop clause requires that the employee be a member of the union before getting the job. An agency shop clause gives employees the option of joining the union but requires that they pay union dues in any event.

21. Distinguish between a strike and a lockout. What kind of disputes are strikes and lockouts limited to? How are the other types of disputes between union and employer dealt with?

A strike involves a withdrawal of services by employees which may constitute a refusal to come to work, but also may be merely a slowdown or refusal to do certain types of work. A lockout is an action undertaken by the employer whereby the employer refuses to let the employees work.

A strike or lockout can only take place in an interest dispute during the negotiation process for a collective agreement. Once such a collective agreement is in place any disputes have to be handled by arbitration (rights disputes). Recognition disputes are handled by the governmentimposed organizational process whereby a union becomes certified.

22. Explain what steps must take place before a strike or lockout is legal.

A strike or lockout can only take place in an interest dispute and even then it must be shown that the parties have attempted to bargain in good faith. Once that is clear, a certain amount of notice must be given to the other party before the strike or lockout can take place. Some jurisdictions such as Alberta have mandatory mediation before strike notice may be given.

23. Explain what is meant by “picketing”, when it can take place, and the limitations that have been placed on picketing in different jurisdictions.

Picketing involves strikers standing near or marching around a place of business trying to persuade people to refrain from doing business there. Only information can be conveyed.

Intimidation or physical violence are prohibited under the legislation and if they may result in criminal charges in addition to sanctions applied under the relevant labour legislation.

Picketing must be peaceful and not in violation of private property. Courts or boards may limit the number of picketers where the crowd becomes intimidating.

.

72

Chapter 10: Employment 24. What is the legal position of a person who wishes to cross a picket line?

In most jurisdictions, people have a perfect right to cross a picket line if they wish. A picket line is merely a method of persuading people to support the union’s cause.

25. How is collective bargaining for public sector and essential service employees different from that for people employed in private industry?

Most provinces permit collective bargaining to some extent for employees in the public sector or that provide essential services. However, only a few allow such employees to participate in strikes and picketing. Usually there is some form of compulsory arbitration to resolve disputes. Of course, in all labour disputes, including private ones, the government has the right, either by existing statute, or by the passage of a specific bill, to end a work stoppage and impose a settlement, or an alternative method of resolving the dispute, such as compulsory arbitration.

Solutions to Cases 1. Lyons v. Multari, 2000 CanLII 16851 (ON CA), leave to appeal to SCC refused, [2000] S.C.C.A. No. 567.

The courts are increasingly finding a non-competition restrictive covenant to be against public policy and void when the protected party’s economic interests would be sufficiently protected by a non-solicitation restrictive covenant. The courts consider the length of time and geographic area of a restrictive covenant in the context of the particular industry, determining if they are unreasonable and void for public policy reasons.

2. Evans v. Teamsters Local Union No. 31, 2008 SCC 20 (CanLII).

The Supreme Court made it clear that an employee should not always be required to return to work for the dismissing employer. This should only occur where there are no barriers to re-employment. “…[T]he employer bears the onus of demonstrating both that an employee has failed to make reasonable efforts to find work and that work could have been found.

Where the employer offers the employee a chance to mitigate damages by returning to work for him or her, the central issue is whether a reasonable person would accept such an opportunity…. [A] reasonable person should be expected to do so “[w]here the salary offered is the same, where the working conditions are not substantially different or the work demeaning, and where the personal relationships involved are not acrimonious” [T]he British Columbia Court of Appeal held that other relevant factors include the history and nature of the employment, whether or not the employee has commenced litigation, and whether the offer of re-employment was made while the employee was still working for the employer or only after he or she had already left. The critical element is that an employee “not [be] obliged to mitigate by working in an atmosphere of hostility, embarrassment or humiliation”.

3. Brazeau v. International Brotherhood of Electrical Workers, 2004 BCCA 645 (CanLII).

Harassment consists of unwelcome conduct based upon a person’s protected status. While there was harassment by Mr. Brazeau, which the trial judge concluded fell into a medium category, there was no clear warning given to him that if he continued to harass Ms. Pynaker, he would suffer disciplinary consequences, such as dismissal. As such, his dismissal was wrongful. The trial judge must take into account the full context of the harassment, in order to make these kinds of decisions. The harassment initially consisted of unwelcome romantic advances, but there was no physical contact of a sexual nature. The parties continued to work

.

73

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition together successfully for some years, and it was not until two or three years later that it began to affect their working relationship. Since the trial judge took all of this into account in her judgment, the appeal was dismissed.

4. Emerald Foods Ltd. (c.o.b. Bird’s Hill Garden Market IGA) v. United Food and Commercial Workers’ Union, Local 832, 2003 MBCA 83 (CanLII).

Upon review of the contents of the President’s letter, the Board concluded that it was delivered with the purpose of influencing the outcome of the vote. This constitutes an unfair labour practice. The letter itself spoke of wage negotiations which were taking place through a focus group without union involvement, and carried the implicit warning that improved wages and benefits might not take place should the union be certified. While employers are able to distribute information, they cannot threaten or attempt to influence the outcome of certification votes. The intentions of the employer are relevant in making this kind of determination. The labour statute in this case protected employees against an employer exercising too much power.

5. Loyalist College of Applied Arts and Technology v. Ontario Public Service Employees Union, 63 OR (3d) 641, 2003 CanLII 29709 (ON CA).

A collective agreement covers all aspects of the employment relationship, other than bare hiring. For the College to impose a condition on employment that was not imposed on other members of the union, and then to fire Ms. Bergman based on that condition was not valid.

Ms. Bergman was entitled to her remedies under the collective agreement.

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

74

Chapter 11 Agency and Partnership Learning Objectives • • • • • •

Describe the agency relationship, a relationship of utmost good faith, outlining the rights and responsibilities of agents and principals Distinguish between actual authority and apparent authority of agents Explain fiduciary duty and describe when it arises Distinguish the three types of business organizations used in Canada, focusing on the method of creation and the rights and obligations of partners specific to each type List the characteristics of a sole proprietorship and explain why sole proprietors face unlimited liability Outline the advantages and disadvantages of operating a business through a partnership and describe the processes of dissolving partnerships

Discussion DESCRIBE THE AGENCY RELATIONSHIP

In business, an agent often acts on behalf of a principal in contractual dealings with third parties by entering into a binding contract between the principal and agent on behalf of the principal. The agency relationship is usually created by contract and normal contract rules apply. The agent may be either an employee of the principal or an independent contractor. It is also possible for an agent to be acting gratuitously and still bind a principal in contract. A lack of capacity on the part of the agent will not affect the resulting contractual obligations between the principal and third party.

A similar lack of capacity of either principal or third party will affect the validity and enforceability of a contract as is the case with any contract.

Agents’ dealings with third parties will bind principals so long as the agents are acting within their authority.

Normally the third party will have no recourse against the agent since the contract is between the principal and the third party. If the identity of the principal is not revealed but the agent makes it clear that they are acting as agent, the agent cannot be sued. But where agents, although acting as agent, contracts as though they were the principal, only the agents can be sued. Only where agents enter into agreements in such a way that it is ambiguous as to whether they are acting as agent or principal does the third party have a choice to sue either the principal or the agent. Once the choice is made, the third party is bound by that choice. Neither apparent authority or ratification will apply where there is an undisclosed principal.

When agents exceed their authority they can be sued by the third party for breach of warranty of authority. Agents can also be sued by the third party if there has been a fraudulent or negligent misrepresentation. In such circumstances the principal can be sued as well under the principle of

.

75

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition vicarious liability, so long as the fraudulent misrepresentation took place when the agent was exercising agency authority. The actual authority of an agent will end upon notification by the principal, although apparent authority can survive and so it is important for the principal to notify others of the termination of that authority. Death or insanity of the principal will also normally end that authority. In some jurisdictions it is possible to create an “enduring power of attorney” which will survive mental incapacity and allow the designated agent control over the principal’s affairs.

DISTINGUISH BETWEEN ACTUAL AUTHORITY AND APPARENT AUTHORITY OF AGENTS

An agent’s authority may be based on actual authority that is given expressly in the agency agreement or implied from the circumstances.

Where principals lead a third party to believe that an agent has authority to act on their behalf, it is called apparent authority and is based on the principle of estoppel. This apparent authority will bind the principal even though, unknown to the third party, the agent may have been specifically forbidden to indulge in the type of dealings forming the basis of the third party’s complaint. Such apparent authority can arise because of a principal’s reference to the agent’s authority in front of the third party without qualification or because the principal has given that agent a title or position that a reasonable person would suppose would carry with it certain authority. When agents exceed the actual authority they have been given, but acts within apparent authority, the principal is bound but may then turn to the agent for compensation because the agent has breached the agency agreement. It is only when the agent has exceeded both actual and apparent authority that a third party can sue the agent for breach of a warranty of authority and in some cases negligence.

When the agent has exceeded both actual and apparent authority, the principal is not bound, but it is still within the power of the principal to ratify the agreement and in effect retroactively give the agent authority to create a binding contract. Such ratification is only available, however, where the principal could have personally entered into the contract at the time when the agent entered the contract and at the time of the purported ratification. The principal must also be careful not to inadvertently ratify such an unauthorized contract by taking some benefit thereunder. The effect of such ratification is retroactive to the time that the agent purported to act on behalf of the principal and, therefore, during the period between the agent’s action and the ratification, the third party is at risk--in effect, bound to the contract if the principal chooses to ratify. Because of this the third party can put a reasonable time limit within which the principal must ratify the contract.

EXPLAIN FIDUCIARY DUTY AND DESCRIBE WHEN IT ARISES

The agent has a duty under contract law to fulfill the terms of the agency contract and competently provide the service required. The agent also has a fiduciary duty to the principal. Agents must refrain from becoming involved in any conflict of interest situation, convey to the principal any information received in the exercise of their duty and not take advantage of any opportunities that come to them because of the agency relationship.

Nor can agents enter into business in competition with their principals.

They can’t receive payment from both the principal and the third party at

.

76

Chapter 11: Agency and Partnership

DISTINGUISH THE THREE TYPES OF BUSINESS ORGANIZATIONS USED IN CANADA, FOCUSING ON THE METHOD OF CREATION AND THE RIGHTS AND OBLIGATIONS OF PARTNERS SPECIFIC TO EACH TYPE

the same time without disclosing that fact to both. Normally the agent cannot delegate their responsibilities and must account for all monies earned in the agency function. The principal’s obligations to the agent are to pay for the services and otherwise honour the terms of the agency agreement which normally includes an obligation to reimburse the agent for expenses incurred.

Partnership involves two or more people carrying on business together with a view towards profit where incorporation has not taken place. The law of partnership is governed by the Partnership Act, which sets out what constitutes a partnership as well as the responsibilities of the parties to each other and to those they deal with. Two or more people in business together sharing profits is the usual indication of a partnership but the Act also lists exceptions. The parties must also be carrying out an ongoing business activity. Merely participating in a single or limited activity will not normally be enough.

A partnership may be created by oral agreement or conduct, but it should be created by formal written agreement since the general obligations of the partners set out in the Act can be modified by such an agreement to suit the specific needs of the group. This agreement, however, will not affect the rights of outsiders dealing with the partnership. As is the case with a sole proprietorship, a partnership faces unlimited liability for the obligations and liabilities of the partnership. Each partner is an agent for every other partner and therefore responsible for any contracts entered into by that agent. Similarly, each partner is vicariously liable for the acts of the other partners done in the course of the partnership business, and also for the acts of any employees of the partnership. These factors can make the presence of unlimited liability an extremely important factor in determining whether a partnership should be created. The availability of insurance, however, can reduce the risk.

It is also possible to create a partnership relationship inadvertently simply by carrying on a business with another person. This carries with it all of the responsibilities discussed above. Retiring partners are responsible for not only obligations incurred while they were partners but also for obligations that were incurred after they left if they failed to notify the injured party that they were no longer partners. Just which types of partnership businesses must be registered varies with the jurisdiction.

LIST THE CHARACTERISTICS OF A SOLE PROPRIETORSHIP AND EXPLAIN WHY SOLE PROPRIETORS FACE UNLIMITED LIABILITY

There are three types of partnerships used in Canada – the General Partnership (described above), the Limited Partnership, and the Limited Liability Partnership.

A Limited Partnership is similar to a general partnership accept that there are both general partners and limited partners. It is a common investment vehicle. The position of a limited partner is that liability is limited to the amount invested in the partnership business. It is only when limited partners fail to properly register their interest or violates one of the restrictions on their activities, such as participating in the management of the partnership, that they will lose this limited liability and be treated as a general partner. To accommodate professionals, limited liability partnerships (LLP’s) are now allowed in many jurisdictions where only the

.

77

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition partnership’s assets and the personal assets of the partner actually responsible for the negligent or fraudulent act will be available as compensation. The personal assets of the other partners are protected by this limited liability from the negligent or fraudulent acts of partners. All partners business and personal assets are available to satisfy the business debts of the partnership

OUTLINE THE ADVANTAGES AND DISADVANTAGES OF OPERATING A BUSINESS THROUGH A PARTNERSHIP AND DESCRIBE THE PROCESSES OF DISSOLVING PARTNERSHIPS

There are three main methods of carrying on business: a sole proprietorship, a partnership, and a corporation. The sole proprietorship involves one person carrying on business with single person ownership, relatively free from outside interference but compliant with all government regulations and requirements. While the sole proprietor makes all of the decisions associated with the business, and is entitled to all the profits therefrom, the sole proprietor also bears sole responsibility for all costs, losses, and obligations that are incurred in the business activity. The liability is unlimited and includes vicarious liability for torts committed by employees.

In general, partnership should be considered as a viable alternative to incorporation as a method of carrying on business. Many of the disadvantages associated with partnership can be overcome. Business persons should exercise great care in choosing the particular method that they will use to carry on his business.

Partners are considered fiduciaries of each other and, therefore, have an obligation to act in the best interests of their partners. Partners must account for profits and the use of partnership assets and must not compete with the partnership. Information obtained through the partnership must be disclosed as must any conflict of interest. Unless modified by agreement the Partnership Act provides that profits will be shared equally, that expenses will be reimbursed, that all partners share management responsibilities, that partners are not entailed to a wage, that major changes must be with unanimous consent, that new partners must be agreed to by all partners, and that all partners have the right to inspect all records.

Partnership has the advantage of protecting the minority partners, of being less costly and the disadvantage of unlimited liability can be to a large extent overcome by insurance.

Generally, a partnership will end when one party serves notice on the others to dissolve the partnership, though the agreement between them may provide for a different method of dissolution. The partnership can be prematurely terminated, however, by the death, insolvency or bankruptcy of one of the partners. The partnership can also be terminated by court order. Upon termination of the partnership, if there are sufficient assets to pay the debts of the partnership, any excess assets will be distributed to the partners to reimburse them for any expenses or loans made to the partnership, with an equal distribution to the partners of the remainder, unless the agreement between them states otherwise. Any debts will be paid first out of profits, then capital, then from the personal assets of the partners.

.

78

Chapter 11: Agency and Partnership Answers to Questions 1. What is the agent’s function? Why is it important to understand the law of agency in business?

An agent enters into new legal relationships (usually contracts) on behalf of a principal with a third party. In business activities the vast majority of contracts are entered into through the services of an agent.

2. Explain what effect an agent’s limited capacity will have on the contractual obligations created between a principal and a third party. What effect would the incapacity of the principal have on this relationship?

The reference to capacity in this question is to be differentiated from authority of the agent. The incapacity of an agent generally will not affect the validity of the contract between the principal and third party unless the agent was not capable of understanding what was happening. An under aged principal, however, will not be bound by contracts for non-necessities.

3. Distinguish between an agent’s actual, implied, and apparent authority. Explain why this distinction can be important from the agent’s point of view.

An agent is given actual authority to act on behalf of a principal. This actual authority can be expressly given in the form of verbal or written instructions or can be implied by circumstances. So long as the agent acts within actual authority there will be no liability for losses incurred. Apparent authority is assumed when a principal has done something to lead a third party to believe that the agent has authority that in fact the agent does not have authority. When the agent acts beyond the actual authority, either expressed or implied, but within apparent authority, the contract with the third party is binding on the principal, but the principal can then sue the agent for breach of the agency agreement. It is only when the agent violates both actual and apparent authority that the third party can sue the agent directly for breach of warranty of authority.

4. Explain the role estoppel plays in agency law.

Promissory estoppel is a defence available when consideration is brought into question. It can only be used as a defence and not as a cause of action. When one person makes a promise about future conduct and the other person relies on that promise, incurring expense, the beneficiary of the promise can use the promise as a defence if sued by the person making the promise. Ordinary estoppel deals with statements of fact. When one person makes a statement of fact that another relies on, the first person cannot deny that fact. In agency law if a principal leads a third party to believe that an agent has authority, it is a fact. If the third party relies on that statement and enters into a contract with the agent on behalf of the principal, the principal will not later be permitted to deny the existence of the authority.

5. Explain what is meant by “ratification” and describe the limitations on a principal’s right to ratify the actions of his or her agent. How can the principle of ratification be as dangerous to the principal as it is to the third party?

When an agent acts beyond both actual and apparent authority, the third party is not contractually bound to the principal. The principal, however, has the option of ratifying the agreement. That is to give the agent retroactive authority to enter into the contract, making

.

79

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition the third party bound by the contract. The third party then faces the possibility of the principal ratifying after the fact, while the principal has the option of making the contract binding or not. However, the principal can inadvertently ratify by accepting some benefit under the contract, thereby binding themselves to the contract.

6. What effect does it have on the relationship between principal and third party when an agent writes on an agreement “subject to ratification?”

This is a qualification which indicates that no agreement has yet been made between the parties. It is a condition precedent that the principal must approve of or ratify the terms of the agreement before it is effective.

7. Agents owe a fiduciary duty to their principals. What are the requirements of that duty?

A fiduciary duty requires an agent to act in the best interests of the principal. Any information that would benefit the principal that comes to the agent while acting as agent must be communicated to the principal. Agents must not take advantage of personal opportunities that come to them because of their position. Agents cannot take commissions from both the principal and the third party unless that fact is disclosed to both. An agent who owns property cannot sell it to the principal without disclosure of the interest in the property.

8. What options are open to a third party who has been dealing with an undisclosed principal if the contract is breached? Does an undisclosed principal have the right to ratify an agent’s unauthorized act?

If the agent made it clear they were acting as agent only the principal can be sued. If the agent acted as if they were principal only the agent can be sued. Where the circumstances are ambiguous as to whether the agent was acting as principal or agent the third party can choose to sue either but is bound by that choice. An undisclosed principal cannot ratify the acts of an agent, since the agent must be claiming to represent a specific principal in the dealings with the third party.

9. Explain how the doctrine of vicarious liability applies in a principal-agent relationship.

If the agent happens to be the employee as well, then vicarious liability will be present so long as the act complained of happens within the scope of the employment. When the agent is independent, vicarious liability will only apply if the agent has fraudulently or negligently misrepresented something on behalf of the principal while actually acting as agent.

10. Distinguish among a sole proprietorship, a partnership, and a corporation.

A sole proprietorship is an individual doing business on their own, while a partnership is two or more people carrying on business together. A corporation is a legal entity created pursuant to a statute that carries on business in its own right.

11. What advantages and disadvantages are associated with carrying on business as a sole proprietorship? As a partnership?

The advantages of sole proprietorship include being in control by themselves and not having to split the profits with anyone. The major disadvantage is bearing the risks of business alone.

Many of those risks can be managed with insurance. The advantages of partnership include the

.

80

Chapter 11: Agency and Partnership protection of minority interests because of the requirement of unanimous consent and involvement of partners in management. This factor also presents the primary disadvantage of partnership since unanimous agreement must be obtained before any changes that affect the partnership can be made. Partners have a right to inspect records. There are few formal requirements that must be met to carry on business and few government regulations that must be complied with and the operation of a partnership is generally less costly than incorporation.

12. Distinguish between sharing profits and sharing revenues.

Sharing of revenues means the division of the gross receipts from some sort of business activity before deducting costs. Sharing of profits on the other hand means that all expenses and costs will be met before the split of funds takes place. It is only the latter that will be evidence that a partnership exists.

13. If two people enter into a business together with the object of making money but lose it instead, can the business still be a partnership?

Yes, it is only necessary that the object be to make profit. It makes no difference that a loss has been incurred instead.

14. Why must a person understand the law of agency in order to understand the law of partnership?

All partners are agents of each other. The liability and responsibility of each partner for each of the other partners is based on the concepts of agency.

15. What danger exists when a third party is led to believe that two people are partners, when in fact, they are not? What legal principle is applied in this situation?

Leading someone to believe that you are a partner will make you liable for that partner’s actions as if the partnership does in fact exist. This is an application of the principle of estoppel.

16. What is the significance of the existence of a partnership agreement for outsiders dealing with the partnership? What is the advantage of entering into a formal agreement?

A partnership agreement will not affect the rights of an outsider to obtain a remedy against each individual partner. The Partnership Act regulates such liability. The advantage of the partnership agreement is to govern the relationship among the individual partners and to establish their responsibilities to each other in a custom fashion that may differ from the framework of the Partnership Act. As with any written contract, it has the advantage of later being strong evidence in the event of a dispute.

17. Explain the different ways in which a person can become responsible for the acts of his or her partner and describe the limitations on this responsibility. Describe the liability of retiring and new partners.

One partner can be responsible for any contracts entered into by other partners based on the concepts of agency. Similarly, one partner can be liable for the wrongful conduct of another partner based on the concepts of vicarious liability (tort liability). One partner can be responsible for any breach of trust on the part of another partner. But these liabilities will only fall on the partner where the wrongful actions are committed within the scope of the partnership business. A retiring partner will be responsible for any conduct taking place while he was a

.

81

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition partner of the firm. A partnership agreement may modify this, but a retired partner will not be held responsible for conduct taking place after retirement unless outsiders were not properly notified of the retirement. A new partner will not be responsible for any conduct before becoming a partner in the firm unless such liability was assumed in a partnership agreement.

18. Partners have fiduciary obligations to each other. Explain what this means and give examples.

A partner has an obligation to act in the best interests of the partnership business and the other partners. There is a corresponding obligation to act in the utmost good faith. This means that a partner must not compete with the partnership by carrying on a similar business, must not accept personal benefit without the consent of the partners and must convey any private information that comes because of his associations with the partnership. An example would be that an accountant acting in partnership with another accountant cannot compete with the partnership business by preparing financial statements privately without disclosing the profits generated and paying them to the partnership.

19. What events may bring about the end of a partnership prematurely? Under what circumstances might it be necessary to get a court order to end a partnership?

A partnership can be dissolved upon notice of one of the partners or the death, bankruptcy or insolvency of any partner. If the business carried on by the partnership becomes illegal the partnership is automatically dissolved. Generally, a court can dissolve a partnership where it feels it appropriate to do so--where the business continually operates at a loss, when one of the partners becomes mentally incompetent or is unwilling to perform the partnership responsibilities, or when the conduct of one of the parties is prejudicial to the partnership relationship.

20. What will the normal effect be on a partnership when a partner dies or becomes insolvent? How is the law of British Columbia significantly different?

Upon death, insolvency or bankruptcy, the partnership will usually be dissolved. In B. C. when there are more than two partners involved, the partnership will only be dissolved in relationship to that one partner.

21. When a partnership is being dissolved, and does not have sufficient assets to pay its debts, how is the responsibility for these debts distributed? How are the excess assets distributed?

The assets are distributed first to pay off the debts of the partnership and, if there are not enough assets, creditors will turn to the personal assets of the individual partners. Excess assets will pay expenses of partners, then loans advanced by the partners, then capital investments. Any assets left will be distributed according to the normal distribution of the partnership.

22. What must a person do in order to qualify as a limited partner? What happens when a limited partner violates one of these qualifications?

The limited partnership must be registered. Failure to comply with these regulations causes the limited partner to become a general partner, exposing personal assets to satisfy the debts and responsibilities of the partnership.

.

82

Chapter 11: Agency and Partnership 23. What is the main advantage of limited liability partnerships? In light of this, what does the law require, in an attempt to protect those who suffer losses through the actions of a partner or an employee of a limited liability partnership?

The limited liability partnership (LLP) is available in some jurisdictions to professionals so that only the negligent or fraudulent partner has personal assets at risk, along with the assets of the partnership itself.

Solutions to Cases 1. B.P.Y.A. Holdings v. The Innovators Insurance, 2001 BCSC 836 (CanLII) Morgex could argue that Mr. Trimble and Innovations Insurance had no apparent or actual authority to bind them as principal. The plaintiff could argue the opposite - that in fact there was apparent or actual authority. A finding of fact would have to be made by the court. The court held that, “(t)he evidence in this case establishes that Innovators Insurance had a contract to provide Kootenay Honda with a policy of hole-in-one insurance for the sum of $35,000. It failed to do so and is in breach of that contract. The evidence also establishes that Innovators Insurance was negligent in the representation it made to Kootenay Honda that hole-in-one insurance was in place, a representation upon which Kootenay Honda relied to its detriment. Thus, on both of these bases, Innovators Insurance is liable to Kootenay Honda for damages both for breach of contract and for negligent misrepresentation.”

2. Ocean City Realty Ltd. v. A & M Holdings Ltd., 1987 CanLII 2872, 36 DLR (4th) 94 (BCCA).

The owner of the property A & M Holdings Ltd. could argue breach of fiduciary obligation on the part of Forbes, the real estate agent. The purchaser could do the same. It may have also been pleaded that in turn Ocean City Realty Ltd. is vicariously responsible for the actions of Forbes. Forbes and Ocean City Realty Ltd. would just simply argue breach of contract to pay the commission and try to present facts that the other parties had agreed to the dual agency of Forbes.

3. 3464920 Canada Inc. v. Strother, 2005 BCCA 384 (CanLII).

The complaint was breach of fiduciary obligation through conflict of interest. The Supreme Court of Canada has since considered this case: [2007] 2 S.C.R. 177, 2007 SCC 24. The Court allowed the appeal in part, holding, “(b)y acquiring a substantial and direct financial interest in one client (Sentinel) seeking to enter a very restricted market related to film production services in which another client (Monarch) previously had a major presence, Strother put his personal financial interest into conflict with his duty to Monarch. … It gave Strother a reason to keep the principals of Monarch “in the dark”, in breach of his duty to provide candid advice on his changing views of the potential for film production services tax shelters. … The firm cannot be held to have breached a fiduciary duty on the basis of facts of which its partners were ignorant.”

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

83

Chapter 12 Corporations Learning Objectives • • • • • •

Analyze the separate legal entity principle Describe the advantages and disadvantages of incorporation Explain the process of incorporation Discuss the funding of a corporation Examine the roles of corporate directors, officers, and shareholders Distinguish the ways that a corporation can be terminated

Discussion ANALYZE THE SEPARATE LEGAL ENTITY PRINCIPLE

DESCRIBE THE ADVANTAGES AND DISADVANTAGES OF INCORPORATION

EXPLAIN THE PROCESS OF INCORPORATION

A corporation is a legal entity, separate and apart from the members who make it up. This is a legal fiction because the corporation does not in reality exist as a separate person, but for the convenience of the legal system, it is treated as if it does. It is to be contrasted to an individual, who is a breathing and sentient person. The separate legal entity of the corporation provides a convenient method of accumulating capital (the selling of shares) without imposing significant responsibilities on the shareholders. Those shareholders have limited liability. That is, the most they can lose if the corporation is liquidated is the amount they have invested. As a general rule there is no restriction on the free transferability of shares. Shareholders are free to purchase and sell the shares on the open market without affecting the continuation and functioning of the independent corporation. A corporation cannot die like an individual and because it is separate from the members who make it up, the death of the shareholders will not affect the continuation of the corporation. Since management and members are separate, it is possible to have a professional management group.

Limited liability, which is the main attraction of incorporation, is often countered by the requirement that the principals sign a personal guarantee of the indebtedness of the corporation to a bank when the corporation is borrowing money. However, other advantages such as free transferring of shares and succession, majority control, tax advantages and separate management remain. This makes corporations the most common method for carrying on business today.

The most significant method of carrying on business in modern times has been through incorporation. The incorporation process takes place by a group of people called shareholders coming together and forming, .

84

Chapter 12: Corporations through application to government, a corporation which then has the status of a separate legal entity. These types of bodies were originally created by royal charter or special acts of the legislature. Today the standard method by which corporations can be created is by the granting of a certificate of registration after filing articles of incorporation. Historical and limited methods for creating companies or corporations are by the grant of letters patent, or by registration, depending on the jurisdiction. Where the registration method is used, restrictions may be set out in the memorandum of association but this has no effect on those dealing with the corporation unless they have knowledge of the limitation. There is usually no similar limitation on capacity where letters patent or articles of incorporation methods are used. Note that there are other incorporated entities such as cities, universities, Crown Corporations and societies.

DISCUSS THE FUNDING OF A CORPORATION

In broad terms, corporations are funded either through borrowing or through the issuance of shares. A share does not represent ownership, but it represents the interest that each shareholder has in the corporation.

When a company finances through the sale of shares, it is a form of equity financing rather than debt financing. When corporations borrow, they will do so either through direct loans from individuals or financial institutions, or through the sale of debentures or bonds.

It should be noted that when shares are sold they can bring with them special rights and restrictions and accordingly, different classes of shareholders can be created. Typically, these classes are common and preferred shares. Common shares carry with them the right to vote in general meetings of the corporation and the right to a dividend when one is declared. With preferred shares there is a claim to a specific dividend on a regular basis, usually without the right to vote unless dividends are not paid. Even with preferred shareholders, there is no “right” to a dividend.

Companies are usually divided into broadly held and closely held companies. As a general rule, the closely held company involves few shareholders and usually has some restrictions on the free transferability of the shares (such as the need to obtain the consent of the other shareholders). Broadly held corporations usually involve shares being freely traded on the stock market and are much more closely regulated.

EXAMINE THE ROLES OF CORPORATE DIRECTORS, OFFICERS AND SHAREHOLDERS

Directors of corporations are chosen by the shareholders and have responsibility for the management of the corporation. Directors owe a fiduciary duty to the corporation and not to the shareholders. They are required to act in the best interests of the corporation and usually must exhibit the degree of skill that one would normally expect from a reasonably prudent business person. Directors may also be personally .

85

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition liable where insider knowledge has been misused, where the corporation has not paid wages, taxes or has violated environmental law. They may also be charged criminally if they have directed employees to commit crimes to benefit the organization.

Senior managers are responsible for the ongoing daily operation of the business and have obligations similar to the directors. Promoters are responsible for creating the corporation in the first place and their responsibility, in addition to those of the directors and managers, is to disclose all pertinent information and refrain from taking advantage of their positions at the expense of the shareholders.

The shareholders have few responsibilities, but do have access to records kept by the corporation, such as the annual reports. They also have the right to vote at shareholders’ meetings and to choose the directors. In many jurisdictions shareholders have the right to bring an action against the directors on behalf of the corporation when necessary and the right to retain their percentage of the outstanding shares when new shares are issued (pre-emptive rights). Shareholders also have the right to relief from oppression when the powers of the directors are abused at their expense. In some jurisdictions shareholders can file a dissent and have their shares purchased at a fair price when they are harmed by a decision that is otherwise beneficial to the corporation. Many other rights and protections can be incorporated into a shareholders agreement.

DISTINGUISH THE WAYS THAT A CORPORATION MAY BE TERMINATED

A corporation does not die but can be brought to an end through dissolution, or winding-up. This may be done voluntarily or involuntarily as a consequence of court order. Also if a corporation does not keep its filings up to date with the government or its agent, it can be struck from the register. There is a process for revival available for corporations that are struck.

Answers to Questions 1. What is meant by a corporation’s having a separate legal identity?

The separate legal identity means that, in law at least, the corporation is a separate legal person from its shareholders and also separate from the management. Principles such as limited liability and the longevity of corporations are based on this concept.

2. What is a ‘society’ and how does it compare to a corporation?

It is a separate legal entity, like a corporation, but the procedure and obligations of the members are quite different. It is carried on, on a not-for-profit basis.

.

86

Chapter 12: Corporations 3. Explain how the liability of a shareholder is limited.

In corporations where a shareholder invests a certain sum, the most that the shareholder can lose is the amount of the investment. Creditors cannot go beyond the assets of the corporation and sue the shareholders to seek a return on the debt.

The shareholder thus has limited liability.

4. Why are the principles of agency law relevant to corporations?

Since the corporate entity is a legal fiction, all of its activities must be carried out through the services of real people acting as agents. The principles of agency law set out in Chapter 11 are, therefore, extremely important when dealing with corporations.

Directors and employees, from officers right down to clerks, may have actual or apparent authority to bind the corporation, depending on the nature of their jobs.

5. Explain how a personal guarantee reduces the limited liability of the principals of a closely held corporation.

A personal guarantee, if granted to a creditor of the corporation by one of the principals of the corporation, makes the principal directly liable for the debts of the corporation. This protects the creditors of the corporation but overrides the limited liability the principals might otherwise enjoy.

6. Explain the advantages of free transferability of shares and how and why this right is often modified by shareholder agreement.

The main purpose for the creation of a corporate identity in the first place is to facilitate capital investment from as large a pool of investors as possible. Through a share purchase, investors are able to invest significant funds and are also free to withdraw from the operation by selling those shares without disrupting the operation of the company. In smaller corporations, however, such free transferability of shares can be a disadvantage. When there are few shareholders the personality of the shareholders becomes important since they are often involved in the running of the company and so restrictions are placed on the transferability of shares in closely held corporations.

7. Set out and explain some of the disadvantages associated with the corporate method of carrying on business.

Unlike partnership it is difficult to make major changes in the corporation since incorporating documents have to be altered. The position of a minority shareholder is one of relative weakness in a corporation, whereas a single partner has considerable amount of power and can veto major decisions. The running of the corporation is usually more expensive.

.

87

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 8. Distinguish among companies and corporations that have been created by special acts of parliament, by royal charter, by registration, by letters patent and by filing articles of incorporation.

Historically, one of a kind businesses were created by royal charter (e.g. The Hudson Bay Company). Now this is done by special act of parliament (CBC, CNR, etc.). For general purposes several different methods of incorporation have been developed.

Some provinces use the registration system that requires the registration of certain documents with the appropriate government agency. Letters patent jurisdictions, developing their systems from the royal charter power, create corporations by the governing authority granting letters patent. In more recent times jurisdictions such as the federal government and most provinces have turned to a method which involves the filing of articles of incorporation to obtain a certificate.

9. Explain the significance of the memorandum of association in a registration jurisdiction. Contrast it with the role of articles of incorporation and articles of association.

The memorandum of association in a registration jurisdiction is the document that accomplishes the creation of the corporate body. It is analogous to a constitution in that it sets out important matters such as the name of the company, the authorized share capital and the objects of incorporated entity. The articles of association are more like the bylaws of the incorporated entity used in other jurisdictions. These bylaws deal with the day-to-day operation of the incorporated entity including how the shares are issued and cancelled, requirements for meetings of the board of directors and shareholders, voting procedures, etc. The articles of incorporation used in such jurisdictions as Ontario and the federal government are quite different from the articles of association in that they are analogous to the memoranda of association in a registration jurisdiction and comparable to a constitution. In those jurisdictions there are separate bylaws dealing with the day-to-day operation of the corporation.

10. What is a “society” and how does it compare to a corporation.

A society is also a body corporate, but its objects specifically are not to make a profit.

11. What is the capacity of most corporations? What is the exception to this rule?

Modern corporations have all the powers and capacity of a natural person unless the articles of association or memorandum place restrictions on those powers.

12. Explain why the concept of a par-value share is misleading and why the use of such shares has declined.

With a par-value share a specific value is attached to the share certificate at the point of issue. Such a value has no significance except at the point of issue. A par value share may be issued at $1.00, but once on the market the value of that share is determined by the marketplace and may vary from $.50 to $5.00. It may also be discounted at the point of issue and the par value price may bear no relationship to its trading price. .

88

Chapter 12: Corporations 13. What is meant by a “preferred” share? Contrast this with the “common” share.

Explain why the term preferred shares is misleading.

It is possible to create different classes of shares and while many different characteristics can be given to these shares, usually they are divided into common and preferred shares. Preferred shares give the shareholder preference in relation to dividends. That is, a set amount of dividend is payable to the shareholder. That dividend must be paid before any dividends are paid to common shareholders.

Preferred shares do not usually carry with them a right to vote unless the dividend payments are in default. Common shares carry a right to vote and a right to dividends if they are declared. In other words the majority common shareholder controls the company.

14. Does a shareholder, whether preferred or common, have a right to a dividend?

Explain.

No shareholder has a right to demand a dividend. Whether a dividend is paid or not is determined by the board of directors. Even when a preferred share is involved, which sets out that the preferred shareholder is entitled to a yearly dividend, that is not a debt and the corporation is not obligated to pay it. Shareholders cannot sue to force payment of a dividend unless the dividend has been declared and has not been passed on to the shareholders.

15. What is the significant difference between a bondholder and a preferred shareholder, both of whom are entitled to a specified payment each year?

The preferred shareholder is an investor in the corporation and has no right to demand a dividend and cannot sue upon failure to receive one. A bondholder is a creditor of the corporation who can sue or enforce payment through realizing any security involved if the corporation fails to pay.

16. Distinguish between a closely held and a broadly held corporation and explain the differences in terms of the provisions in place in your jurisdiction.

The answer to this question will vary with the circumstances and the jurisdiction, but essentially the shares of a broadly held corporation are either traded on the stock exchange or the corporation is so large that it has been designated as such by the appropriate government agency. A closely held corporation is usually smaller, often a family organization, with just a few shareholders and some restrictions on the free selling of those shares. A broadly held corporation is subject to more control than a closely held corporation. In some jurisdictions closely held corporations are referred to as private corporations and in others as non-reporting corporations.

17. Set out the nature of the duties owed by a director of a corporation. To whom are these duties owed? Who else in the corporate organization owes similar duties?

The director has an obligation to be careful in dealings on behalf of the corporation and can be sued for negligence if that duty is violated. The director also has the duty .

89

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition of a fiduciary which is to act in the best interests of the corporation, be loyal, avoid conflicts and otherwise to act in the utmost good faith towards the corporation. The director cannot take advantage of opportunities that come because of the position as director, must disclose any situations of conflict of interest and cannot start any business in competition with the corporation. The duty is owed to the corporation and not the shareholders. A similar duty is owed by the officers.

18. Explain why it is becoming increasingly difficult to get prominent individuals to serve as directors of Canadian corporations.

Not only has the standard of care required of a director increased (now to the level of a reasonably prudent business person) but directors also face a number of situations where they can be held personally liable for the corporations actions. In addition to unpaid taxes and wages, the directors can be personally liable for violations of environmental legislation and even in some jurisdictions, violations of consumer protection legislation. This risk can be managed through an appropriate indemnity of the director from the corporation, backed up back directors’ and officers’ liability insurance.

19. Who is usually responsible for running the affairs of the corporation?

Although directors are legally responsible for management, in a large corporation they usually appoint a managing director or chief executive officer (CEO), who is given overall responsibility, along with a managing committee of the directors, to run the affairs of the corporation. The day-to-day operation of the corporation is assigned to others who report to the CEO. These officers may include an executive vicepresident, treasurer, secretary, and other senior executives, such as vice presidents and managers, as deemed appropriate for the organization.

20. How can a promoter avoid personal liability for pre-incorporation contracts?

Some jurisdictions allow corporations, once they or formed, to ratify a preincorporation contract. If such is possible it will reduce the risk to the promoters.

Where ratification is not possible, promoters should include a provision in the contract exempting themselves from any resulting liability.

21. Explain any duties shareholders assume. Summarize the rights of the shareholders in relationship to other shareholders, the management and directors of the corporation.

The shareholder has no duty to the corporation unless he or she qualifies as an insider or has some position within the corporation. The shareholder has significant rights to certain information and can have access to records. The shareholder has a right to receive a copy of the annual report and financial statements. The shareholder has a right to vote on shareholder resolutions (where such power has been given) and to vote for the board of directors. The shareholder has the right to have that vote made by proxy. In some jurisdictions shareholders have pre-emptive rights, relief from oppression and in other cases the special rights given to preferred shareholders. .

90

Chapter 12: Corporations 22. Explain what is meant by a ‘proxy’ and why proxies can be so important at a corporation’s annual general meeting.

A shareholder may not be able to attend the annual general meeting where votes are cast and directors are chosen. Shareholder has the right to authorize someone else to vote in their place. This is called a vote by proxy and if a faction can gain enough proxies they can gain control of a corporation by controlling those elected to the board of directors.

23. Distinguish among a derivative action, dissent and oppression. Explain when it would be appropriate to use each of them.

A derivative action allows the shareholders to sue the directors in the name of the corporation for their wrongdoing. A dissent action arises when fundamental changes to the corporation have adversely affected a minority shareholder, but are in the interest of the corporation. It allows the shareholder to be bought out at fair market value. An oppression action arises when someone (shareholder, director, officer, creditor) is unfairly prejudiced by the actions of the company. The court may make any order it sees fit, up to and including dissolving the corporation.

24. Explain the purpose of a shareholders’ agreement and why it is important.

A shareholders’ agreement is put in place, usually in small, closely held corporations, to cover various contingencies which may arise in the future in order to avoid conflict. It often includes pre-emptive rights, restrictions on the sale of shares, and termination provisions if one of the shareholders wishes to leave the company. It is often called a unanimous shareholders’ agreement or a USA. 25. How can a corporation be terminated?

A corporation is usually terminated by dissolution provisions which are included in incorporation legislation. There may be separate winding up legislation. However, in some areas failure to file annual reports will eventually cause the corporation to be removed from the lists. Where assets are involved the corporation should be dissolved in line with the legislation. This can be either a voluntary or involuntary process.

Solutions to Cases 1. E.M. Plastics v. Abby Signs and Lardeur , 2009 BCPC 18 (CanLII).

The claimant obtained judgment against Abby Signs Ltd. but its claim against Lardeur failed as there was no evidence that Mr. Lardeur either personally guaranteed the debts of the company, or that he committed any fraudulent or improper conduct.

There were no statutes that made him liable for the debts of the company. The company was incorporated to protect Mr. Lardeur from such liability and the claim against him failed as a result.

.

91

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 2. BCE Inc. v. 1976 Debentureholders , [2008] 3 S.C.R. 560, 2008 SCC 69.

Directors owe their duty to the corporation and must do what is in the best interests of the corporation. If there is an irreconcilable conflict between the best interests of the corporation and of a stakeholder, the directors should choose in favour of the corporation. Different stakeholders have different remedies, including oppression, pre-emptive rights, dissent, a derivative action, and what may have been provided in a unanimous shareholders agreement. In the case before the Supreme Court of Canada, the directors were obliged to consider the position of the debentureholders and the evidence confirmed that they did so. This fulfilled the directors’ duty and the proposed buyout did not amount to an unfair disregard for the interests of the debentureholders. The arrangement did not fundamentally alter the debentureholders’ rights, as the investment and return they contracted for remained intact. Accordingly, the Supreme Court allowed the appeal and approved the buyout.

3. Dilorenzo v. Canada, 2002 FCA 466 (CanLII).

The appeal court in this case held that it was appropriate for the tax court to take into account the lack of education and sophistication of Dilorenzo. It was appropriate for him to rely on experts and he had exercised due diligence as a director and was not liable for the negligence of the accountant or for the default of the corporations.

4. Pearson Financial Group Ltd. v. Takla Star Resources Ltd. (2001), 302 A.R. 190 (Q.B.), 2001 ABQB 588 (CanLII).

The court held that Pearson does have standing to bring the application. The court stated, “(t)he timing of the purchase of the Pearson shares goes only to the exercise of my discretion in determining the appropriate remedy.”

5. Salesco Limited v. Lee Paige (2007), 61 C.C.E.L. (3d) 279, (2007), 36 B.L.R. (4th) 229 (Ont. S.C.), 2007 CanLII 37463 (ON SC), Capobianco v. Paige, 2009 CanLII 29899 (ON SC).

The Court stated that P owed a duty to all of Salesco’s shareholders. As an officer of Old Spray-Park he owed a duty to its shareholders, including Salesco. As a director of Old Spray-Park, M owed a duty to its shareholders. The court then concluded that “the shareholders of Old Spray-Pak, including Salesco, could reasonably expect that its directors and officers would further its financial interests in good faith, fairly and accurately present its financial position to its bankers and not denude the Company of its assets for their personal benefit. They could reasonably expect to be notified of material developments such as the calling of a Bank loan. The court stated, “(i)n total disregard of those reasonable expectations, P and M preferred their own interests and acted to denude Old Spray-Pak of its value and to defeat the interests of its shareholders including Salesco. In rendering Old Spray-Pak a “shell,” they acted contrary to its best interests and the interests of its shareholders. Transferring its employees, assets and business to New Spray-Pak was contrary to Old Spray-Pak’s and Salesco’s interests and the interests of their shareholders.”

.

92

Chapter 12: Corporations 6. 602533 Ontario Inc. v. Shell Canada Ltd. (1998), 37 O.R. (3d) 504 (C.A.).

It is standard practice for many lawyers to conduct some searches of parties to upcoming litigation, such as bankruptcy, corporate and personal property searches.

This can result in not pursuing the litigation or an application to revive a corporation before the litigation is launched. Failure to revive the plaintiff before the law suit was initially launched in this case caused the loss before both the Ontario Superior Court of Justice and the Court of Appeal. It is significant that the limitation period expired while the plaintiff was a dissolved corporation. The Court of Appeal stated that, “…even though 602533 issued its claim in February 1990, that claim was a nullity because 602533 was then a dissolved corporation. The fact of 602533’s dissolution did not, however, prevent the limitation clock from ticking. Thus, by April 22, 1996, the date of the summary judgment motion before Corbett J., the six-year limitation period had run its course. In the interim, because the 1990 claim was a nullity, 602533 cannot be said to have commenced its action within the six-year period.

Rather, as a matter of law, it was as if 602533 had failed to institute a claim within that time frame.” The court noted that the law may be different in Alberta.

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

93

Chapter 13 Real, Personal, and Intellectual Property Learning Objectives • • • • • • • • • •

Describe the various estates in land Distinguish real and personal property Outline the unique properties of mortgages and the rights of the parties Compare the rights and obligations of landlords and tenants Outline the special rules applicable to fixtures List the rights and obligations associated with bailment Examine the protection given to intellectual property Outline the rights protected by copyright and patent laws Distinguish trademarks and industrial designs Describe how the common law protects confidential information and trade secrets

Discussion DESCRIBE THE VARIOUS ESTATES IN LAND

Real property involves the land and buildings attached to it. The term property indicates the interests the person has in the item being possessed rather than the item itself. A fee simple interest would have originally been granted by the Crown, and conveys an unfettered right to use or sell property. These rights are limited to some extent by zoning legislation and the obligation to obtain permits. A life estate is a type of interest in land that conveys exclusive possession. This entitles the holder to possess the land until the death of the person who is used for the basis of the calculation (usually the person possessing the property). Another lesser interest in land is a leasehold interest.

Again this conveys the right to possession and use of the property but is limited by some time aspect e.g. a three year lease. Such leases can also be created on a periodic basis e.g. month to month, year to year.

An easement or right of way is a third party’s right to use some part of the land. Easements are usually created by contract however in many jurisdictions it is possible for a person to obtain such an interest by merely using the property for a number of years without being prohibited from doing so. In some provinces, the right to actual possession of the land can also be acquired through use over a number of years and this is called adverse possession. Other rights with respect to land are licenses, a profit à prendre, and restrictive covenants.

It is possible for two or more people to own property together. If this is done in a tenancy in common the parties separate interests in the land. This separate interest can be sold or inherited. If it is a joint tenancy, however, each party jointly owns the whole property and when one of them dies the other(s) have the right to the whole property by the right of survivorship.

People can obtain the right to property in other ways. An option agreement

.

94

Chapter 13: Real, Personal, and Intellectual Property allows a person to accept an outstanding offer to sell property and that offer cannot be revoked. The option gives the offeree the right to purchase the property at a given price if the option is exercised.

COMPARE THE RIGHTS AND OBLIGATIONS OF LANDLORDS AND TENANTS

DISTINGUISH REAL AND PERSONAL PROPERTY

A very important aspect of the study of real property involves the relationship between the landlord and tenant. The tenant has the right to the exclusive possession of the area rented for a specific time period or for an ongoing time that may be terminated by either party on notice. Generally the landlord must provide vacant possession and quiet enjoyment, with the tenant being obligated to pay rent. There is no general obligation on the landlord to provide property that is clean or in good repair unless specified in the lease, unless the defects render the property unusable. Where a lease is breached the landlord has a general right to seize the tenant’s property or to sue for compensation.

Registered leasehold interests run with the land and are binding on subsequent land owners. Lease agreements are contracts and the rights of the parties can be modified or altered by amending the contract terms. Each jurisdiction has special residential tenancy legislation governing such aspects of this relationship as rent controls, security deposits, the landlord’s obligation to repair and restrictions on the landlord’s right to enter the premises.

Usually the sale of land involves first the agreement of purchase and sale and then the actual transfer through deed or the issuing of a certificate of title in a land titles jurisdiction. Historically, there were considerable difficulties with being certain that the vendor had the right to sell the property because of earlier property interests and disputes over ownership. Land registries were introduced to combat this difficulty. The more traditional registration system is a depository of documents and the parties to land transactions are only bound by the documents that have been registered in that land registry. The parties then look at the documents that have been registered to determine their rights. The land titles system takes this one step further and certifies that a particular party owns the property subject only to the interests that are listed on the title document. In addition most provinces have passed special statutes dealing with condominium property. This was necessary because traditional land ownership concepts deal with the land itself and make concepts of common property difficult. As well traditional concepts contemplate only the horizontal division of property and condominiums are often separated in a vertical manner.

The term “real property” refers to land and things permanently attached to the land, such as buildings. The essential characteristic of real property is that it is fixed and immovable. Personal property, on the other hand, is movable and can be divided into two categories – chattels (tangible goods) and choses in action (intangible rights such as shares, bonds and negotiable instruments).

A special category of intangible personal property is called intellectual property. Copyright gives authors control over the use and reproduction of their work. A patent gives inventors the right to profit from their inventions.

Trademarks protect the name or logo of a business. Industrial designs protect the distinctive shape or design of an object. Confidential information and trade secrets are further examples of intellectual property that can be protected contractually or by common law.

.

95

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition OUTLINE THE UNIQUE PROPERTIES OF MORTGAGES AND THE RIGHTS OF THE PARTIES

OUTLINE THE SPECIAL RULES APPLICABLE TO FIXTURES

LIST THE RIGHTS AND OBLIGATIONS ASSOCIATED WITH BAILMENT

Mortgages and agreements for sale are methods of using real property as security for debt. An agreement for sale is used to sell property on credit with the purchaser getting possession and the vendor retaining title to the land, with a right to repossess if the payments are not made. Historically a mortgage involved the conditional transfer of the title to the property to the creditor as security for the loan. If the loan was not repaid the title remained with the creditor who had the right to take possession of the property and to sell it for the outstanding amount of the loan. Now in land titles jurisdictions a mortgage is simply an interest in land owned by the debtor and on default the creditor can sell or take title to the land.

Fixtures attached to the land or premises by the tenant can usually be removed by the tenant upon termination provided that doing so will not damage the property. If they are not removed they become part of the real property. The lease agreement will usually categorize which fixtures are landlord’s fixtures and which are tenant’s fixtures.

Bailment is created when goods owned by one person are given for a time to another. The person holding the goods is called the bailee. The bailment can be created gratuitously, or by contract. The duty on the bailee to care for the goods will vary with the provisions of the contract and who is benefiting from the bailment. Where both parties benefit (bailment for value) or where the bailment is voluntary but the bailee is benefiting, the duty is high. But where the bailment is voluntary and for the benefit of the bailor, the obligation may be much less.

When people find a watch or ring in a park, they have the right to that item against everyone except the owner. If that finder were to hand it to the police or the lost-and-found centre and the rightful owner could not be found, that finder would be entitled to it. Only the rightful owner or someone having an enforceable interest in it, such as a secured creditor, could demand it from the finder.

EXAMINE THE PROTECTION GIVEN TO INTELLECTUAL PROPERTY

OUTLINE THE RIGHTS PROTECTED BY COPYRIGHT AND PATENT LAWS

Intellectual property law attempts to balance the protection of the product of a person’s mental effort against the free distribution of new and innovative ideas which stimulate the advancement of the commercial environment. Its attention focuses both on defending the rights of individuals in relation to ideas, information, and other creative works, and on regulating how others use those products of the mind. These opposite interests often collide, especially now in the digital information age, with the explosion of computers, software, and internet technology.

Copyright law restricts others from copying or reproducing of works, giving the owner of that created work a monopoly over it. Copyright protects literary, dramatic, musical and artistic works as well as performer’s performances, sound recordings, and communications signals. Computer software is now also specifically protected under the Copyright Act. The created work itself, and not the idea, is copyrighted so there is nothing to prevent another artist or author from expressing the same ideas in another way. Copyright is created automatically with the creation of the work but registration can give additional protection. The copyright holder has

.

96

Chapter 13: Real, Personal, and Intellectual Property complete control (with a few exceptions) over his work for the life of the creator plus fifty years. Even when the copyright is assigned, the author retains moral rights in the created work to approve of any changes. When a copyright is infringed remedies may be available such as an injunction, Anton Piller order, damages, an accounting or fine or imprisonment in some cases. A copyright board and several associations are in place to enforce the provisions of the Act and help in the royalty collection process.

Patent rights only come into existence when applied for and registered. The registration process requires public disclosure of the invention but it then gives the patent holder a monopoly over the right to produce or profit from the invention for 20 years. Theories, concepts and obvious improvements do not qualify and only an original invention can be patented. With patents the protection is for the idea rather than for the object or thing produced. The remedies that are available for infringement are similar to those available in copyright infringement.

DISTINGUISH TRADEMARKS AND INDUSTRIAL DESIGNS

DESCRIBE HOW THE COMMON LAW PROTECTS CONFIDENTIAL INFORMATION AND TRADE SECRETS

Trademarks are symbols or designs associated with a product or business.

Trademarks are created by registration and provide protection to avoid consumer deception. While the remedies are essentially the same as with infringement of copyright or patent, it should be noted that even where there is no registered trademark that has been infringed there may be a common law “passing off” action that is available. Industrial designs are designs or patterns that distinguish a manufactured article (e.g. the shape of a soft drink bottle) can also be protected through registration.

Common law remedies are available where confidential information has been disclosed. The duty not to disclose such confidential information is based on some special relationship such as principal/agent, employment or directorship of a corporation or society. People in these positions are prohibited from disclosing trade secrets or other forms of confidential information. Remedies are similar to those discussed above. These obligations can be modified by contract. It is wise to make clear to employees and others of confidentiality expectations and to include nondisclosure provisions in employment and consulting contracts.

Answers to Questions 1. How does personal property become real property? Discuss why a determination of why and when this has happened may be significant.

When chattels are affixed to real property they become part of that real property, or fixtures.

The circumstances under which they were affixed will determine whether anyone other than the owner of the real property can remove them.

2. What is a fixture? Under what circumstances can someone other than the owner of the real property, such as a tenant, remove fixtures?

When chattels are affixed to real property they become a part of that real property and are called fixtures. Only the owner of the real property has the right to remove them. But where

.

97

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition tenants affix those chattels they are often entitled to take them with him as they leave unless doing so would cause damage or where those goods were intended to become a permanent part of the real property.

3. What interest in land does the purchaser get when he or she buys a house?

The purchaser obtains an interest in land or the right to use the land called a fee simple. Such an interest gives the purchaser the right to use the land or to sell it subject to local zoning and other restrictions.

4. What is meant by a fee simple estate in land?

A fee simple is the greatest interest in land that it is possible to possess, apart from Crown ownership, and can be equated to ownership. It conveys with it the right to transfer or sell the land. Fee simple is the dominant method of holding an interest in land today.

5. Explain the rights and obligation of reversion and remainder when discussing a life estate.

A life estate is involved when people are given the right to hold possession of property for the duration of a life, which is usually their own. The death of the person determines the end of the life estate. At that point the property reverts back to the original grantor of the life estate, who is often the person who holds the fee simple. This is referred to as a reversion. The property may also be designated to go to another person called a remainderman, after the end of the initial life estate. Dower and curtsey are examples of life estates.

6. Contrast life estates and leasehold estates.

A life estate involves possession of the property for the duration of a specified life, which is usually that of the person provided with the life estate. Obviously it is not a set time. With a leasehold interest, however, possession the property is often conveyed for a specific period of time, for example a 99 year lease, and this is the primary distinction between a life estate and a leasehold estate.

7. What is meant by an easement? Give examples, and explain why an easement is called a lesser interest in land.

An easement does not convey a right to exclusive possession of the land involved and, therefore, is referred to as a lesser interest in land. An easement conveys with it a right to use another person’s land either by encroaching on it or crossing over it. An easement right to cross over is called a right of way.

8. Explain the significance of a dominant and servient tenements when dealing with easements.

For an easement to be valid as an interest in land there must be a servient tenement, which is property on which the easement is imposed. There must also be a dominant tenement that gets the benefit of the easement. For example, when person A has the right of way to cross person B’s property to get to his own property, the property of person A is referred to as the dominant tenement and the property of person B is referred to as the servient tenement

.

98

Chapter 13: Real, Personal, and Intellectual Property 9. What is meant by a restrictive covenant? Under what circumstances will such a covenant be binding on subsequent landowners? How does this relate to a building scheme?

A restrictive covenant is created by the original seller of the property as part of granting a purchaser an interest in that property (usually ownership), and places some sort of restriction on its use. For example, no house can be built on the land without a tile roof or no building can be erected over three stories high. This kind of restrictive covenant may be used to protect the value of the seller’s adjacent property or to protect the view, etc. When property is subdivided by a developer, certain restrictions may be placed on title to protect property values, and this is called a building scheme. Both restrictive covenants and building schemes run with the land and all future owners are bound by those restrictions.

10. Contrast a tenancy in common with a joint tenancy, and indicate how one can be changed to another. Why is the distinction important?

Both joint tenancies and tenancies in common are methods by which people may own property together. That is all parties can point to any portion of the property and claim to have a designated interest in it. With a tenancy in common the interest in the land is inherited when one of the parties dies. With a joint tenancy with a right of survivorship, the remaining joint tenant(s) become the owners of the property. Sometimes when a joint tenancy has been created, one of the parties then decides it is time to end the joint tenancy. Relief from the court may be available by severance and sale if the parties cannot agree on a buy out or sale.

Joint tenancy with a right of survivorship is a common way for couples to hold title and is a common vehicle to keep real property out of probate and away from probate fees.

11. How can failure to properly register a mortgage or deed affect the initial parties to an instrument in a registration jurisdiction? What happens when an innocent third party becomes involved?

Failure to register an interest in property in a registration jurisdiction will not affect the rights of the original two parties as that relationship is governed by the personal dealings between them. Registration is designed to protect the interests of an innocent third party. If the property is sold to an innocent stranger, the title will not be affected by an unregistered mortgage or deed unless the stranger has knowledge of the mortgage or deed. This is true even in a land titles system where the certificate of title guarantees the ownership and interests in land to be as stated, since it is possible for the person who has neglected to register to correct the oversight, as long as the interests of an innocent third party are not affected.

12. How are rights under a lease agreement different from the rights of a resident created under a licence agreement?

When a leasehold interest is established, even if it is only for a short time, an exclusive right to the possession of that property is given. The only one entitled to be on the property during that time is the leasehold tenant and their permitted guests. When a license to use the property is granted, however, there is no exclusive right to use the property. A hotel grants the license to use a suite and retains the right to enter the room to clean and inspect the premises while the guest is staying there. The landlord of leased property does not have similar rights.

13. Under what circumstances must a leasehold interest be evidenced in writing? Why? A leasehold interest conveys an interest in land and under the Statute of Frauds all contracts dealing with the conveyance of land must be evidenced in writing. Most provinces have qualified this so that it applies only to leasehold interests of more than three years duration.

.

99

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 14. What is a periodic tenancy? What special problems come into play with periodic tenancies that are not present with term leases?

A periodic tenancy involves a lease agreement that is, in effect, renewable at the end of each period specified in the agreement. There is no termination date and, therefore, it is necessary for the tenant or landlord to serve notice of a wish to terminate. With a term lease, there is no requirement for notice as the lease automatically terminates at the end of the term.

15. Explain what is meant by a landlord’s obligation to ensure a tenant’s “quiet enjoyment”.

A landlord must ensure that nothing happens to interfere with the tenant’s use and enjoyment of the property. There must be no third party who has a right to force the tenant not to use the property.

16. Explain what is meant by the term “finders keepers” in terms of who is entitled to the property that has been found.

When a chattel has been found, such as a watch on a beach, the finder has a right to it against all others except someone with a prior claim, such as the original owner.

17. Discuss different ways in which a bailment may be created. What duty is imposed on a gratuitous bailee? What duty is imposed on a bailee for value?

The bailment may be created gratuitously for the benefit of the bailee as when a neighbour borrows your lawn mower or for value where the bailee is paid for the service of holding a chattel. In the case of both, the obligation on the bailee is to use the same degree of care in looking after those goods as would a reasonable owner of them. The duty imposed on a gratuitous bailee for the benefit of the bailor is considerably less. Of course any contract provisions can modify these duties.

18. Distinguish between the obligation placed on a bailee for value and that imposed on a common carrier or innkeeper.

The duty on a bailee for value is to take the same care of the goods as a reasonable owner person would exercise. The duty may be modified by contract. The duty on an innkeeper or common carrier is to be responsible for those goods if they are lost or damaged unless, of course, that damage is the fault of the bailor. In effect the common carrier or innkeeper takes on the responsibility of an insurer.

19. What two principles does the law of intellectual property try to balance?

The free accessibility of information is balanced against the right of the creator of the ideas or information to profit the ideas or information. Stated differently, the degree of the incentive to create is balanced against the good to society of early free access to the protected intellectual property.

20. Explain how a copyright is obtained and the qualifications that must be met in order to obtain such protection.

The copyright is obtained just through the creation of the work in Canada. However, international protection can be obtained through registration. In order to qualify, the work must be original and it must be preserved in some permanent form such as in a written document.

.

100

Chapter 13: Real, Personal, and Intellectual Property 21. Summarize the nature of the protection given to the holder of a copyright and indicate what remedies are available to enforce such rights.

The protection given to the holder of a copyright is a monopoly in relationship to that work for the lifetime of its creator plus 50 years. If that copyright is infringed, remedies include an injunction, an accounting for profits, damages and an Anton Piller order providing for the seizure of the goods that are in violation of the copyright.

22. Discuss under what circumstances an Anton Piller order would be given and indicate how this remedy might be more valuable than other remedies that might be available.

An Anton Piller order is an order to seize the goods that offend the copyright. Because the order is obtained ex parte, the seizure is a surprise, preventing the goods and evidence from being destroyed or hidden. The court will only give such a remedy when there is clear and compelling evidence of the infringement, damages would not be a sufficient remedy and when surprise is necessary in seizing the goods in order to protect the evidence.

23. What is the purpose of patent law and why is registration required for protection?

The patent is not designed to protect the actual work but the idea behind the work or invention. An application for registration followed by registration, gives the inventor a monopoly over the use and profits from that invention or idea. The reason for the registration is to provide for the disclosure of the information to others so that they can use the new knowledge in further advancing society. An important purpose patent law and the registration process is to disclose information rather than hide it.

24. What kinds of things are protected by trademark legislation and how is that protection obtained or lost?

Trademark legislation is designed to protect terms, symbols and designs that are used to identify a product or a business, such as the golden arches for McDonalds. The trademark is created by registration which gives the owner of the trademark exclusive rights in relationship to it. Failure to register results in the loss of this protection but other avenues may be available for enforcement such as a passing off action.

25. What kinds of material are intended to be protected by industrial design? How is the protection obtained?

Industrial designs are intended to protect designs or patterns that distinguish a manufactured article, such as the distinctive shape of a particular designer handbag. In order to obtain this protection the industrial design must be registered and the product must be marked appropriately with the registration mark.

26. How does the duty of confidentiality arise and what protection or remedies are available to the confider?

The duty of confidentiality usually arises when a special relationship is in place such as employment, principal/agent, company director or otherwise that imposes a duty of confidentiality on the parties. When the confidence is broken, or likely to be broken, the kinds of remedies that are available are mainly damages, an accounting or, in some circumstances, an injunction.

.

101

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 27. Indicate how criminal law, tort law and contract law can be used to protect intellectual property. How effective are such alternatives?

When a confidential relationship is created by contract, such as employment, it is appropriate to set out in the contract that disclosure of certain specified information is prohibited so there can be no doubt what is intended. Tort remedies are not as effective, generally, but may be available in specific situations such as when an outside party induces an employee or other to breach a contractual duty of confidentiality. Criminal remedies such as theft or fraud have also been used to prosecute people who have misused confidential information.

Solutions to Cases 1. Paramount Life Insurance Co. v. Hill [1986] A.J. No. 1111 ( C.A.).

Title is guaranteed in a land titles jurisdiction, but it is for the benefit of the purchaser. The business partner and purchaser were innocent of any wrongdoing. Therefore the court found that the purchaser held good title to the exclusion of the widow former joint tenant and that the mortgage was valid. The widow would be foolish to make the mortgage payments because she would not obtain any benefit. The result would likely not be any different in a land registry jurisdiction since registration took place and the purchaser and mortgagee were innocent of wrongdoing.

2. Letourneau v. Otto Mobiles Edmonton (1984) Ltd. , 2002 ABQB 609 (CanLII), [2003] 3 WWR 389.

This was a bailment for reward, as the trailer was left for the defendant to repair, in the location and under the direction of the defendant. The duty of care is that of a reasonable person holding personal goods. No current work order was signed, so there was not an effective limitation of liability clause. The defendant was found liable for the theft of the trailer and for the full cost of replacement.

3. Mars Canada Inc. v. M&M Meat Shops Ltd. 2008 CanLII 4982 (ON SC).

The court reviewed the various agreements between the parties and concluded that since “the wording of paragraph three of the Settlement Agreement is clear and unambiguous, there is accordingly no need or legal basis to admit or consider extrinsic evidence in respect of the negotiations leading up to the Settlement Agreement concerning what the parties (or their counsel) intended. Such an exercise will only introduce the subjective intention of the parties which is not appropriate.” The question that remained was whether the sales through Mac’s outlets were permitted. In that regard, the court held that “the M&M Meat Shops operated by Mac’s in or adjacent to its convenient stores are clearly M&M Meat franchised stores, trading under the names LES ALIMENAT M&M and M&M MEAT SHOPS. Accordingly, in permitting the sale of the Restricted Products in Mac’s M&M Meat Shops, M&M Meat is not in breach of paragraph three of the Settlement Agreement.”

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

102

Chapter 14 Information Technology and the Internet Learning Objectives • • • • • • • • •

Describe how existing laws are being applied to regulate the internet Identify three torts that are often committed online Identify the legislation applicable to internet transactions Explain the significance of clicking “I Accept” upon formation of contracts online List the requirements imposed by legislation on internet sales contracts Identify several crimes commonly committed over the internet Describe the recurring problems with ascertaining jurisdiction over issues arising in cyberspace Outline the security and privacy concerns arising in the workplace as a result of computer use List steps that businesses should take to protect intellectual property in the online environment

Discussion DESCRIBE HOW EXISTING LAWS ARE BEING APPLIED TO REGULATE THE INTERNET

IDENTIFY THREE TORTS THAT ARE OFTEN COMMITTED ONLINE

IDENTIFY THE LEGISLATION APPLICABLE TO INTERNET TRANSACTIONS

Creating laws to regulate the internet presents some unique challenges. One of the greatest problems relates to jurisdiction. Another difficulty with online transactions is that often the identity of the person or business being dealt with is uncertain. Also, the devices to protect consumers from unscrupulous business dealings are inadequate. Existing laws go a long way to establish rights and obligations for the parties doing business online, but sometimes the protection and enforcement of those rights can be an insurmountable problem.

Defamation – Are ISP’s responsible for what their customers publish or should they only be responsible if they fail to remove a publication after receiving notice?

Nuisance – Can a nuisance be created over an internet connection the same way that it can be created over a telephone line?

Negligence and Misrepresentation – Careless recommendations, advice or statements of apparent fact may be actionable by those who rely on the statements to their detriment. However, enforcement remains an issue.

The Uniform Electronic Commerce Act has been adopted by every legislative body in Canada except the Northwest Territories. Ontario has enacted the Electronic Commerce Act. Under this Act, electronic information is deemed “sent” when it enters an information system that lies outside the sender’s control. The message is presumed to have been “received” when it enters the addressee’s information system, such that it can be retrieved and processed.

.

103

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition EXPLAIN THE SIGNIFICANCE OF CLICKING “I ACCEPT” UPON FORMATION OF CONTRACTS ONLINE

LIST THE REQUIREMENTS IMPOSED BY LEGISLATION ON INTERNET SALES CONTRACTS

IDENTIFY SEVERAL CRIMES COMMONLY COMMITTED OVER THE INTERNET

DESCRIBE THE RECURRING PROBLEMS WITH ASCERTAINING JURISDICTION OVER ISSUES ARISING IN CYBERSPACE

The general rules of contract law apply but issues arise as to what constitutes acceptance. Clicking the “I Accept” button may signify acceptance but does it mean that the party has actually read and understood the agreement?

Moreover, the courts have held that using a website with knowledge of the terms of use may be sufficient to create a contract, even when there is no “I Accept” icon. Note that the postbox rule will likely not apply to online transactions.

Generally, provincial Sale of Goods Acts and consumer transaction statutes apply to electronic transactions. The International Sale of Goods Contracts Convention Act, as well as the provincial and territorial counterparts, may also come into play when transactions cross national borders. Consumer protection legislation in several jurisdictions imposes restrictions on mailorder transactions and these restrictions are being extended to internet transactions as well. An Internet Sales Contract Harmonization Template has been implemented by Manitoba, Alberta, Nova Scotia, Ontario, British Columbia, and Quebec.

In addition to the problems related to the fraudulent uses of electronic technologies and the outright piracy of computer programs, businesses must contend with computer viruses that interfere with the operation of programs and corrupt or destroy data. Hackers can steal telephone services and access confidential or secret information through misuse of the telecommunications systems and computers of other businesses. These opportunities have become more available with the vast growth of the number of wireless networks. Outright piracy of computer programs, recordings, and videos is already a huge problem. Other common internet and computer offences include child pornography, theft, unsanctioned gambling, criminal defamation and harassment, pedophilia, hate literature, and other human rights violations.

The issue of jurisdiction arises in different forms. The most obvious is determining which court will have the right to hear a case. There is also a question of what law should be applied regardless of where the case is heard.

A retail business that sells goods over the internet could risk being sued in every area where the sales page is seen.

A further problem with jurisdiction is the ability to enforce a court order once it is obtained. Treaties often allow for the enforcement of one court’s orders in another jurisdiction, but generally, as a prerequisite, the conduct complained of must be actionable in both areas.

To avoid battles over jurisdiction, the parties should make their own rules, specifying in their contract what law is to apply. Where business is solicited, disclaimers should be included similar to product warranties, such as: “Void where prohibited by law,” or “Only available to residents of Canada.”

OUTLINE THE SECURITY AND PRIVACY CONCERNS

Security and privacy issues arise as a result of the ease with which information can now be accessed, accumulated and sorted. Email and other internet communications can be intercepted, made public or redirected to competitors or others who might misuse it.

.

104

Chapter 14: Information Technology and the Internet ARISING IN THE WORKPLACE AS A RESULT OF COMPUTER

Protecting privacy is an immense challenge, and computer users ought to refrain from giving out their private information online. This area is now regulated by the Personal Information Protection and Electronic Documents Act (PIPEDA), which applies to all jurisdictions in Canada except where the provinces have passed “substantially similar” legislation.

Employee use of technology is also fraught with risk. Businesses may find themselves linked to criminal or tortious activity and be vicariously liable for the actions of their employees. Piracy of digital media is rampant. Business must also be careful in monitoring employee computer and internet activity.

Ontario courts now recognize the tort of invasion of privacy through the concept of “intrusion upon seclusion” and as noted above, it is often a criminal offence to intercept communications between individuals. These issues may be addressed through carefully worded employment contracts and by notifying employees of the fact that their actions will be monitored.

LIST STEPS THAT BUSINESSES SHOULD TAKE TO PROTECT INTELLECTUAL PROPERTY IN THE ONLINE ENVIRONMENT

Business must take steps to ensure that the business and employees comply with all applicable copyright and trademark law when dealing with software usage, the downloading of music and videos, and the registration of domain names. Further, particularly valuable intellectual property should not be available online without a secure payment system, an enforceable license agreement with a choice of law and jurisdiction provision, and an investment in some hack proofed firewall expertise and technology.

Answers to Questions 1. Why is it necessary to regulate the internet?

Most noncommercial users would like to keep the internet as free of regulation as possible and the difficulty of regulating such a freewheeling technology adds to the problem. However with all of the abuses that are now taking place such as viruses, hacking, scams and frauds, spam, gambling, child pornography and especially the pirating of software, music, games, videos and written material, it seems that the growth of internet specific regulation is inevitable.

2. What are some of the problems related to enforcing the law when the medium for transmitting information is the internet?

The main problems are the ease of putting material on the internet and downloading and copying music, games, video and written material. Also identifying the culprits and their location are difficult. Often the abuser has located in another country, which may be a safe haven with laws that insulate them from prosecution or civil action.

3. How does the current law of tort, contract, consumer protection, and intellectual property affect internet communications?

Current law provides remedies for many of the abuses currently taking place. The problems are with the widespread and international nature of the internet making identification of abusers and enforcement extremely difficult.

.

105

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 4. Explain the role played by private bodies and ADR in regulating the use of the internet.

The internet providers themselves have been involved in some self regulation and will often take steps to stop abuses when they are brought to their attention. Also private dispute resolution bodies have been set up to deal with many of the disputes and problems arising through use of the internet such as the resolution of disputes over domain names and trademark infringement.

5. How are disputes between different domain-name claimants resolved?

Domain names are given out by a private body to internet users as requested and the resulting domain name often infringes on the use of someone else’s business trademark. The resulting dispute is often resolved through application to an arbitration panel that applies a series of standards to determine who is entitled to use the domain name.

6. How does federal and provincial legislation contribute to the increase of security on the internet?

Legislation is being enacted at both the federal and provincial levels controlling the dissemination and misuse of personal and confidential information and in several cases making breaching privacy an actionable tort. The federal Personal Information Protection and Electronic Documents Act and the Ontario Privacy of Personal Information Act are examples.

7. List the concerns for employers arising from computer misuse by employees in the workplace. What steps can employers take to minimize the risk of vicarious liability?

Frauds and scams, piracy of music software and other copyrighted material, hate and discriminatory web sites, hackers, viruses, child pornography, gambling, human rights violations and disclosure of private information are examples. Businesses may find themselves linked to tortuous or criminal activity, and may be vicariously liable for the actions of their employees. These issues may be overcome by carefully worded employment contracts and by monitoring employee activity.

8. Explain the problems created by the internet with respect to jurisdiction and what factors courts now use to determine whether they will hear a case.

Because the internet is borderless, it is difficult to determine in which jurisdiction an offence has been committed and which jurisdiction’s law should apply. Today the courts will look at whether there is some special connection with a particular area over and above others. For example, if transactions took place with residents in that area, the courts decide they have jurisdiction.

9. What steps should a company take to protect themselves and their data from internal and external threats?

The safest method is to encrypt all data, use special security programs and to keep all such processes up to date. Also employees should be educated in all security routines and processes. Note that securing wireless networks can be a special problem and extra care should be taken to protect such networks.

.

106

Chapter 14: Information Technology and the Internet 10. Identify the potential problems that may arise if an employer installs webcams or keystroke logging on the computers used in the workplace.

Business must also be careful in monitoring employee computer and internet activity. Ontario courts now recognize the tort of invasion of privacy through the concept of intrusion on seclusion and as noted above, it is often a criminal offence to intercept communications between individuals. Furthermore, employers must consider the impact of PIPEDA before monitoring employee email. This Act applies to all private sector organizations that collect, use or disclose personal information in the course of carrying out a commercial activity.

“Personal information” includes “information about an identifiable individual,” and this broad definition likely includes information that would be gleaned from monitoring email, especially personal email.

Solutions for Cases 1. Leduc v. Roman , 2009 CanLII 6838 (ON SC).

The court did allow the plaintiff to cross examine the defendant about the content of his Facebook page. The personal reactions of students to the stated question and the court order granted may indicate where public opinion may lead future legislation on this issue.

2. Black v. Molson Canada, (2002), 60 O.R. (3d) 457 (Ont. S.C.J)

The court held in favour of Black. Molson’s trademark was associated with the production of a specific product: beer. There are lots of examples of businesses with the name Canadian in their titles or product names and they cannot all be acting in bad faith. There is no danger that people will confuse this domain name with the Molson product. The fact that Black wasn’t using the domain name yet had no effect as there was evidence he did plan to use it. Black had the right to use the Domain name in the website catering to Canadian business and entrepreneurs.

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

107

Chapter 15 Sales and Consumer Protection Learning Objectives • • • • • • • •

Describe the scope of the Sale of Goods Act Explain the relationship between title and risk and outline the rules for determining who has title.

Examine the rights and obligations of buyers and sellers Describe the remedies of buyers and sellers upon default Explain what consumer protection legislation is and why it exists Review the Competition Act and other federal consumer protection legislation Review the areas of consumer protection covered by provincial legislation Identify the main forms of negotiable instruments and explain their basic characteristics

Discussion DESCRIBE THE SCOPE OF THE SALE OF GOODS ACT

The law of contracts established a series of rules and concepts designed to govern the agreements between parties in a general way. As with most general principles, however, it became necessary to modify them in special situations. The Sale of Goods Act (SGA) was intended to provide missing terms in contracts for the sale of goods when the parties had neglected to supply sufficient details themselves. However, the important themes in contract law of the freedom of the contracting parties to govern their own activities and the principle of caveat emptor were carried through in the Sale of Goods Act. The parties were given the power to contract out of the provisions contained in that legislation simply by stating another intention in their agreement.

By operation of Section 2 of the SGA, the Act only applies where a sale is involved (both title and possession of the goods will transfer) and the sale is of a good (as opposed to services). There must be some sort of monetary consideration that is paid as well. Some jurisdictions still require the contract to be in writing.

EXPLAIN THE RELATIONSHIP BETWEEN TITLE AND RISK AND OUTLINE THE RULES FOR DETERMINING WHO HAS TITLE

An important aspect of the Sale of Goods Act is to determine who bears the risk when goods are destroyed or damaged and the basic principle is that risk follows title (although the parties can agree otherwise if they so wish such as with CIF, FOB and COD contracts). The transfer of title (ownership) is determined by a series of rules set out in the Sale of Goods Act dealing with different situations. Rule 1 states that where the goods are specified and in a deliverable state, title transfers when the contract is made.

Rule 2 - where something has to be done to those goods to put them into a deliverable state, title transfers when the changes are made and the buyer receives notice. Rule 3 - where the goods have to be weighed or measured first, title transfers when the weighing and measuring takes place and notice

.

108

Chapter 15: Sales and Consumer Protection is given to the buyer. Rule 4 - when goods are taken on approval, title transfers upon approval being communicated, after a reasonable time or after the buyer acts in some way to those goods inconsistent with the seller’s continued title. Rule 5 deals with future goods or goods not yet manufactured. Title in this case transfers when the goods are selected and unconditionally appropriated to the contract with the assent of the other parties. (It must be noted that assent is something quite different than the notice discussed in Rule 2 and 3 above.) Personal Property Security Act provisions can also impact on title. Ownership is an interest that can be perfected by possession or registration.

EXAMINE THE RIGHTS AND OBLIGATIONS OF BUYERS AND SELLERS

The Sale of Goods Act contains a number of conditions and warranties that are included in the contract unless the parties agree otherwise. There are provisions that the person who sold those goods must have the right to sell them, that they will be free of liens and encumbrances and that the buyer will obtain quiet possession. Goods bought by sample must match the sample. When goods are bought by description, the goods must match the description and be free from any defect that would render them unmerchantable. Most sales of manufactured goods qualify as sales by description.

When a buyer purchases goods for a specific purpose relying on the statements of a salesperson, there is an implied condition in the contract that the goods will be reasonably fit for that special purpose. When goods are bought by sample, the goods delivered must substantially match the sample and be free from any hidden defect that would render them unmerchantable.

When the parties don’t agree on a price, the Act imposes an obligation to pay a reasonable price for the goods.

DESCRIBE THE REMEDIES OF BUYERS AND SELLERS UPON DEFAULT

When there has been a default and the seller still has possession of the goods, he can retain them as an unpaid seller’s lien, even though title may have transferred. Even if the goods are in transit he can stop and recover them providing they have not yet reached the buyer. Under the Bankruptcy and Insolvency Act, in certain circumstances the seller can retake goods from the defaulter even after delivery. Generally speaking sellers are much better off if they can sue for the price of the goods rather than suing for damages. The seller can sue for the price of the goods except where the buyer was entitled to refuse delivery because he had not yet received title, payment was not yet due or the goods were defective in some way. Such refusal to accept delivery may still constitute a breach of contract on the part of the buyer, but the will only be required to pay damages rather than pay for the price of the goods (unless specific performance is ordered).

The buyer has the same kind of remedies that are available in a breach of contract action. If there has been misrepresentation, fraudulent or innocent, the remedies available under that heading apply. A problem that may be encountered where the buyer suffers extensive damages is that the seller need only pay if the possibility of those damages was reasonably foreseeable at the time they entered into the contract.

.

109

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition EXPLAIN WHAT CONSUMER PROTECTION LEGISLATION IS AND WHY IT EXISTS

REVIEW THE COMPETITION ACT AND OTHER FEDERAL CONSUMER PROTECTION LEGISLATION

REVIEW THE AREAS OF CONSUMER PROTECTION COVERED BY PROVINCIAL LEGISLATION

IDENTIFY THE MAIN FORMS OF NEGOTIABLE INSTRUMENTS AND EXPLAIN THEIR BASIC CHARACTERISTICS

The provisions of the Sale of Goods Act and other statutes are designed to provide protection to consumers in relation to the quality or title of the goods they purchase. Other consumer protection legislation extends the responsibility of the merchant and manufacturer for the products they produce themselves and also controls their activities by prohibiting unacceptable practices in the merchandising process such as false and misleading advertising. When the products are essentially hazardous, there is a duty to warn the user of the hazard. Where misleading statements are made by the seller or seller’s representative, those statements are incorporated into the contract. Legislation has been introduced to control door-to-door sales, referral selling, unsolicited credit cards, tax refund loans, etc. In loan transactions there is a requirement to disclose the actual amount owed as well as the actual interest rate to be paid. The courts are empowered to overturn unconscionable transactions. Debt collection and credit reporting practices are also regulated.

The Competition Bureau is an independent agency that administers and enforces the federal Competition Act. The purpose of the Competition Act is to promote fair competition in the marketplace. Some practices are deemed criminal in nature, while others are deemed civil and allow for remedies directly to those harmed. Federal legislation also provides for the control of dangerous products, including food and drugs, prohibits misleading and deceptive statements and controls practices that interfere with the free market system such as price-fixing and monopolies. Today’s consumer protection legislation also provides information services for the consumer.

Provincial Legislation addresses such common consumer issues as: regulation of gift cards, door-to-door sales, referral selling, pay day loans, and debt collection. In addition, there are many government and nongovernment agencies that distribute information to consumers and hear consumer complaints.

Negotiable instruments are regulated by the federal Bills of Exchange Act and can take the form of cheques, bills of exchange or promissory notes.

Cheques and bills of exchange involve the drawer ordering another to pay a third party, whereas a promissory note is simply a promise to another by the maker to pay a specific amount. Negotiable instruments are enforceable by an innocent holder in due course against the drawer as well as endorsers on the instrument.

Answers to Questions 1. Explain the purpose of the Sale of Goods Act in relation to the obligations of the parties to a sale of goods transaction.

The purpose of the Sale of Goods Act is to supply the terms in a contract that parties may leave out and that can be implied from the circumstances. The Act sets out what terms will normally be implied, but in general the parties can specifically overrule these implied terms by stating otherwise in the contract.

.

110

Chapter 15: Sales and Consumer Protection 2. What three qualifications must be met before the Sale of Goods Act applies to a transaction?

Firstly, the subject matter of the contract must be classifiable as a good rather than a service or real property. Secondly, the transfer of those goods must be anticipated by the contract (a sale) and thirdly the transaction must involve the transfer of money (monetary consideration).

3. What is the distinction between a sale and an agreement to sell? What is the significance of that distinction?

A sale refers to those situations where title and property in the goods are transferred immediately. When either the title or property is to be transferred sometime in the future it is referred to as an agreement to sell. Since risk normally follows the title, an agreement to sell will leave the risk of loss with the seller. A sale usually transfers the risk immediately to the buyer.

4. When does the risk transfer to the buyer in a sale of goods transaction? Explain the exceptions to this general rule.

The general rule is that risk follows title. However, this general rule can be overridden firstly by the parties in a C.I.F (cost, insurance and freight) contract which places the risk on the seller during shipping even though title may have already transferred. Secondly, F.O.B. (free on board) contracts make the seller responsible for those goods until they are placed on board the carrier chosen for transport. Thirdly, C.O.D (cash on delivery) contracts leave both the proprietary interest in the goods and the risk associated with them with the seller until payment.

5. What is a bill of lading? How can it affect who bears the risk in a sale of goods transaction?

The seller names itself as the party entitled to receive the goods at their destination on the shipping receipt. The seller then maintains control of the goods, as well as title and risk, as the buyer would not be entitled to receive the goods until the seller gives permission to the shipper to deliver to the buyer.

6. Indicate when title transfers in the following situations: (a) when the contract for sale is unconditional and the goods involved are in a deliverable state at the time the purchase is made.

This is Rule No. 1 and property passes to the buyer at the time the contract is made. (b) when the subject of the contract involves specific goods to which the seller is obligated to do something, such as repair, clean or modify, in order to get them in a deliverable state.

This involves Rule No. 2. The property in the goods only transfers when the thing required has been done and the buyer has notice of it. (c) when the contract for sale involves specific, identified goods which must be weighed or measured before being given to the buyer.

This is Rule No. 3 and property passes when the act required to be done is done and the buyer has notice of it.

.

111

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition (d) when the goods are delivered to the buyer on approval.

This is Rule No. 4 and title transfers (1) when the buyer gives approval or acts toward the goods as if they are accepted and (2) if the buyer doesn’t act as though they are approved or accepted, but retains the goods, title transfers after a reasonable time. (e) when goods purchased by description have not been selected, separated out, or manufactured, at the time the sales contract is entered into.

Property in the goods transfers when the goods have been unconditionally appropriated to the contract by one of the parties with the assent of the other.

7. The Sale of Goods Act imposes terms relating to goods matching samples or descriptions, and meeting standards of fitness, quality and title. Explain the nature of these implied terms and their effect on the parties. Indicate which terms are conditions and which are warranties. Explain the significance of the distinction.

If a condition has been breached, this is an important term of the contract and it allows the victim of the breach to discharge that contract. If a warranty has been breached, the victim of the breach must continue performance, but has the right to sue for compensation. One section of the Sale of Goods Act implies a term in the contract that it shall be a condition of the contract that the seller will have the right to sell the goods at the time the proprietary right is transferred. Another term implies that there shall be a warranty in the contract that the seller will provide quiet possession of the goods, meaning the buyer will be allowed to use the goods free of interference. It is stated that there is an implied warranty in the contract that the seller will provide goods free of any charge or encumbrance meaning no one else will have an interest in those goods. Another term stipulates that the goods delivered must match the description or illustration provided. If the goods delivered are substantially different this would be grounds for discharging the contract. Another section of the Act says that the goods provided must be of merchantable quality, that is, free of any defect that would have persuaded the buyer not to purchase them at the agreed price had they known of that defect.

Similarly, when a buyer has relied on the skill and ability of a salesman in determining whether those goods are suitable for a particular purpose, the goods must be suitable for that purpose. When the purchase of the goods is by sample the bulk of the goods must match the quality of the sample inspected. The goods must be free from any defect that would render them unmerchantable.

8. Explain what merchantable quality means.

This means that the product must be free of any defect that would have persuaded the buyer not to purchase the product at the agreed on price.

9. Explain the effect of an exemption clause included in a contract which is inconsistent with the terms set out in the Sale of Goods Act. Since the parties to a contract have the right to override the provisions set out in the Sale of Goods Act, a carefully worded exculpatory clause will have the effect of eliminating the implied conditions and warranties relating to fitness and quality. The actual effect of the exculpatory clauses must be viewed in the context of provincial consumer protection laws to determine whether they may override this general rule.

.

112

Chapter 15: Sales and Consumer Protection 10. Explain the rights of the seller when the buyer of goods: (a) becomes insolvent Generally all contractual remedies are available and so the seller would have the right to sue either for the price of the goods delivered or for damages depending on whether title has transferred. (b) defaults on the contract of sale while the goods are still in the hands of the seller Under these circumstances the seller has an unpaid seller’s lien against the goods and can retain them and eventually sell them depending on the specific contractual provisions. (c) defaults after the goods have been given to a third party to deliver, but before they are received by the buyer While the goods are in the hands of a shipper, as long as they have not yet reached the buyer, the seller has the right to stop those goods and reclaim them while they are in transit (stoppage in transitu). Note that under the Bankruptcy and Insolvency Act, under certain circumstances the seller can even retake those goods from the defaulter after delivery. (d) where the buyer becomes bankrupt after the goods have been delivered Under the Bankruptcy and Insolvency Act the seller can recover the goods delivered within 30 days of that bankruptcy so long as they haven’t been resold to someone else.

11. Explain why a seller of goods might be less likely to sue for damages than for price.

It might be difficult to establish that any damages have been suffered. In the context of the duty to mitigate damages, it would be difficult to claim for lost profits if the goods can be sold at the same price to someone else.

12. Under what circumstances may a buyer refuse delivery of goods?

The buyer may refuse delivery before property in the goods has passed, before payment is due or when the seller has breached some condition of the contract.

13. The Sale of Goods Act in each province implies certain terms into contracts of sale relating to the fitness and quality of the product. Some Canadian jurisdictions make these provisions mandatory in consumer transactions. Explain the situation in your jurisdiction.

In B.C. the parties are not permitted to contract out of (including exculpatory clauses eliminating liability) those sections dealing with fitness and quality. In New Brunswick and Saskatchewan, however, special legislation has been passed imposing conditions of durability for the goods.

14. Describe the practices controlled by the Competition Act and explain how that control is accomplished.

The legislation not only controls monopolies, mergers, price-fixing, etc. but also such practices as misleading advertising, double-pricing and bait and switch.

.

113

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 15. How does the concept of privity of contract limit the effectiveness of many consumer protection provisions? How have some jurisdictions overcome this problem?

Since a contract creates rights and responsibilities between the initial parties to it, outsiders or third parties can’t make claims under the original contractual relationship. Therefore consumer protection provisions relevant to contracts don’t extend protection to outsiders or third parties. This problem can be overcome by suing in tort rather than contract, but when this is done, fault must be demonstrated. The provinces of New Brunswick and Saskatchewan have extended contractual protection beyond the immediate parties to the contract in their legislation dealing with requirements of fitness and quality. In addition some courts have been willing to find separate contracts existing between the manufacturer and the ultimate consumer because of the advertising claims made, thereby avoiding the privity problem.

These are referred to as collateral contracts.

16. What common law provisions are available to protect consumers from unscrupulous business practices?

Aside from the straight breach of contract remedies, the consumer would also have a remedy in tort against the manufacturer. Unfortunately, in order to succeed in tort it has been necessary to prove that the manufacturer was at fault or negligent. This was often difficult to do. Today some courts are willing to find collateral contracts existing between manufacturers and consumers, thereby avoiding the fault problem in tort law.

17. Describe the methods outlined in federal and provincial consumer protection statutes to control businesses with a tendency to abusive practices. Discuss the effectiveness of these tactics.

Several different tactics have been utilized to control specific types of businesses and specific types of abuse in the consumer protection field. Often the practices are either prohibited or controlled by legislation as discussed above. However, the consumer protection agencies established by legislation can be helpful in other ways. They can provide information to consumers with regard to their rights and may assist the consumer in pursuing those rights. They may educate consumers and, in some situations, they have information gathering powers and other powers in relationship to the businesses themselves--in fact becoming a control agency.

18. Identify the legislation in effect in your jurisdiction that offers relief to victims of unconscionable transactions.

The Unconscionable Transactions Act (or its equivalent, depending on jurisdiction) has been designed to release parties from unfair contracts they have entered into because of an inequality in the bargaining positions of the two parties or when one party has been taken advantage of because of a weakness such as desperation, poverty or mental infirmity short of incapacity. The courts have the power under this legislation to interfere with the resulting contract to the point of setting it aside or modifying its terms including ordering a refund of the money. In British Columbia and Newfoundland the governments can actually initiate an action against a merchant on behalf of the consumer and carry it through.

19. What statutory provisions have been introduced throughout Canada to control door-todoor selling, referral selling and other potentially abusive practices?

In some provinces legislation is incorporated in consumer protection acts and in other provinces in separate legislation. Usually they impose a cooling-off period giving consumers

.

114

Chapter 15: Sales and Consumer Protection a certain amount of time to change their minds about purchases and requiring the door-todoor seller to be registered. Similarly, referral selling has been controlled in most provinces and in some provinces prohibited altogether. There are many examples of other practices that are controlled in various jurisdictions. Some provinces have brought in legislation controlling specific types of businesses (e.g. tax refund loan businesses).

20. What services are provided to consumers through organizations set up by the federal and provincial governments? Discuss whether these services are adequate.

These bodies can hear and investigate complaints, seize records, search premises, suspend licenses, etc. They often provide information services for consumers and can also provide the consumer in some situations with help to pursue the remedies provided in the legislation. The federal department of Consumer and Corporate Affairs has even become involved in some provincial consumer matters.

21. Distinguish among a cheque, a bill of exchange, and a promissory note.

A bill of exchange is an instrument where one person orders another to pay a third party. A cheque is a bill of exchange drawn on a bank. Thus a person with an account at a bank orders the bank to pay some third party. A promissory note involves only two parties and is a promise by one person to pay another at some point in the future. A bill of exchange can be used to transfer funds or as a method of creating credit if it is made payable some time in the future. A cheque is generally not used to grant credit since it is payable on demand. A promissory note is just a method of creating credit.

22. Explain how the position of a holder in due course compares to the position of an assignee of contractual rights.

When contractual rights are assigned, the assignee takes subject to the rights between the initial parties. Any defense that is good against the original creditor is good against the assignee as well. That is not true with negotiable instruments. An innocent holder in due course is in a better position than the person from whom the instrument was obtained.

The position of a holder in due course differs from that of an assignee of contractual rights in that the former is not subject to the rights or equities between the initial parties.

23. Explain the nature of an endorsement and its significance on a negotiable instrument.

Endorsement consists of a signature and words on the back of the negotiable instruments. There are different kinds of endorsement but normally this is done to add the credit of the endorser to the instrument so that if it is not honoured the holder can turn to the endorser for payment.

Solutions to Cases 1. Resch v. Canadian Tire Corporation, 2006 CanLII 11930 (ON SC), 17 BLR (4th) 301.

Mr. Resch or the injured boy’s mother could sue on behalf of the boy, as “next friend”. The action would be for breach of contract and in negligence for product liability against the dealer and in negligence for product liability against the manufacturer. Consumer protection legislation should be examined to see if it gives a statutory contractual claim against the manufacturer and a collateral contract could also be pleaded. The claim against the dealer may be complicated in tort if Canadian Tire Corporation did an intermediate inspection of the bike. The court found that the boy was not a “buyer” within the Sale of Goods Act, because he was an infant and lacked capacity, so implied conditions and warranties from the Act were not available to him.

.

115

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 2. R. v. Stucky, Ont. C.A., per Weiler and Gillese JJ.A., 2009 ONCA 151 (CanLII), 240 CCC(3d) 141.

The Court of Appeal overturned the conviction under section 52 and ordered a new trial. The court stated, “…to satisfy the mens rea component of s.52 offences …, the Crown must prove beyond a reasonable doubt that an accused had knowledge of the false or misleading character of the representations, or was reckless in that regard.” The court made passing reference to provisions of the Consumer Reporting Act dealing with false or misleading representations. The court held that there must be a real and substantial connection to Canada in order to apply the Competition Act to acts involving foreign victims.

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

116

Chapter 16 Priority of Creditors Learning Objectives • • • • • • • • •

Outline the process of securing debt by using personal property Outline the process of securing debt by using guarantees Outline the process of securing debt by using other forms of security Review other laws related to creditors Explain the process of bankruptcy Describe the alternatives to bankruptcy Distinguish the priorities among creditors in a bankruptcy Present the bankruptcy offences Describe the situation after discharge from bankruptcy

Discussion OUTLINE THE PROCESS OF SECURING DEBT

BY USING PERSONAL PROPERTY

One of the main areas of contention and litigation that is of concern to business people involves disputes over the collection of money owed to creditors.

Central to the process of lending and borrowing money is the creation of security to ensure the repayment of that money. Security usually involves a creditor having first claim against some asset over and above the debtor and other creditors. Real and personal property can be used as security. The discussion in this chapter deals primarily with personal property.

When the seller is the creditor, the usual method of securing repayment is to sell the goods under a conditional sales agreement. Traditionally this was a two-stage process. The first stage transferred possession while the creditor retained title as security. The creditor could repossess the goods and have them resold in the event of default and have priority over other creditors in the process. The other traditional method for creating such security was the chattel mortgage. The creditor was given title to some form of personal property to secure a loan giving him priority with respect to that property over other creditors. Today these traditional methods are still used, but under the Personal Property Security Act title doesn’t actually transfer but the effect is the same. These two forms of security involve tangible chattels. It is also possible to use intangible claims as security in such a debt transaction.

When one person has such a claim against another, it is referred to as a “chose in action”. Accounts receivable in a business can be assigned to a creditor as security for a loan. If the debtor fails to pay the loan, the creditor has the right to collect on those accounts receivable.

There are many different forms of personal property security and, therefore, most provinces have passed general legislation referred to as a Personal Property Security Act incorporating security against all of the different forms of personal property under one heading, a security interest, so that there are many common perfection, attachment, priority and enforcement rules.. The

.

117

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition method of creating a secured relationship under the PPSA is unique. There are three stages. First, the parties must enter into the contractual agreement.

Second, the secured interest must attach to the collateral that has been identified to provide the security. Third, the secured interest must be perfected.

The contractual agreement requirement is satisfied upon the general principles of contract. Although a security agreement is required in many cases, there is no standard form agreement prescribed by the legislation.

Attachment occurs when a creditor gives the debtor the agreed consideration.

However, in order to gain priority against other creditors with respect to those goods the security interest of the creditor must be perfected. This is done by registering the interest or by taking possession of the item used to secure the loan. If priority has been established through registration, the creditor obtains priority over most other persons obtaining an interest in the collateral that has a registration later in time. Failure to register often causes the creditor to lose priority against other creditors. The obligation, therefore, shifts to potential third parties to search the registry to find out if there are any encumbrances against the collateral. If the provisions are properly followed and there is a default the creditor has the right to take possession and sell the goods.

The PPSA contains a series of special priority rules that can affect the claims of secured creditors. One example is a Purchase Money Security Interest (PMSI). This refers to a situation where a lender advances funds to allow a borrower to acquire specific items. In that circumstance, if the lender registers against the collateral purchase within 15 days for the date of acquisition, the lender will have priority in those goods over all other creditors, regardless of when the other creditors registered their security. Sometimes a PMSI notice must be given to some creditors who have a prior registered security interest in all present and after acquired personal property of the debtor.

OUTLINE THE PROCESS OF SECURING DEBT

BY USING GUARANTEES

OUTLINE THE PROCESS OF SECURING DEBT

BY USING OTHER FORMS OF SECURITY

When the security available from the debtor is inadequate, creditors will often insist that someone else be responsible for the indebtedness along with the debtor by providing a guarantee of the indebtedness of the debtor to the creditor. Such a guarantee obliges the guarantor to honour the debt, should the debtor default. When guarantors are required to pay, they step into the shoes of the creditor and can enforce all the remedies that were available to the creditor against the defaulting debtor, including the right to seize any property that has been used as security. A guarantee has to be evidenced in writing under the Statute of Frauds.

Another vehicle for creating a security is found in the federal Bank Act. Sections 426 and 427 allow banks to use crops in the process of growing and goods in the process of manufacture as security for loans. A floating charge is used to create Section 427 Bank Act security against the general assets or inventory of a business but still allow that business to deal with those assets.

Debtors have the right to manufacture and sell any inventory as long as they are solvent and making payments. As soon as there is default, the floating charge becomes crystalized and attaches to each of the assets included in the inventory, and freezing it from further transaction.

.

118

Chapter 16: Priority of Creditors When goods or services are used in the process of construction on land, an unpaid supplier can, pursuant to the applicable provincial legislation, file a builders’ lien (sometimes called a mechanics’ lien) against the real property.

This has the effect of causing the person who benefits from the work, usually the owner of the real property, pay toward the goods or services. The lien claimant also obtains priority for payment over many other creditors. The owner of the property is required to holdback a legislated percentage of the payment to the general contractor for application toward any builders’ liens that may be filed against the land within the required time after the goods or services are provided at the work site.

Negotiable instruments including bills of exchange, postdated cheques and promissory notes are also used as instruments of credit. With a certified cheque the bank adds its assurance that it will honour the cheque when presented. An accepted bill of exchange is much like a guarantee of assured payment. Promissory notes, like other negotiable instruments, have the advantage of being easily transferred and in the hands of a holder in due course conveying better rights, independent of the original transaction. When negotiable instruments are used to advance credit in consumer transactions they must be stamped consumer purchase and this advantage may be lost.

Letters of credit are often used in international transactions to add a bank’s credit to a transaction to assure its proper completion.

REVIEW OTHER LAWS RELATED TO CREDITORS

EXPLAIN THE PROCESS OF BANKRUPTCY

DESCRIBE THE ALTERNATIVES TO BANKRUPTCY

Some provinces still retain bulk sales legislation which provides protection to general creditors where merchants sell their inventory or trade assets en masse, signaling a warning that they are likely going out of business. A landlord’s right to distrain for rent is another example of where one creditor is given a priority over many others. Provincial legislation also allows creditors to reverse fraudulent transactions entered into by debtors in order to avoid payment or shelter their assets.

When debtors are unable to meet their obligations when they become due, they are said to be insolvent. If the insolvent debtor has some assets, it may be appropriate for the creditors to seek a court order to place that debtor in bankruptcy. Alternatively, the debtor may do this voluntarily by making an assignment. In either case the process involves transferring all the debtor’s assets to a trustee in bankruptcy who then distributes liquidates them and transfers the proceeds to the creditors. Where no bankruptcy offense has taken place, a non-corporate bankrupt will eventually be discharged and able to start over again. Under federal and provincial legislation debtors are prohibited from transferring assets to relatives or friends to avoid those assets being made available to creditors. Similarly they are prohibited from paying one creditor in preference to another.

As noted above, a debtor may become bankrupt either by voluntarily filing an assignment in bankruptcy or by being petitioned into bankruptcy. To obtain a bankruptcy order, the creditor must specify in the petition that the debtor owes more than $1000 in debt and has committed an act of bankruptcy during the previous six months. Significant acts of bankruptcy include the voluntary assignment of assets to a trustee in bankruptcy, fraudulent transfers of money or assets to keep them out of the hands of the

.

119

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition trustee, the giving of a fraudulent preference to one of the creditors, an attempt to leave the jurisdiction without paying debts, and general insolvency. It is usually the failure to pay debts as they become due that is the specified act of bankruptcy.

Under the Bankruptcy and Insolvency Act, a debtor can make a proposal to partially or delay payment of debt and get protection from the creditors for a limited period of time. If the proposal is accepted by the creditors and the court the assets are not lost to the debtor. Both individuals and corporate debtors can elect to make a proposal in an attempt to avoid going bankrupt.

This process involves filing of a Notice of Intention to make a proposal, usually followed within 30 days by the filing of the proposal itself. Once presented, the proposal must be approved by both the creditors (2/3 by value and majority by number) and by the court. If the proposal is rejected, the debtor is automatically bankrupt. Large corporate debtors can engage in a similar process under the Companies’ Creditors Arrangement Act. DISTINGUISH THE PRIORITIES AMONG CREDITORS IN A BANKRUPTCY

DESCRIBE THE BANKRUPTCY OFFENCES

DESCRIBE THE SITUATION AFTER DISCHARGE FROM BANKRUPTCY

When a debtor is bankrupt, the trustee in bankruptcy must assess the claims of the various creditors. This is done by requiring creditors to file a Proof of Claim. The trustee can challenge the legitimacy of any of the claims. Among the valid claims, secured creditors have priority over preferred and unsecured creditors. In most instances, secured creditors are entitled to enforce their security without reference to the trustee. Once the secured creditors are paid, the remaining assets are distributed by the trustee to the preferred and unsecured creditors. Preferred creditors are paid first. Such claims are for funeral expenses, bankruptcy costs, wage arrears, taxes etc. A common issue that impacts all creditors is deemed trust claims advanced by the Canada Revenue Agency for unremitted source deductions and GST. These trust claims can have priority over all secured and unsecured creditors.

Common bankruptcy offences committed by debtors are: conveyances to avoid creditors, preferences of payment to some creditors, failing to make proper disclosure, destroying records, and hiding or concealing property. The bankruptcy trustee can review and reverse offending transactions, and with the assistance of the court, penalties can be imposed upon the bankrupt for failure to fulfill the statutorily required obligations.

During the bankruptcy process, the bankrupt is required to continue to make regular payments (surplus income payments) to the Trustee to be distributed to the creditors. However, once the bankruptcy process is completed and the estate has been distributed, the bankrupt may apply to the court to be discharged. The discharge is often automatic, after nine months, for an individual involved in his first bankruptcy, unless a creditor or the Trustee opposes the discharge. If someone opposes a first time bankruptcy, or if the bankrupt has been bankrupt before, the matter will be heard by a court. An application for a discharge from bankruptcy may be granted unconditionally, it may be granted subject to certain conditions, or it may be denied.

When discharged, the debtor is freed from the enforcement of most previous claims by creditors and is in a position to start over. Any assets subsequently obtained by discharged bankrupts are theirs to do with as they wish. Pursuant

.

120

Chapter 16: Priority of Creditors to the Bankruptcy and Insolvency Act, some obligations do survive discharge, such as fines, alimony and maintenance payments, and some civil damage awards. Enforcement of student loans also survives bankruptcy.

Answers to Questions 1. Distinguish between the following: (a) Real property and personal property Real property is land or buildings. Personal property is moveable chattels or personal rights or claims held by one party against another (chose in action). (b) Choses in action and chattels A chose in action is intangible personal property such as a debt. A chattel is tangible, moveable personal property. (c) A chattel mortgage and a conditional sale With a chattel mortgage the personal property is used as security for a loan from a new creditor. The title is transferred to the creditor from the debtor in pre-PPSA jurisdictions.

A conditional sale allows the seller to provide financing while retaining title to the goods until final payment. (d) A chattel mortgage and a mortgage on real estate A chattel mortgage involves the use of a tangible item of personal property such as a car or a boat for which the debtor conveys title to the creditor to secure a loan in pre-PPSA jurisdictions. A real estate mortgage involves real property such as a house and land being used for the same purpose in land registry jurisdictions. In land titles jurisdictions a mortgage is just a creditor’s interest in land of the mortgage debtor.

2. What kinds of property can be used as collateral under the PPSA? Chattels, debts or claims and lease arrangements and any other form of personal property, tangible or intangible.

3. What are the advantages of using a personal property security act to govern all transactions involving the use of personal property as security?

The personal property security legislation passed brought all of the various rules dealing with different kinds of personal property security under one statute and dealt with them in a uniform way. There is a common form, a common registry, and common procedures.

4. What significant problem associated with the practice of taking goods as security is alleviated by the registration requirements introduced by legislation? Describe the resulting obligations on all parties.

The problem is that essentially two innocent parties are involved, that is, when a debtor transfers title to goods to a creditor and then resells those goods to a third party without the creditor’s permission. Essentially, both the creditor and the third party are innocent. If the creditor were allowed to retake the goods the third party would suffer. Similarly, if this were

.

121

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition not permitted the creditor would suffer. Registration was introduced to overcome that problem, which put an obligation on the creditor to register the agreement and an obligation on the third party to search the registry before entering into an agreement to purchase the goods. If either fails to do so, they suffer the loss.

5. Distinguish among the security agreement, attachment and perfection. Explain the significance of each of them and how each is accomplished.

A security contract is the agreement between the parties creating the security and debt relationship. Attachment takes place when the security agreement is executed and funds are advanced. Attachment results in the creditor obtaining rights in the collateral used as security, but still those rights are only good against the original debtor until the security has been perfected. This is done either by registering the security agreement or by the debtor placing the goods in the possession of the creditor. Proper attachment and perfection give the secured creditor priority to recover against the collateral against most third parties.

6. How is the priority of secured parties determined? What are the two exceptions to this general approach?

Priority is generally determined by date of registration. The two exceptions are a purchase money security interest, which will prevail over a general security interest as long as it is registered within the time stipulated by statute and any required PMSI notice is provided. The other exception is goods bought from the debtor in the normal course of business would not be subject to recovery under the secured party’s general security agreement.

7. What are the rights of a secured party when there is a default by the debtor? What determines the limitations of those rights?

If the original contract provides for it the creditor can upon default take possession of the goods and sell them to recover the amount owing. The creditor must act in a commercially reasonable fashion in looking after the seized goods and reselling them. Any deficit after sale can be obtained from the debtor. Alternatively the goods can be retaken and the creditor can elect to retain the goods in satisfaction of the debt. There are many additional restrictions on how the goods must be treated and to control the process. In addition it must be remembered that the normal contractual remedies are available.

8. What obligations are imposed on the secured creditor who retakes the goods used as security when the debtor defaults?

The bailiff charged with repossessing the goods is not permitted to break down doors, force open windows or use any threat of physical contact, without a court order and police assistance. When the goods have been repossessed they can be resold to recover the money, after being held by the creditor for a specified period of time. The goods must be sold at public auction or privately at a “fair price” depending on the jurisdiction.

9. Explain the rights of debtors after they have defaulted and the secured party has taken possession of the collateral.

The creditor must give the debtor notice of an intention to sell (or retain) and the debtor has the right to file an objection and be heard in court. Then the goods must be disposed of in the normal way with any excess going to the debtor. Where the goods are to be disposed of or where there is an objection to retention, the goods must be cared for in a commercially reasonable way and the sale of them must take place in a commercially reasonable way.

.

122

Chapter 16: Priority of Creditors 10. “The debtor is always liable to the creditor for any deficiency after the goods used as security have been sold”. True or false? Explain your answer.

The answer depends on the jurisdiction. If there is any deficit owing, it will still be owing after the repossession and resale. In British Columbia it is seize or sue but not both where consumer transactions are involved.

11. What is the difference between a guarantee and an indemnity? Why is the distinction important?

Guarantees involve agreements whereby third parties ensure a debt will be repaid if the debtor defaults. An indemnity is an agreement where one party agrees to be directly responsible for paying the debt of another and no default is required to trigger the obligation.

In some provinces, only guarantees must be evidenced in writing under the Statute of Frauds.

Guarantees and indemnities are a separate contract, and therefore must have all the required elements of a contract.

12. What duties does the creditor owe the guarantor before and after the guarantee is given?

The creditor has to make full disclosure of all relevant details of the debt at the time the guarantee is provided. The creditor must preserve the debt and security from the debtor for the benefit of the guarantor after the guarantee is given since the guarantor is subrogated to the interest of the creditor. If either duty is breached it would void the guarantee.

13. If the debtor defaults, what steps does the creditor have to take before she is entitled to demand payment from the guarantor? If the guarantor pays the creditor, what rights does she have against the debtor?

The creditor need not take any steps before demanding payment from the guarantor unless stipulated in the contract that other forms of security must be realized first. Once paid, guarantors take an assignment of the position of the creditor, and can then take any action against the debtor to recover their money that the creditor could have taken to collect the debt.

14. What is the main advantage of the provisions of the Bank Act that allow the banks to take security for loans they grant? Why may these provisions cause confusion?

Growing crops, inventories, goods in the process of manufacture may be taken as security, even though they change in nature. Under provincial PPSA’s this same type of items may be taken as security, so there is more potential conflict between the federal Bank Act (registration required with the Bank of Canada) and the provincial Acts (registration under the provincial registry).

15. What happens upon default when a floating charge has been used to secure a debt?

What is the main advantage of using floating charges?

A floating charge is said to descend and crystalize upon the goods that are used as security upon default. Until that time the floating charge does not fix against any particular security and so no priority is established in relationship to it. Those goods can be purchased or sold without conveying with them any charge against the title. It is only at the time of default when the floating charge crystalizes that a priority is established. Any sale that takes place after that or any use of the commodity involved as a security etc. would be subject to the now crystalized floating charge. Therefore at the time of default anyone who has a fixed charge against the collateral would have priority against the holder of the floating charge. The floating charge would have priority over general creditors once it becomes crystalized.

.

123

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 16. What significant difficulty facing the supplier of goods and services in the construction industry is overcome by the creation of the builders’ lien? How can suppliers protect themselves? Explain the role of the holdback.

The problem addressed by builders’ liens is simply that the owner of the property is usually not the party with whom the subcontractors have contracted. In the absence of a builders’ lien the owners benefiting from the work done would normally have no obligation to pay either the person doing the work or supplying the goods. In such cases the worker or supplier is permitted to register a lien against the land to force payment. If the owner of the property has hired a general contractor, that general contractor and any subcontractor can file a builders’ lien to force payment from the owner. Owners can protect their interests by holding back 10% (depending on the jurisdiction) from contract advances to the general contractor to get a court order to discharge liens which may later be filed within the designated time period. In turn the owner would require the general contractor to also perform a holdback. This assures that funds will be available to pay the sub-trades and suppliers and limits the owners obligations to the amount held back.

17. Explain the nature and use of a letter of credit and distinguish between a standby letter of credit and a normal letter of credit.

A letter of credit is an instrument produced by a bank that guarantees payment. A normal letter of credit facilitates payment in international trade transaction. A standby letter of credit acts like a guarantee to ensure that one contracting party, for example in construction on property, completes their obligations under the contract.

18. How does the Bulk Sales Act protect creditors when a business is selling all, or almost all, of its assets?

The Bulk Sales Act is designed to prevent merchants from selling all, or almost all, of their business’s assets before a creditor can take action and recover against those assets. Creditors expect a business to sell inventory in the normal course of operations, but when all, or most, of the inventory, equipment, or other assets needed for the ongoing operation is sold, that is an indication that the merchant is going out of business. The Bulk Sales Act operates in these circumstances to protect the creditors. The purchaser must obtain a list of creditors, notify them of the sale and pay the proceeds directly to them if they so wish, or obtain a waiver from them. Great care must be taken to comply with the legislative requirements. Failure to comply will make the sale void as against the creditors, requiring the purchaser to account to the creditors for the value of the goods.

19. Explain the difference between a fraudulent transfer and a fraudulent preference. What is the legal effect of both of these types of transactions?

A fraudulent transfer or conveyance occurs when a debtor transfers property to a friend or relative in an attempt to delay, defeat, hinder or prejudice creditors. A fraudulent preference occurs when a debtor makes payment or grants security to one creditor in an attempt to delay, defeat, hinder or prejudice other creditors. These transactions are illegal and can be reversed by the court if relief is sought within the allotted time.

20. Define the objectives of bankruptcy legislation.

The purpose of bankruptcy legislation is to restore a person as a productive member of society and to ensure that all available assets are preserved to protect the interests of the creditors. A third objective is to punish fraudulent debtors.

.

124

Chapter 16: Priority of Creditors 21. Distinguish between bankruptcy and insolvency.

A person is insolvent when they cannot meet their financial obligations when they become due. Insolvency is one factor that can force a person into bankruptcy but bankruptcy involves the legal process of transferring the debts assets to a trustee in bankruptcy either voluntarily though an assignment or involuntarily through a bankruptcy order under the Bankruptcy and Insolvency Act. 22. Distinguish between an assignment in bankruptcy and a bankruptcy order. Explain the process involved in each case.

When bankruptcy is declared the bankrupt assigns all assets to a trustee. When this is done through assignment the debtor voluntarily assigns assets to a trustee in bankruptcy. When creditors force bankruptcy on a debtor this is done by obtaining a bankruptcy order from the court and the assets of the bankrupt are transferred to the trustee by operation of law.

23. Explain the role of the Trustee in the bankruptcy process.

The trustee in bankruptcy is charged with collecting all of the assets of the bankrupt, liquidating the assets, determining the validity of all the claims against the bankrupt and distributing the assets and proceeds according to the priorities set out in the Bankruptcy and Insolvency Act. 24. Discuss the informal options that are available to debtors who are experiencing financial difficulties.

Negotiate directly with the creditors to make alternative arrangements for payment. Debtors could also attempt to negotiate a consolidation loan with their lending institution, which may lower the overall interest rate.

25. Distinguish between Division I and Division II proposals and explain the advantages of making such a proposal.

Both types of proposals are intended as a method for debtors to postpone or suspend legal actions so that they can reorganize their affairs and avoid bankruptcy. A Division I proposal is for corporations and commercial debtors owing more than $75,000 and is a more involved process than Division II. A Division II proposal is for consumers and is a more simple process. If the proposal is accepted and the debtor fulfils it, bankruptcy is avoided.

26. “A consolidation order under the Orderly Payment of Debts program requires the debtor to pay her debts in full.” True or false? Explain your answer.

True. A consolidation order requires that the debtor pay all debt within a three year period, unless creditors consent to a longer period. It is always possible for the creditors to accept less than full payment.

27. What legislation is used by large corporations to obtain bankruptcy protection? What is the main advantage of using this legislation?

Large corporations can restructure debt under the Companies’ Creditors Arrangement Act. The advantage of the CCAA is that the restructuring process in controlled by the court and as a result it can provide more flexibility than the BIA proposal process.

.

125

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 28. Who files the proof of claim? What is its purpose? Who evaluates the validity of a filed process of claim?

Each creditor files a proof of claim with the Trustee, who evaluates the claim for validity.

This process establishes the nature of the debt, how much is owed and any counterclaims the debtor may have.

29. Describe the order of distribution of the assets, and the proceeds from the sale of assets of the bankrupt. How does a “super priority” affect the order of distribution?

Secured creditors have priority over the bankrupt’s assets given as security. Preferred creditors are then paid, pursuant to the priorities set out in s. 136 of the BIA. Finally, unsecured creditors share the remainder on a pro-rata basis. The federal government has “super priority” or deemed trusts against the debtor’s assets for certain types of claims under the Income Tax Act, Canada Pension Plan, Employment Insurance Act and the Excise Tax Act, which means the government sometimes has priority even over secured creditors for these debts.

30. How are fraudulent transfers and fraudulent preferences dealt with by the BIA? The courts have the power to reverse these transactions, forcing the return of the funds or the assets to the Trustee in bankruptcy.

31. What are the duties of a debtor in the bankruptcy process?

The bankrupt debtor is required to file an affidavit listing all debt, creditors and assets. The bankrupt must also provide a summary of all asset transfers that took place within the year previous to the bankruptcy (longer, if the court orders) plus any settlements that took place within the previous five years. The bankrupt must cooperate with the Trustee and the court, deliver all assets and records to the Trustee and do all things that “may be reasonably required by the Trustee […] or the court.”

32. Explain what is meant by a bankruptcy offence and the possible consequences of committing one.

A bankruptcy offence includes such things as giving one creditor a preference over others, trying to hide property or lying or failing to disclose important information to the court or other bankruptcy officials. The effect can be the imposition of penalties as well as the refusal to grant a discharge to the bankrupt.

33. What restrictions are bankrupts subject to?

Bankrupts must disclose the status of bankrupt if involved in any business transaction or when borrowing money over $500. Bankrupts cannot be a director of a corporation, and may not be able to carry on a profession.

34. “An application for discharge by a first-time bankrupt will automatically be granted”.

True or false? Explain your answer.

True, after nine months, unless a creditor or the Trustee opposes the discharge for some reason.

.

126

Chapter 16: Priority of Creditors 35. What factors will a court consider when determining what conditions, if any, to place on a discharge from bankruptcy?

What efforts bankrupts made to pay creditors, have they reduced their lifestyle, have they cooperated with the Trustee, have they fulfilled their duties under the BIA, and have they committed any bankruptcy offences?

36. What changes for a bankrupt after an absolute discharge?

The debtor is now free from the enforcement of most previous debt, and may start over, although a few claims, such as alimony, maintenance and student loans survive.

37. Why is it unlikely that there will not be a discharge after the bankruptcy of a corporation?

Corporations cannot be discharged from bankruptcy unless they pay all of their creditors in full. Bankrupt corporations may make a proposal out of bankruptcy and if successful the bankruptcy is set aside.

38. What can a corporation in financial difficulty do to avoid bankruptcy?

Corporations can file a Division I proposal to creditors under the BIA. Large corporations can also restructure under the Companies’ Creditors Arrangement Act. 39. When can a creditor who has appointed a receiver to take possession of the debtor’s assets face liability for making the appointment?

When they have appointed a receiver or taken possession of assets without giving reasonable notice to the debtor before doing so, together with any required statutory notice.

Solutions to Cases 1. Ontario Wilderness Outposts Inc. v. Nishnawbe Aski Development Fund, [2006] O.J. No. 892(Sup.Ct.J.), 2006 CanLII 6911 (ON SC).

Anything that has been permanently affixed to the land changes from personal property to real property. The tests are degree of affixation and purpose of the property in relation to the land. In this case, the cabins were sitting on blocks, and could be easily moved without damage to the land. There was never any intention to make them a permanent part of the property, and the contract with the government could have required them to be removed once the leases had terminated. The judge decided the cabins were personal property and therefore could be seized by the lender pursuant to their security agreement. If the cabins were affixed to the land, NADF could still take security by a proper registration and fixture notice.

2. Carevest Capital Inc. v. Belle Harbour Developments Inc., [2009] O.J. No. 138 6 (S.C.), 2009, CanLII 15439 (ON SC).

A guarantee is a contract and the parties have some freedom to contract. Here the form of guarantee had the guarantor waive these types of defences to claims on the guarantee. Further the judge found the facts of the case created no real chance of success even if the defences had not been precluded.

.

127

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 3. 430872 B.C. Ltd. v. New Home Warranty of British Columbia (Trustee of), [2004] B.C.J. No. 612 (C.A.).

A trustee stands in the place of the bankrupt, with all the same rights, but no higher rights. As there had been no breach of contract, there was as of yet, no right to draw down on the letter of credit. It was not therefore available to the trustee. If it had been a standby letter of credit, and there was default in performance on the contract, then the beneficiary of the letter of credit could draw on it.

4. Bank of Montreal v. Canada (Attorney General) (2003), 66 O.R. (3d) 161 (C.A.), 2003 CanLII 52158 (ON CA).

Ordinary debts do not take precedence over an assignment into bankruptcy, however some claims of the government have “super priority”. The demand for the GST remittance was issued before the bankruptcy, and therefore the government would have priority over those monies, in preference to any other creditors. Lenders will take guarantees and collateral security to deal with this additional risk, if it is available. Otherwise the availability of credit is affected. Lenders will often obtain a clearance letter from Canada Revenue Agency that there are not any outstanding remittances owing from the debtor before a loan is advanced and when the loan is reviewed.

5. Re Coates (2006), 396 A.R. 307 (Q.B.), 2006 ABQB 201 (CanLII).

The court held that the characterization of this money as an “overpayment of taxes” by the legislature was simply a fiction, so that the money could not be characterized as income and taxed in the hands of the recipient. As a result, the courts characterized the money as a windfall, which is specifically exempted under the terms of the BIA in this context. If it was windfall income however, it would have been attachable. Furthermore, generally under the Bankruptcy and Insolvency Act, provincial exemptions from creditor enforcement are applicable in bankruptcy.

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

128

APPENDICES Introductory Comments The article set out in Appendix 1 was written during a period of educational leave and completed in 1996. It is considerably out of date and was never submitted for publication. This means that it has never been academically reviewed and so with that caution I offer it to stimulate thinking about not only what is taught to business students about law but also how that learning process should take place. As part of this project I developed what I call the Yates Cases. These are an attempt, unlike the judicially decided cases we normally use, to develop more open-ended business case studies where both business and legal issues are introduced leading to several different methods of approaching the problem. These cases are now included as Appendix 2 below.

I have also included commentary on the individual cases in Appendix 3 below.

.

129

Appendix 1 Recommendations for Teaching Business Law in Canada “........business law faculty need to keep in mind that the goal of business law courses is to teach the law to business students, not law students. Business students should not be trained to be mini-lawyers, but to be informed and aware business managers, capable of providing direction to the attorneys they hire and to understand and evaluate the legal advice they receive.”1 This paper has two objectives. The first is to determine what should be included in a general business law course taught at the college or university level in Canada, and the second, to examine how such material should be presented to provide a better education for students and a better integration of the study of law into the business school curriculum. Most of the research has been conducted from sources in the United States since they have a vital, organized body of professionals teaching the subject and a considerable body of literature available. This stands in stark contrast to Canada and other jurisdictions where publications on legal education are largely directed to the teaching of lawyers as opposed to teaching business people about the law.

Part 1 In the last 35 years a great change has taken place in the way business law is taught in American business schools. Prior to 1959 business law was taught using a structure similar to what is used in much of Canada today. Those traditional courses concentrated on contract law and a more cursory examination of other topics such as torts, agency, employment and methods of carrying on business. The great change involved a shift away from these traditional topics to a concentration on the legal environment in which business functions and an examination on government regulation of modern businesses both directly and indirectly. In “regulatory environment” courses, topics such as contracts and agency are dealt with incidentally and only to the extent necessary to understand how the legal environment works.

To understand these developments in the United States it is necessary first to appreciate the impact of two reports published in late 1959.2 Both of them criticized the narrow rule-based approach to management legal education that prevailed in the United States at the time. Pierson recommended that the more traditional business law topics such as contracts, agency and employment be dealt with only “.... to the extent necessary to show some of the ways the living law enters into specific business situations.”3 A considerable amount of debate followed.

1

The Use of Simulated Hearings in Business Law Courses, Lawton and Oswald, The Journal of Legal Studies Education, Volume 11/1, Winter/Spring 1993, p. 103 at p. 104

2

Gordon and Howell, Higher Education for Business {1959} and Pierson, The Education of American Businessmen{1959}

3

Pierson, supra, note 1, at 212 taken from Moore & Gillen, Managerial Competence in Law and the Business Law Curriculum: The Corporate Counsel Perspective. American Business Law Journal, Vol. 23/3, Fall 1985, p. 352

.

130

Appendix 1: Recommendations for Teaching Business Law in Canada The American Assembly of Collegiate Schools of Business (AACSB) is an accrediting body for American business schools and in 1969 that body added to the debate by responding to these two reports. In that year the AACSB changed its requirement that there be at least one course in business law to the requirement that business students be exposed to a “background of the economic and legal environment of business enterprise along with consideration of the social and political influence on business.” Later amended to... “a background of the economic and legal environment as it pertains to profit and/or non profit organizations along with ethical considerations and social and political influences as they affect such organizations.”4 The AACSB effectively determines the curriculum of accredited business schools and so this change and resulting new standard has had a great impact. As a result many schools abandoned the traditional approach altogether, some doing completely away with subjects such as contracts, agency and employment and opting instead for a more open ended “liberal arts” approach to the examination of legal concepts.

Over the years the debate between those advocating a more traditional approach on the one hand, and those supporting a more liberal approach on the other has continued with most schools trying to settle on some middle ground. The middle ground that has emerged was the “environmental” business law courses that are prevalent in most American business schools today. These courses examine the legal/regulatory environment within which modern business must function concentrating on business relationships with government or its relationship with others as controlled or affected by government. This forces a focus on government regulatory bodies and the statutes and regulations passed by government controlling business, but it also requires at least a limited examination of the traditional common law topics as the source of the body of rules that helped to form that legal environment. The debate today centers on how much of the traditional business law course topics such as contracts, agency, and employment can be retained in such an “environmental” approach to the study of business law. Some schools solve this problem by requiring two courses, the first usually being the more traditional business law course with a concentration on subjects such as contracts, and the second concentrating on the government regulation of business. Many schools find that having two business law courses does not fit their overall business curriculum requirements and so are left with the dilemma of what to include in the single, required business law course, usually resulting in the compromise discussed above. This begs the question of what we should do in Canada. Should we follow the American example and move to a legal environment of business type course with more of a concentration on government regulation or should we stay with the more traditional common law centered approach that is now in place.

We must be careful not to be seduced by the American debate and assume that the basic premise is correct or that it automatically applies to us. It is clear that American business law instructors have responded, first to the Pierson and the Gordon and Howell reports, and to a much greater extent to the introduction of the AACSB standard requiring that an environmental approach to business law be adopted. In the United States, the debate seems to have been reduced to an examination of how to implement the new standard while preserving as much of what they can of the traditional approach to business law. What we must ask is whether the “environmental” approach to business law is a valid direction for us to go and if so how much of the traditional approach to business law which now predominates in Canadian business schools do we wish to sacrifice.

Although we don’t experience the same pressure that forced American business law teachers to change their direction so dramatically, the standards established by the AACSB and the change of direction that resulted deserve to be acknowledged and require examination in terms of our current practices.

4

AACSB Accreditation Council Policies, Procedures, and Standards, 1982-83 at p. 27

.

131

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition In the United States a considerable amount of research has been done to determine what the customers think should be included in business law courses. Gary A. More and Stephen E Gilled5 surveyed corporate legal counsel thinking that it would be valuable to determine their opinion of what the managers with whom they work should be taught. Two of their conclusions are helpful to us. First they found that the respondent lawyers had little respect for the legal knowledge of the managers and executives for whom they worked6 and secondly they found that corporate counsel wanted to included topics that would move the courses more to a “legal environment of business” characterization. Of course, when asked, they wanted their people to know about all of the topics listed, but when forced to rank these topics, seven of the top ten were what would be characterized as regulatory or environmental topics, such as antitrust (in Canada, competition law), labour, and consumer protection. Based on these findings, the authors set out a model business law course7 consisting of 25% introductory materials, 25% private law matters and 50% the regulatory environment of business. They concluded that the trend in the United States was toward the environmentalization of business law courses8 and that the legal counsels surveyed wanted that trend to continue9 In their introductory remarks the authors referred to other surveys which had found that business people when asked about the types of problems they encounter in their business, rank highest in importance topics of the “environmental/regulatory” type.10 They also noted in passing, however, that business law students themselves found the traditional topics more interesting11 Klayman and Nesser12 conducted two surveys that support this conclusion. They surveyed business school graduates of Ohio State University and looked at what other business schools were teaching in their courses. They too concluded that more emphasis should be placed on the environmental/regulatory topics and less on some of the more traditional ones. They also set out a model course that corresponds generally to one set out by Moore and Gillen.

These articles are typical and illustrate the general conclusions reached in the 1980’s that business schools should adopt the legal environment approach to business law and move away from the more traditional topics. This is what the accrediting bodies wanted. This was what the business people wanted, and this was what the business schools were doing. Note that these conclusions applied to graduate as well as undergraduate courses in business law.13 This general approach has now become set in the American system. The only question is how much of the traditional subject matter should be retained. Subsequent surveys and articles while supporting a concentration on environmental/regulatory subject matter have argued for a step 5

Managerial Competence in Law and the Business Law Curriculum: The Corporate Counsel Perspective, Gary A. Moore and Stephen E Gillen, The American Business Law Journal, Vol. 23/3, 1985 p. 351

6

Ibid. p. 362

7

Ibid. p. 386

8

Ibid. p. 354

9

Ibid. p. 389

10

Ibid. pp. 354-55

11

Ibid. p. 355

12

Eliminating the Disparity Between the Business Person’s Needs and What is Taught in the Basic Business Law Course, E. Klayman and K. Nesser, American Business Law Journal, vol. 22/1 Spring/1984 p. 42

13

The Business Law Curriculum: Recent Change and Current Status, Dunfee, Brennan & Decker, American Business Law Journal , vol. 18/1, Spring 1980, p. 59

.

132

Appendix 1: Recommendations for Teaching Business Law in Canada backward towards the inclusion of more of the traditional material such as agency, contracts, and corporations. The problem of how much attention to devote to contracts seems to be at the center of the present debate. In the fall 1990 volume of The Journal of Legal Studies Education, Reed14 concluded that contract law ought to be de-emphasized from its traditional standing where it dominates the content of the business law course to a role of much less significance. That same volume records a panel discussion considering the role of contracts in an introductory business law course.15 While the panelists took various positions, most agreed that contract law was important and should be included in such a course but only as one of many other important topics.

Contracts could even be looked at in some depth to illustrate how the law works but not at the expense of other important topics of the environmental/regulatory type. Certainly contract law should not receive the concentrated attention it has in the past.

Other articles argue for at least some retention of the study of contract law in business law courses. Yeargain and Tanner16 on the basis of a survey done on South Eastern Louisiana University alumni found that the respondents considered contracts an important element of the business law course and concluded that it ought to be retained as a subject. And Little and Daugherty17 observed that the business executives they surveyed reported that a basic understanding of contract and corporate law was vital and the most important topic listed. Natural environment concerns ranked second. They also pointed out that many of the newer textbooks that have been designed for “legal environment” courses have taken a step back and included at least one chapter on contract law.18 This look at contract law is important since many of the changes that occurred in the movement towards what we have characterized as “legal environment” type courses involved the de-emphasis and in many cases the complete abandonment of contracts and other similar topics.

While the retention of some examination of contract law is important, it’s de-emphasis can also be supported on the basis that contract law itself has become of lessened importance in the commercial world. K.A. Strasser stated that “the courts are no longer the primary molders of commercial policy, and perhaps not even an important factor in the making of that policy.”19 He observed that because businesses have moved away from the courts and adopted other methods of resolving conflicts between them, most contract disputes are no longer dealt with in court and are often resolved, without reference to contract law at all.

For our purposes these articles show that in the United States, the role of contracts as the dominant part of the introductory business law course can no longer be supported, but that contracts still should have a place as one of the important topics covered in such a course.

The consensus that has developed seems to be a settling somewhere between the initial reaction to the Gordon and Howell, and Pierson reports as well as the adoptions of the AACSB standards 14

King Contract Wears no Cloths, O. Lee Reed, The Journal of Legal Studies Education vol. 9 No. 1, fall 1990, pp. 31

15

The Role of Contracts in the Introductory and only Law Course that most Business Students Will Ever Take, The Journal of Legal Studies Education vol. 9 No. 1, fall 1990, pp. 1

16

Alumni Perspectives on the Business Law curriculum, Yeargain and Tanner, Ibid. p. 37

17

Survey of Virginia Corporate Executives on the role of Law in the Business Curricula, Little and Daugherty, The Journal of Legal Studies Education , Vol. 13/1, Winter/Spring 95 p. 147

18

Ibid. p. 49

19

Teaching Contracts-Present Criticism and a Modest Proposal for Reform, K.A. Strasser, Journal of Legal Education vol. 31, (1981) p 63.

.

133

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition where the traditional subject mater of business law was abandoned in favor of an environmental/regulatory issues approach, to an approach where a balance has been struck between these basic traditional topics and an examination of the environmental/regulatory issues.

This compromise seems to be supported by a survey done of chief executive officers of Fortune 500 companies. The author20 concluded as a result of his survey that “- an ideal curriculum would be composed of a judicious combination of the two approaches.”21 To further confuse this discussion I must point out that in 1991 the AACSB accrediting body has again changed their standards or guidelines.22 The new guidelines generally encourage course offerings “that reflect the visions, goals and objectives determined in view of the business constituents that a particular school serves.” And as far as business law is concerned the schools should teach “the influence of political, social, legal and regulatory environmental and technological issues.”23 This seems to be an acknowledgment that the compromise between the “environmental/ regulatory” approach and the more traditional approach reached by most business schools is appropriate. But it also allows for more flexibility in what the various business schools offer in the area of business law and so it is likely that there will be a move away from the standardization of the legal environment of business courses we have witnessed over the last decade.

For my purposes I am attracted to the approach advocated by McGuire 24 where he suggests that the subject matter covered in a business law course should be based on a framework of logic rather than reaction to outside influences. He refers to Donnell’s observation25 that there are four basic sources we can turn to in determining what should be taught: what business people think ought to be included; what other business instructors want included; what students would like to see included; and what other schools already teach. To this I would add a fifth source, the standards or guidelines set by the AACSB accrediting body. It is clear in the United States that all of these factors had an influence in moving the American business law educators towards the “Legal Environment of Business” type of courses that have been discussed above. While these influences have value as a check or test against which we can evaluate, they cannot be relied on as the source of what we should teach in business law. To rely on them as such would be to abrogate our responsibility in designing the law course. No one is in a better position to determine what should go into a business law course than the business law instructors themselves. They are the ones with the training and experience. Donnell said “I would argue that the law instructors in business schools are the experts in curriculum design in our field.”26 Curriculum must be determined not by the design of others but by the law faculty itself. Feedback from business people who are graduates may be skewed by their own experience and may only show a preference for what they know and have taken in the past. The students themselves don’t know what they need to know, and if we respond only to what other business faculty want we will be

20

Corporate Perspectives on Business Law Curricula: an Empirical Study, S. Massin, The Journal of Legal Studies Education, Vol. 8 No. 1/2 1990 p. 71

21

Ibid. p. 90

22

Survey of Virginia Corporate Executives on the Role of Law in Business Curricula, Little and Daugherty, Jr. The Journal of Legal Studies Education , Vol. 13 No. 1, Winter/Spring 1995 p. 147

23

Ibid. p. 148

24

Logic and the Law Curriculum: A Proposed Conceptual Framework for "The Legal Environment of Business", C. McGuire American Business Law Journal, Vol. 23 No. 4, Winter 1986 p. 479

25

Ibid. p. 479

26

Ibid. p. 486

.

134

Appendix 1: Recommendations for Teaching Business Law in Canada forever in a service mode. As far as copying other schools is concerned we run the danger of simply perpetuating their mistakes.

The development of curriculum is a logical and a conceptual process27 and McGuire suggests an approach be developed based on a conceptual framework. He also suggests that the idea of the legal environment of business is an appropriate framework to work from. This seems to require a concentration on the function of the business person working within the firm or business. The legal environment of that firm can be looked on as a series of relationships between: the firm and customers; the firm and creditors; the firm and employees; the firm and government; the firm and the public; the firm and investors; and the firm and suppliers. When we use this structure as a framework the topics logically follow.

Using McGuire’s approach the following structure and content would be required in an introductory business law course for use in Canada. The legal system itself must be introduced and so history, constitutional law, the charter, the court system, the legal structure and procedure should all be included. Traditional topics such as contracts, torts, agency, corporations and real property should also be included as the source of the duties and obligations found in such relationships, as should “legal/regulatory” subjects such as human rights, management relations, consumer protection, competition law, environmental law and employment standards. The traditional as well as the “legal/regulatory” topics could all be taught within the structure of those listed relationships with the firm but I think a better approach would be to divide the course into three parts. The first part would be an introduction to the legal system, the second a summary of some basic principles of law (the traditional topics of contracts, corporations, agency etc.) and the third an examination of the “legal environment of business” topics which would be dealt with by concentrating on those eight legal relationships listed. Of course there would be considerable overlap and all of the “traditional topics” would apply to these relationships as well, but I think that there would be an advantage to laying down some fundamentals first. If this three-division recommendation were adopted, the students would have the advantage of already having a basic foundation of legal principles when these relationships were discussed.

Using this three-part approach then, the firm/customer relationship could be the basis for studying acts regulating the sale of goods, product liability, advertising regulations, credit regulations, consumer protection act, trade practices act, secured transactions and human rights legislation. The firm/creditor relationship–sale of goods, secured transactions, bankruptcy, security regulations, and corporate bail-outs. The firm/suppliers relationship–sale of goods, secured transactions, bankruptcy, competition law, etc. Note that these first three relationships could be looked at together as private outside relationships. The firm employee/relationship would be the basis for looking at labour codes, employment standards, unemployment insurance, human rights and workers compensation. The firm/investor relationship–partnerships, corporations societies, and securities regulation. The firm/competitor relationship–competitor torts, competition laws, and intellectual property. The firm/government relationship–taxation, close regulations of some industries such as broadcasting, banks, public utilities, transportation and administrative law.

Finally the relationship between the firm and the public–tort liability, environmental protection, product liability, the breakdown of the rules of privity, human rights law and this generally will lead to a discussion of social responsibility and business ethics.

The following is presented as a model Canadian business law course to be taught at the college or university level. It would be divided into three parts, an introduction, common law principles or fundamentals, and the legal environment of business. Assuming 3 hours per week 27

Ibid. p. 492

.

135

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition for 14 weeks, such a 42-hour course would be divided as follows. The first ten hours would be devoted to an introduction to the legal system, the next twelve hours to fundamentals and the remaining time to the legal environment of business which would be structured around an examination of the eight business relationships discussed above and so it would seem logical that some common law areas be dealt with in this final section as well (such as methods of carrying on business and to some extent tort law).

Part 2 Thus far I have looked at “what” we should be teaching in the general business law course. The next question and the subject matter of part two of this paper relates to “how” that content ought to be taught. This question is to be answered within the context of a desire to better integrate the study of business law into the business curriculum. There is little debate today that business law is a very important subject to be dealt with in business schools. Certainly business executives rank the subject of business law as very important 28 and, if anything, teaching this subject as part of the modern business curriculum has become more important as we become a more litigious society.

“A decade of growth in the scope nature and complexity of government regulation has catapulted attorneys into the daily business operations of corporations to an unprecedented degree. The equally rapid rise in consumer shareholder employee and competitor litigation has forced prudent managers to include legal advice as an essential element of business planning and decision making.”29 John R. Allison pointed out the danger of business people not having a basic understanding of legal concepts. “Without a working knowledge of both fundamental legal concepts and the legal principles pertinent to their particular enterprise, business people run the risk of making mistakes that may have grave consequences for their personal careers and for individuals and firms that depend on their judgment.”30 He also said, “Of the various external constraints on business decision-making, law is the most pervasive. Every business entity must operate constantly within a domestic and international legal framework. Few business decisions of any consequence are without legal implications. Law is thus a vital component of professional business education, whether at the undergraduate or MBA level.”31 The importance of a course in business law is generally acknowledged, but business law instructors often find themselves cut off from the rest of the business school. One reason for this may be that most business law instructors have little or no formal business training, the appropriate degree for a law instructor being a LL.B. or LL.M rather than a graduate business degree. Also, the approach used in business law usually does not follow the common model of 28

See generally The role of Law in a business School Curriculum, J. Allison, The Journal of Legal Studies Education , Vol. 9,1991 p. 239. An executive appraisal of the importance of business law, G. Siefel III, H. Hildebrandt, E. Miller, American Business law Journal, vol. 22/2 summer/84 p. 249, Survey of Virginia Corporate Executives on the role of Law in the Business Curriculum Little and Daugherty, The Journal of Legal Studies Education , Vol. 13/1, Winter/Spring 95 p. 147

29

Managing Your Lawyers, Chayes, Greenwald, and Wing, Harvard Business Review, Jan.-Feb. 1983 p.

84.

30

The Role of law in the business School Curriculum, John R. Allison, The Journal of Legal Studies Education , Vol. 9/2, Spring 91 p. 239 at p. 242

31

Ibid. p. 239

.

136

Appendix 1: Recommendations for Teaching Business Law in Canada other business courses. Even the way cases are used in law courses is foreign to the case study method as developed for the business schools as will be discussed below. Our business colleagues generally seem content to let us go about our business so long as it does not interfere with theirs.

In short business law instructors often find themselves in a world of their own with their business school colleagues not concerned with, or particularly appreciating what they do.

Under these circumstances it is not surprising that when pressures come for downsizing, or otherwise accommodating program changes, business law is particularly vulnerable. The object then is to not only improve the teaching methodology in the course itself but in the process tie business law closer to the rest of the business curriculum; to integrate it. Siedel stated, “In a classic essay that has been reprinted in a recent catalogs describing the anniversary of the University of Chicago MBA program, Professor James Lorie argued that a University has its greatest comparative advantage in teaching basic disciplines such as ‘Mathematics, statistics, accounting, economics, law, psychology and sociology; it has least competence in teaching the current practice, techniques and language of business.’ Consequently he concluded, business school faculty representing these disciplines ‘are mathematicians, statisticians, economists, psychologists, lawyers and sociologists.’ Law is undoubtedly, as Lorie asserts a discipline that should to be taught in business schools.... The problem is that despite its centrality to American culture and business, law is too often perceived in business schools as a stand-alone discipline that has few links with other disciplines and functions. This perception is clearly wrong. ... But the question remains: How can the traditional business law image be changed? The answer ...Is to link law teaching more explicitly to other areas within the business school.”32 In looking at the American sources, one thing that seems generally agreed upon is that the too common rule-oriented approach to teaching business law is inappropriate. Rather than simply conveying rules, facts and other information the key to a successful business law course is to deal conceptually with the ideas and principles behind those rules. Peter C. Ward33 laments how often we encourage students to amass trivia, spoon-feeding information to them and neglecting to teach concepts and principles. “The result is that too much of the teaching of business law has deviated from the business of education to the force-feeding of objective information. Those students who receive high marks emulate trivial pursuit winners rather than the recipients of an educational experience that has encouraged the development of understanding.” That is not to say that the students should not be exposed to such rules and information at all. Donnell states34 that the course he would design would not be rule-oriented although there would be considerable examination of the rules “because the students need them to hold onto...” But the emphasis would be on the underlying principles and concepts. Quite often we fall into the trap of having to give the students masses of information because we have to “get through the material,” in fact we do them a disservice by submerging them in vast bodies of rules and information drowning them in the process. And they are so concerned with staying afloat that they miss the objective of the process that is to understand the concepts and principles that form the structure behind that vast body of rules and information. Donnell also pointed out that we have to be careful not to do too much.

32

Interdisciplinary Approaches to Alternative Dispute Resolution, G. Siedel The Journal of Legal Studies Education , Vol. 10, No. 2, Summer/Fall 1992, p. 163

33

Two Legal Environment Writing Exercises Following the Perry Scheme of Cognitive Development, Peter C. Ward, The Journal of Legal Studies Education Vol. 10, No. 1, Winter/Spring 1992, p. 87

34

Redesigning the Undergraduate Business Law Course, J. Donnell, The Journal of Legal Studies Education , Vol. 2 Spring 1984 p. 1

.

137

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition There is a fine line between creating a challenging course and inundating students with information that will be useless to them in the long run. “...the notion that less is more should be kept firmly in mind. ...Aim to build a solid foundation, and let the student build the superstructure in additional courses or on his or her own.” 35 The methods used to teach business law, vary between institutions. Some only use large lectures, and some just small seminars. The more common approach is to use intermediate size classes of 25–50 students or to use a combination where students are brought together in large groups for lectures and then they are split into much smaller groups for seminars. A strong argument can be made for the abandonment of the lecture format, where the instructor talks and the students write, in favor of smaller class sizes where more student involvement can take place.

Unfortunately in this time of constraint and cutback, it is very unlikely that such an expensive reform would be adopted. Still the lecture format does have some advantages if a degree of flexibility is adopted.

In determining whether the lecture format should be used, we must first look at what we are teaching. If the objective is to convey information, even principles and concepts, then the lecture method, with some modification, may be used effectively. If a skill is to be taught, then a participatory method such as the case study method, simulations, presentations or other types of student involvement where the student takes the initiative in the learning process would be much better and smaller classes are required.36 In business law what we are being asked to do falls somewhere in between. There is a considerable amount of information that we are expected to convey to our students. We expect them at the end of a business law course to know to some extent what the rules are that govern their conduct in the business world and hopefully to understand some of the whys and wherefores behind those rules. But we also like to think that we are helping our students to gain the skill of being able to grapple and deal with or to manage legal problems. We usually say that we want our students to at least gain an insight into how lawyers think, and why they think the way they do. We strive to equip our students to identify issues and problems and to learn how to work with those problems and some would argue to find solutions37 for them.

We are in the business of conveying skills and techniques to our students, but we are also in the business of teaching a considerable amount of information in the form of rules, concepts and principles. It may be that the retention of the lecture format can be justified even if it is not the ideal, but there is no question that we should do all we can to make these lectures a better experience for the students. Emerson in commenting on lecturing to large classes said.

“Classroom presentations require the professor to reach the students in ways far beyond simple lecturing—that is, the class should be about much more than simply “covering” a body of material. Classes can sparkle, with audio and visual tools, as the instructor puts a human face on as many rules, doctrines, and principles as possible”38

35

Ibid. p. 17

36

Introduction to Case Method Teaching, a Guide to the Galaxy, Selma Wassermann, Teachers College Press, New York, 1994 p. 13

37

Survey of Virginia Corporate Executives on the role of Law in the Business Curriculum, Little and Daugherty, The Journal of Legal Studies Education , Vol. 13/1, Winter/Spring 95 p. 147

38

The Professor as Performer: Teaching Legal Studies Megasections, R. Emerson The Journal of Legal Studies Education Vol. 12, No. 2, Summer/Fall 1994, p. 261

.

138

Appendix 1: Recommendations for Teaching Business Law in Canada Solberg, said “Dullness in teaching should be looked at for what it is and for its effect before it is defended. There is something awful, sinful in the extreme, in inflicting one’s dull self upon another for an extended period of time from which the other has little chance to escape... No ordinary citizen is permitted to hold another in bondage for even 50 minutes a day, subjecting such person to physical assault and extracting a fee for the privilege.”39 If we are going to lecture we must make sure that we do a good job of it. We must not bore our students. Solberg’s article is intended to encourage lecturers to spice up their lectures with newspaper accounts, humor and the like and to tie the materials being taught to practical situations to which the students can relate.

There are many ways that we can make these lectures more interesting for the students and more effective as a teaching tool. Problems or case studies, even war stories can be used as the basis of the lecture discussion. Flowcharting of legal relationships has been suggested as a method of making the presentation of those relationships clearer and more interesting and this too can be used to spice up a lecture format.40 MacDonald41 discusses the use of the Socratic method commonly used in law lectures. When the case study method was introduced and captivated legal studies in North America, the Socratic method (as adopted for those law schools) was thought to be a necessary adjunct to that case study method and became inseparably associated with it. Together they made large lectures possible and made law schools economically viable. The adoption of the Socratic method was justified because for law students it was necessary that, “The student judge all material for himself, scrutinize instances closely, accept no other man’s judgment until he had judged its logic for himself...”42 This follows a process of inductive reasoning whereby through a series of pre-planned questions the student is lead, to a conclusion, from the particular to the general.

Although this involves student participation it can still be used in large classes. But this involves singling students out, requiring observations and conclusions from the student and then often demolishing the student’s contribution. This can be a very intimidating process.

The “Socratic” method of dialogue is found extensively not only in law schools but in business law courses as well. Those of us who have been trained in law have likely been exposed to the “Socratic” method in first year law and many of us have adopted this as a teaching style.

Even the proponents and defenders of the Socratic method have to admit some drawbacks “That the Socratic method can be forceful, scathing, and aggressive is obvious.”43 “Lawteach”44 is a British development of the Socratic method that involves a modification of the legal case study method. The students after being given common source materials are, through a series of pre-planned questions, taken to ever increasing levels of conceptual sophistication by being forced to deal with hypotheticals based on those initial readings. The object here is to help the students deal with the concepts and principles behind the rules rather than rote memorization.

39

The Use of Newspaper Articles to Enhance the Legal Environment Lecture, J.Solberg The Journal of Legal Studies Education Vol. 11/2 summer/fall, 1993 p. 273

40

Flow charting, an alternative approach to business law, T. Fogarty, The Journal of Legal Studies Education, Volume 4 Spring 1986, p. 64

41

The Socratic Method and the Teaching of Law and Virtue, J. MacDonald, The Journal of Legal Studies Education, Vol. 7 No. 1/2, Fall 1988/Spring 1989. p. 19

42

Landell as quoted in Stone’s Legal Education on the Couch, Harvard Law Review, Vol. 85 1971 p. 392 at p. 406 .

43

Ibid. p. 408 .

44

Lawteach: A British Approach to the Case Method D.Tribe, A. Tribe, The Journal of Legal Studies Education, Vol. 7 No. 1/2, Fall 1988/Spring 1989. p. 19

.

139

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition The object is to educate rather than simply convey information. Even the introduction of the case study method in law schools was intended to overcome the limitations of the traditional lecture format and involve the student more in the problem identification and solving process rather than being “passive recipients of teacher made solutions.”45 Such a structured interchange of question and answer with the students even in a large lecture can be electrifying, and it should be possible to accomplish this without the negative aspects of intimidation and aggression associated with the Socratic method.

Smaller classes or seminars are ideal to develop the skill development objectives of business law courses. The key to getting the most out of these seminars is to have the students teach themselves. This involves student participation in the educational process, not passivity. In these circumstances the more successful instructor would be the one least heard from in the classes.

This does not mean that the instructor abrogates his/her responsibility for directing and controlling the class, rather he/she functions more like a shepherd, a much more difficult and demanding role to do successfully.

There are several different ways that student participation can be structured into the business law course. Student involvement through simulation can be achieved by students role-playing as clients or other parties in the process of a law suit and through mock trials, moot appeals, and games. Arthur Schaefer recommended a modified “mock trial” approach as an alternative to the lecture or case study approaches normally used in business law courses. “The mock trial is an attempt to provide the students with an opportunity to apply their newly acquired skills in a “real life” situation requiring the preparation of legal papers and presentation of arguments before a group of legal experts.” He goes on to caution that because of the time constraints on business students and their limited exposure to legal concepts “... the undergraduate mock trial will normally not be as sophisticated and will not attempt to fully mirror an actual trial.”46 In an article advocating the transformation of the business law curriculum, Elaine Ingulli47 advocates role playing as an effective method of making students and faculty alike more sensitive to minority and gender issues. She suggests that the participant can be asked to role-play an interview situation where the other parties usually playing dominant roles are asked to behave in a harassing or discriminatory way or they might be asked to role play testifying before a parliamentary committee or in a royal commission or inquiry.

Lawton and Oswald48 give several examples and comment on the value of simulations “... a well-constructed simulation can illustrate to the student the interrelationships of legal rules and practical constraints imposed upon lawyers in resolving business disputes far better than any lecture or textbook reading can do.” They go on to give this caution which applies not only to the use of simulations but should be a guide for all we try to do in a business law class. “In using trialtype hearings however, business law faculty need to keep in mind that the goal of business law courses is to teach the law to business students, not law students. Business students should not be 45

The Socratic Method and the Teaching of Law and Virtue, J. MacDonald, The Journal of Legal Studies Education, Vol. 7 No. 1/2, Fall 1988/Spring 1989. p. 37

46

Mock trials: A Valuable Teaching Tool, A. Schaefer, The Journal of Legal Studies Education, Vol. 8 No. 1/2, Fall 1989/Spring 1990 p. 199

47

Transforming the Curriculum: What does the Pedagogy of Inclusion Mean for Business Law; , E. Ingulli The American Business Law Journal, Val. 28/4, Winter 1991, p. 605

48

The Use of Simulated Hearings in Business Law Courses, A. Lawton and L. Oswald The Journal of Legal Studies Education, Volume 11/1, Winter/Spring 1993, p. 103

.

140

Appendix 1: Recommendations for Teaching Business Law in Canada trained to be mini-lawyers, but to be informed and aware business managers, capable of providing direction to the attorneys they hire and to understand and evaluate the legal advice they receive.”49 Instead of trials and hearings, Shrage advocates the use of simulations that involve students in the parts of the process of a law suit that they as managers would most likely be exposed to–the beginning stages, concentrating on the discovery. He said, “Evidence indicates that students understand and retain more when they have an opportunity to investigate facts, ask questions and then apply principles to those facts. A recent study conducted by the Harvard Graduate School of Education and Kennedy School of Government found that college students do their best when some of their study is done in small groups and where courses include frequent opportunities for regular assignments. [R. Light, The Harvard Assessment Seminars (1990).] If business law faculty can supplement traditional teaching methodology with a simulation that provides students with an opportunity to take a more active role in the learning process, business law courses will be more successful and more useful, and will provide an opportunity to achieve the broader objective of improving students basic oral, written and analytical skills.”50 Another method of generating student involvement is through the assignment of team reports or group projects which require the students to work together. The students may be given a fact pattern or problem where they are required to write a short paper supporting one side or the other, or the students could be assigned opposing sides of an important issue or controversial proposition, give an oral presentation and defend their positions before the other students who will be invited to criticize and ask questions. After the oral presentation an informal debate could take place. This approach has the advantage of requiring the students to work together as a participant in the group, generating a group mark but also retains an element of competition where that group must present and defend their position. Often such group activity generates passionate involvement on the part of the students and creates an exciting learning environment.51 Brenda Knowles52 assigned a research paper to her senior students requiring them to “... look at a particular industry, usually one that the student had some experience with, describe that industry; show past and present governmental regulation activities; and forecast based on past trends whether governmental regulatory efforts would be accelerated or curtailed in the future.”

Even in such an individual effort as a research paper, the teacher had the students involved as a “resource persons” for their industry, reporting to the class on ongoing developments as reported in various media sources, giving updates as appropriate. As an alternative, a student could be required to “teach” the class the subject mater of the assignment. Students usually put considerable effort into such presentations and in the process gain an insight that otherwise might be missed. As a final part of the assignment the students were required to create their own three page case study which “...used the actual factual setting based on the students’ chosen industry as a mechanism for integrating as many antitrust and government regulation issues as possible into the respective situations.”53

49

Ibid. p. 104.

50

A Business Law Simulation: Principles, Process and Basic Skills, H. M. Shrage, The Journal of Legal Studies Education. Vol. 9, No. 3, Fall 1991, p. 413 at p. 415.

51

The Use of Student Projects in Business Law Courses. P. Ward, The Journal of Legal Studies Education. Vol. 10, No. 1, Winter/Spring 1992, pp. 71 at p. 72.

52

Research Assignments and Case Studies as Teaching/Learning Devices in a Governmental regulation course, B. Knowles, The Journal of Legal Studies Education , Vol. 4, Spring 1986, p. 78

53

Ibid. p. 83

.

141

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition Such case studies have proven to be an extremely effective method of involving students in the learning process in business schools and other subject areas and are very flexible in their usefulness. “A case may be used to supplement class instruction or as an independent study problem covering areas of law that receive little or no classroom treatment. Cases may be the basis of class discussions, small group discussions, written projects, or team presentations.”54 I feel that the adoption of the case study method would have a great positive impact on the business law curriculum and if adopted this single modification would go a long way to improve how business law courses are taught. This idea is not new. The former dean of the Harvard Law School, Griswald, recommended that the Harvard Business School developed case study method be adopted by the law school in 1956. He thought that by so doing the law students would then be exposed to the important non-legal factors (physiological, human relations skills, etc.) that have such an important role to play in dealing with legal problems,55 Although his recommendation was not acted upon by the law schools, it does have great merit especially for the business law curriculum where the object is not to teach lawyers but to develop the skills of management.

The case study method as recommended here must be carefully distinguished from the cases as used in law school and in business law courses in business faculties. Legal case studies have been a tradition in law schools since this method of teaching law was introduced at the turn of the century. Probably because of the legal training of those teaching business law, the same general approach has been and is now used in the teaching of business law at most Canadian and American business schools.

A somewhat similar case study method has become the standard used in most business faculties at the university and college level in both Canada and the US. There are, however, important differences in how the two methods of studying cases are used.

In the law schools the cases used are the actual reported decisions of judges which are published and made available to the legal community primarily to determine the law. Students are encouraged to learn the law by analyzing these cases. The process involves reviewing the judge’s summary of the facts, identifying the issue or legal problem the judge has to decide, noting the decision and analyzing the judge’s reasons for that decision. All factors not necessary for the judge to reach a decision in law are considered irrelevant and if they have not been eliminated in the judge’s summary, must be eliminated by the student as they summarize the relevant facts of the case. In effect, what the student is given is a sanitized version of what happened with only those elements remaining that are important from a legal point of view to the lawyers and judges who are trying the case. There is only one right answer, that of the judge, and the purpose of studying the case is to learn the legal principle involved by examining what the judge decided and why. In the law schools the students may go on to criticize the decision itself in light of other cases but the focus is on understanding the legal principles involved. “Law cases focus on a particular problem and the legal principles involved in the dispute. These cases provide the outcome and rules used to reach a particular holding. Students are asked to analyze the rules used and to explain why these rules were applied in the situation.”56 54

Turning War Stories into Case Studies, Diane B. MacDonald, The Journal of Legal Studies Education , Vol. 9, No. 3, Fall 1991, p. 437 at p. 439

55

Law schools and Human Relations referred to in Stone’s Legal Education on the Couch Harvard Law Review. 1985 p. 392 at p. 428

56

The Application of Case Method teaching to Graduate Business Law Courses D. Dobray and D. Steinman, The Journal of Legal Studies Education , Vol. 11, No. 1, Sinter/Spring 1993, p. 81

.

142

Appendix 1: Recommendations for Teaching Business Law in Canada The business school approach to the case study method, however, involves important differences. In business schools cases are used to create problem solving simulations. The student applies information and principles learned in the program and in the process gains hand-on experience and decision making skills in a lifelike business situation. The cases used are usually, although not necessarily, based on some actual occurrence or experience of the author. “Business cases...do not have guidelines controlling the outcomes of the cases. The business case is usually open ended, allowing for a different type of student analysis and problem solving... Business cases enlist students as decision makers, not decision followers.”57 Serious limitations to the use of the legal case study method have been identified even as used in the law schools. “First, there is no well defined or elaborated technique for case review.

Analysis proceeds through repetitions of case briefs (facts, issues, ratio decidendi, reasons for judgment, holding and, possibly critiques) or on the basis of more or less idiosyncratically directed teacher-led discussions. Students must await the instructor’s lead without knowing how to prepare for it. Further, cases are often narrow reconstructions of actual happenings, denuded of the realities of their backgrounds in fact and the processes and events which gave rise to the court’s judgment. Case study is limited to inquiries based on the court’s selection of relevant information and its processing.” 58 It may well be that the law students who read these actual judges decisions are effectively introduced to the workings of the law and legal system. But in business law we are teaching potential managers and entrepreneurs about the law who must look at the law as only one of the factors to be considered in any decision making situation. When we use the legal case study approach in our classes, we do our students a disservice in two ways. First we don’t teach them how to deal with legal problems in a business like way where the legal implications must be factored into the process along with economic, political, ethical and other factors. Secondly, the cases we assign have all of these nonlegal factors eliminated from the deliberation and if they haven’t, we take pains to teach the student how to eliminate these extraneous or irrelevant factors.

Our students are training to be managers and must take into consideration the business variables that they will face in dealing with all such legal problems.

Case teaching has become the leading method of teaching in graduate business schools because it helps students acquire cognitive skills, enhances managerial abilities, and gives students practice in decision making by simulating managerial predicaments. The case method is generally praised as being able to simulate learning more than teaching through lectures. It is designed to develop competence in identifying opportunities, defining problems, gathering and interpreting relevant data, formulating strategies, and making and implementing decisions.

Case study requires students to learn by discovery through the interpretation of information and interchange. Students sharpen their analytical abilities through skillful probing and incisive thinking practiced extensively and continually over several semesters. Thus, they develop a broader conceptualization of problems by comparing and contrasting different situations and approaches. Students must define the problem(s) considering the relevant information, identify alternatives, and implement a plan for effectuating the best alternative, always remaining cognizant of the ramifications that necessarily flow from this decision tree.

In such a way, the case study method approach to learning attempts to prepare students for tough “real world” decision making in a macro environment.59 57

Ibid. p. 82

58

Problem Based Learning: an Alternative Approach to Legal Education S. Kurtz et al. Dalhosie Law Journal, Vol 13, 1990, p.797, at p. 802

59

Ibid. p. 84

.

143

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition We would do better to adapt the business school approach to case studies for use in business law courses. Students would approach the cases with the idea that the legal component is only one of the factors to be considered in the problem solving process. The emphasis would be on developing problem solving skills when faced with legal problems in the business place. “A case study approach remedies what may be called the context problem: putting law into perspective in the business world context. Such a case law approach involves not the traditional court case of law school but the type of problem solving case study used in other business disciplines...

Structuring a law class using a case study framework forces students to take a broader and more complete approach to incorporating legal issues into the decision making process.”60 This shift in approach also provides a better vehicle for teaching risk avoidance strategies where a considerable amount of discussion could be directed to an examination of just what steps should have been taken to avoid the problem arising in the first place. “The best cases are those where the “right answer” is not a single answer but one of several acceptable alternatives. Discussion should focus on the consequences that flow from each choice including the legal and business risks and how those risks may be minimized, if not eliminated”61 Another advantage of adopting the case method would be to retain a cohesiveness with the rest of the business school. “In order to maintain pedagogical uniformity in business schools, it is important for business law professors to understand the case method of teaching and how it can be applied to business law. If cases were at least partially employed to teach business law, faculty colleagues in business schools would understand the required instruction in this field more clearly, and also would accept the significance, legitimacy, and utility of a business law course.”62 In all of these situations whether group projects and presentations, simulations, mock trials or cases are involved, the students are in a collaborative or cooperative learning situation.63 They are teaching each other as they work together in teams, as they give their presentations, as they debate with each other, as they ask and answer questions and as they criticize. The role the instructor once the assignments have been made is to prod or judiciously encourage; to subtly direct and control the flow.

Whatever the specific technique adopted, it is clear that such student centered learning is the most effective way to develop the skills desired; to develop in the student the technique of identifying and solving problems and otherwise generally managing the legal disputes they will encounter in business.

One of the great advantages of adopting the case study method as recommended is that it allows a shift away from a concentration on the legal rules and concepts themselves to an emphasis on the examination of those legal concepts as part of a larger management process. This contributes to the 60

Turning War Stories into Case Studies, Diane B. MacDonald, The Journal of Legal Studies Education, Vol. 9, No. 3, Fall 1991, p. 437 at p. 439

61

Ibid. p. 440

62

Ibid. p. 81

63

Student learning may be individualistic, competitive or cooperative. “students in cooperative classrooms discuss, teach and encourage each other; teachers typically monitor their progress and teach collaborative skills” The role of the teacher determines whether the activity is collaborative learning or cooperative learning. "In cooperative learning the teacher works from within the student group as one of its members" ....whereas ".....in collaborative learning the teacher sets the task and then stands aside allowing the students to teach each other, intervening only as necessary." Collaborative Learning and the Study of the Legal Environment, G. Spiro, The Journal of Legal Studies Education, Vol. 10 no. 1, Winter/spring 1992 p. 56

.

144

Appendix 1: Recommendations for Teaching Business Law in Canada very important purpose of rationalizing and integrating the study of law into the general curriculum of the business school. Just as the students are required to know the political, social and economic factors that may affect a business decision, they would also be required to know and consider the legal factors that may affect that decision. And so the general goal of the business law course to teach legal principles in a broader management context is realized. The choice and design of the case assigned will help determine how much emphasis is placed on the law. But it will be up to the instructor to create an atmosphere where gaining managerial skills is emphasized and the learning of the legal principles is but a part of this broader objective.

As discussed above, a major problem experienced in most business schools is the general isolation of the business law course and law instructors.64 Consideration then, must be given to better integrating law into the business school curriculum. The use of case studies as advocated above will go some distance in accomplishing this goal, but there are other factors that can also be considered. In the business law course, we have a tendency to concentrate on failures where the parties have failed to resolve their conflict and the matter has gone to court. Perhaps we would do better to use examples of how to create a successful contract or simulate successful negotiations leading to a satisfactory resolution of a mater in dispute.

Most think of the legal problems as an exercise in confrontation. In fact it has been estimated that “fewer than 10% of all docketed cases are concluded by judicial decision.”65 In fact these disputes are typically settled through a process of negotiation between the parties often with the assistance of lawyers. As our society becomes more litigious, managers spend more of their time dealing with conflict and in negotiations. “Studies show that managers spend 20% to 25% of their time managing conflict.”66 One of the things we can do in business law courses is to concentrate more on dispute resolution and negotiation. Specifically we could give more emphasis to alternate dispute resolution (ADR) and look at mediation and arbitration in more depth.

Since a great deal of the management function is dealing with conflict, negotiating, entering into new deals or supervising proper performance of existing arrangements both internally and externally, the revamped business law course as set out above could be treated more like another capstone business course, where all of the skills learned in the business curriculum could be brought to bear. For this to work, however, we must relate the specific legal topics we cover clearly to other business school disciplines. For convenience we set out our course based on legal topics such as offer and acceptance or negotiable instruments. These don’t relate to other business subjects that the students have been exposed to. We hope that the students will be able to relate what they learn from us to their business activities on their own. When we look at offer and acceptance as a topic in contract law we might do better to look at an order form, a tender for bids, a letter of intent or the interim agreement in a real estate transaction and structure an examination of the rules and concepts associated with the creation of a contract around an examination of those documents. When we teach remedies for breach of contract we might do better to tie it in with economics looking at concepts of value. An examination of a contract of employment might serve well as a vehicle for a discussion of illegal terms, misrepresentation, mistake and the like. When we look at professional liability we can use accounting examples. Our examination of the Trade Practices Act and the Consumer Protection Act should be tied closely to marketing.

64

Interdisciplinary approaches to Alternative Dispute Resolution, G. Siedel, The Journal of Legal Studies Education , Vol. 10, No. 2, Summer/Fall 1992, p. 163.

65

Negotiation: an Idea Whose time Has Come, Rominger, The Journal of Legal Studies Education, Vol. 13 No. 1, Winter/Spring 1995 p. 101 at p. 102

66

Ibid. p. 102

.

145

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition Where possible we should give more consideration to those we are teaching. The business law course could be taught more successfully by tying it to the majors of the students. Where possible students could be assigned to sections on the basis of their majors. Thus marketing students would be given a business law course slanted towards marketing. Accounting students would receive a course designed to fulfill their specific needs. Where this is not possible cases should be assigned that relate to the area of specialization or writing and project assignments should be made where the students are required to choose from topics relating to their major area.

In business law now, at best, we concentrate on teaching legal rules, concepts and principles so that we can predict what will happen if the matter goes to court. We would do better to look at “dispute prevention, dispute resolution and dispute management.”67 Predicting judge’s decisions is only one small aspect of this much broader approach to business law. In doing this, however, we have to be careful to remember that the subject is business law and that we are not teaching the business policy course which is better left to others more skilled in that area. But we must at least show students “...how various legal concepts are needed for the furthering of various business strategies, the resolution of business problems and the making of business decisions in ways calculated to minimize legal and regulatory exposure.”68 A great area of contribution for the lawyers may be outside of the traditional business law course. The relationship between law and economics has long been appreciated in both disciplines and there are several journals devoted to the topic.69 The input of lawyers may be valuable in institutions where economic issues courses are taught. The involvement of a lawyer where these issues overlap into the legal area could be very productive. Capstone courses where many business subjects are brought together in an interdisciplinary way are another area where the involvement of a lawyer may be helpful. In some areas where a full blown business law course could not be justified, the model of the economics issues courses could be followed and a legal issues course created concentrating on legal issues related to the program discipline. This could be done in not only business areas, but other disciplines such as computers, forestry, mining, nursing, electronics and engineering.

Discussion There are many different opinions as to what a legal environment of business course should look like but most agree that a balance must be struck between an introduction to the legal system, common law subjects and statute/regulatory topics. In most Canadian business law courses, this requires more of an emphasis on competition law, intellectual property, secured transactions, bankruptcy and regulated industries. Also in the field of torts, more emphasis should be put on product liability and professional malpractice. It is strongly recommended that this statute/ regulatory section of the course be structured around an examination of the relationships between the firm and the various parties the firm deals with as outlined above.

A more significant recommendation would be the move away from a rule-oriented information type of course to an emphasis more on principles and concepts. Where lectures are used, it is recommended that all effort should be expended to liven up these lectures as much as 67

Interdisciplinary Approaches to Alternate Dispute Resolution, G. Siedel, The Journal of Legal Studies Education, Vol. 10, No. 2, Summer/Fall 1992, p.141 at p. 144

68

Putting Business into Business Law: The Integration of Law and Business Strategy, R. Petty and R. Mandel, The Journal of Legal Studies Education, Vol. 10, No. 2, Summer/Fall, 1992, p. 205, at p. 206

69

Economic Analysis of Legal disputes and their Resolution, Cooter & Rubinfeld, Vol. 27, Journal of Economic Literature, 1987 p. 1067

.

146

Appendix 1: Recommendations for Teaching Business Law in Canada possible. In all classes, however, the recommendation is for a movement toward more student participation in classes where the students themselves are responsible for their own learning. This may be done through mock trials, simulations, group writing assignments or other projects involving presentations, but it is strongly recommended that the business case method be adopted in these seminars. In addition to greater student participation, this approach could be used to place an emphasis on the business management aspect of dealing with legal problems. One of the key recommendations of this paper is to integrate business law courses more with the general business curriculum. The approach to business case studies as recommended above serves this purpose, providing students with the skills to manage the legal problems faced by their businesses. Finally it is recommended that the lawyers become more involved with the non-legal aspects of business education. The legal faculty should find themselves joining with their colleagues teaching human relations, economics, finance etc. as those instructors deal with topics having legal implications.

They should also make themselves available to play a more significant role in dealing with the legal issues that arise in the capstone business policy course.

There follows a series of appendices where materials are presented that have been collected that may be helpful in attaining these goals. Note as well that many of the footnoted articles referred to in this article are not repeated below and they too can be of great assistance to business law instructors

From The Journal of Legal Studies Education The following are presented as resource materials for use in a business law course. They are divided into categories with an explanation of their use. While they are designed for American schools, most can be easily modified for use in a Canadian business law course.

Cases 1. The Accountant Liability Seminar: A Joint Venture, A. Massa and G. Seaquist, The Journal of Legal Studies Education, Vol. 7, 1/2, Fall 1988/Spring 1989, p. 85.

The authors distributed a survey to determine the students understanding of several hypothetical situations dealings with the liability of accountants. The results showed how much the students didn’t know and this was used to stimulate the students need for, and commitment to the course.

2. The Application of Case Method Teaching to Graduate Business Law courses, D. Dobray and D. Steinman. The Journal of Legal Studies Education, Vol. 11, 1/2, Winter/Spring 1993, p.

81.

The authors advocate the adoption of the business case study method to the teaching of business law courses. Several sample cases are provided in the Appendix.

3. In Defense of the Legal Case Method and the Use of Integrative Multi-Issue Cases in Graduate Business Law Courses. J. Leibman, The Journal of Legal Studies Education, Vol. 12, 2, Summer/Fall 1994, p. 171 The author argues against the adoption of the business case method in business courses and instead argues in favor of the use of the traditional legal case approach. The Appendix provides samples of how such cases can be effectively used.

.

147

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 4. Turning War Stories into Case Studies, D. MacDonald, The Journal of Legal Studies Education, Vol. 9, 3, Fall 1991, p. 80 The author advocates the use of the business case study method and advocates that law instructors create such cases based on their own experiences. A sample case is presented in the Appendix.

Mock Trials 5. Mock Trials: A Valuable Teaching Tool. H. Schaefer, The Journal of Legal Studies Education, Vol. 8, 1/2, Fall 1989/Spring 1990, p. 199 The author advocates the use of simulations in the form of mock trials as an effective teaching tool. Materials are included to do such a mock trial 6.

Mock Jury Trial: A Model for Business Law 1 Courses. C. Miller. The Journal of Legal Studies Education, Vol. 6, 1, Fall 1987, p. 91 This is an example of a successful mock trial simulation used by the author in her classes.

Needed materials are included.

Simulations 7.

Morrow v. Johnson: Fact or Fiction, S. Vance, The Journal of Legal Studies Education, Vol. 2, Spring 1984, p. 57 A trial simulation was established by the author based on an actual case. The students didn’t know the outcome. The materials given to the students are included.

8. Bridging the Gap: Using Contract Simulations as an experiential Teaching Method. L. Jones, The Journal of Legal Studies Education, Vol. 6, 1, Fall 1987, p. 71 The author advocates learning by experience and has created a simulation that involves the students in contract making situations. Information and materials needed are reproduced in the article.

9. The Use of Simulated Hearings in Business Law Courses., A. Lawton and L. Oswald, The Journal of Legal Studies Education, Vol. 11, 1, Winter/Spring 1993, p. 103 The authors advocate a modified hearing simulation rather than the simulations of a real trial for the students. The materials and instructions for holding such a simulation are provided.

Groups 10. Comparative Learning groups in Undergraduate and Graduate Contexts, R. Adler and E. Neal, The Journal of Legal Studies Education, Vol. 9, 3, fall 1991, p. 427 The authors advocate promoting student involvement through cooperative learning group exercises as an alternative method of classroom interaction in business law courses. Several problems used as the basis for such exercises are presented as examples in the Appendix.

.

148

Appendix 1: Recommendations for Teaching Business Law in Canada 11. Utilizing the Team Report in a Business Law Curriculum. F. Powell, The Journal of Legal Studies Education, Vol. 11, 1, Winter/Spring 1993, p. 127 The author advocates the use of team cooperative learning by creating student teams and assigning them problems requiring a report to be presented to the class by the team. Several problems are reproduced in the Appendix that were used in the class.

12. Integrating Contract and Property fundamentals with Negotiations Skills: a Teaching Methodology. M. Barken. The Journal of Legal Studies Education, Vol. 9, 1, Fall 1991, p. 73 The author provided students with an assignment to be done out of class requiring them to work together and negotiate a purchase agreement for residential real estate. In the appendix materials to be given to the students are reproduced. This includes information about the assignment to be given to both sides, then separate information is given to the seller and the buyer.

13. Collaborative Learning and the Study of the Legal Environment. G. Spiro, The Journal of Legal Studies Education, Vol. 10, 1, Winter/Spring 1992, p. 54.

The author discusses the advantages of collaborative and cooperative leaning environments in our business law courses advocating that structured team learning situations be created in the classroom. Materials are provided in the appendices to support this process.

Assignments 14. The Use of Student Projects in Business Law Courses, F. Franke The Journal of Legal Studies Education, Vol. 10, 1, Winter/Spring 1992, p. 71.

As a method to generate student involvement based on their experience, projects involving Materials used in the process are reproduced, including the propositions used in the debates in the body of the article and project suggestions used in the undergraduate course in the appendix.

15. The Jungle: Insights into the Origins and Objectives of Regulatory Process. J. Dyer, The Journal of Legal Studies Education, Vol. 9, 3, Fall 1991, p. 461.

The author assigns the Upton Sinclair Novel, The Jungle as a method of generating a more positive attitude towards government regulation on the part of students. The specific assignment given is set out in the appendix and requires a book report from the students.

16. Research Assignments and Case Studies as Teaching/Learning Devices in a Governmental Regulation course. B. Knowles, The Journal of Legal Studies Education, Vol. 4, Spring 1986, p. 78 The decision making and critical reasoning skills of the students are enhanced by the authors assignment of creating their own case studies. The specific assignment is reproduced in the appendix.

.

149

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 17. Practical Understanding of Legal Concepts, C. Miller, The Journal of Legal Studies Education, Vol. 1, Spring 1983, p. 50 The author has developed specific outside research assignments that are designed to promote a “practical understanding of our legal process and how legal concepts interrelate.” This was done through the assignment of individual fact situations for student response. The specific assignments are set out in the body of the article.

18. Interdisciplinary approaches to Alternate Dispute Resolution, G. Siedel, The Journal of Legal Studies Education, Vol. 10, 2, Summer/Fall 1992, p. 141.

The author advocates the promotion of more interdisciplinary work between the lawyers and other business faculty. Specific methods for doing this in the field of Alternate Dispute Resolution are provided in the form of student assignments in the appendices.

19. Two legal environment Writing Exercises Following the Perry Scheme of Cognitive Development, P. Ward, The Journal of Legal Studies Education, Vol. 10, 1, Winter/Spring 1992, p. 87.

The author advocates the need to develop students’ cognitive abilities. This should be done through writing assignments that conform to Perry’s Scheme and concentrate on the development of the thought processes. The specific assignments given are reproduced in the appendices

Other 20. An Alternative to the Traditional Objective and Essay Examination Formats in Business Law. G. Cameron III and C. Schipani, The Journal of Legal Studies Education, Vol. 9, 1, Fall 1990, p. 106.

The author recommends the use of open ended short answer essay exam questions requiring very specific responses that are relatively easy to mark. Examples of such questions are reproduced in the body of the article and the appendix.

21. Putting Business into the Business Law: the integration of Law and Business Strategy, K. Petty and R. Mandel. The Journal of Legal Studies Education, Vol. 10, 2, Winter/ Spring 1992, p. 205.

The author advocates the better integration of the business law course into the business curriculum through organizing the course around business topics and transactions and the use of business readings and cases. A sample syllabus as well as a number of business cases involving legal issues from the Harvard case series are listed the appendices.

22. Post-Examination Review: Competition that creates concentration! C. Stowe, The Journal of Legal Studies Education, Vol. 2, Spring 1984, p. 47.

Before returning exams, the author advocates a better post examination review by having students, redo the exam in groups, offering rewards for the best group results.

.

150

Appendix 1: Recommendations for Teaching Business Law in Canada 23. The Contractor’s Contract: A Tool for Developing Critical Thinking Skills. M. Nixon and E. Brayton. The Journal of Legal Studies Education, Vol. 12, 2, Summer/Fall 1994, p. 219.

The author advocates the development of a students higher level thinking skills through the use of a problem situation involving contract law where the students are asked to apply what they have learned to a real life situation of the building of a house. The appendices reproduce specific material used in the writing assignment.

24. The Professor as Performer: Teaching Legal Studies Mega Sections. E. Emerson The Journal of Legal Studies Education, Vol. 12, 2, Summer/Fall 1994, p. 261, The author makes several suggestions on how to liven up and enhance the quality of teaching where large classes are involved. Some specific tools are set out in the appendices.

Other Resource Materials Note that Appendix 4 of Solving the Mystery of Legal Research: A Legal Research Exercise,

by C. Haselden found in The Journal of Legal Studies Education, Vol. 9, 3, Fall 1991, p. 452 at p. 460 lists the following resource materials related to games, their use and their creation.

The Educational Effectiveness of Simulation Games: A Synthesis of Findings. M. E. Bredemeir and C. S. Greenblat, 12 Simulation and Games pp 307-332 (1981) Building Instructional games. D. E. Hitchcock, 25 Training pp. 33-39 (March 1988) The Holmesian Paradigm of Problem Solving. R. L. Kellog, 1. Lifelong Learning PP. 4-7 (March 1978) Playful Gaming. A. Makedon, 15 Simulation and Games, PP. 25-64 (1984) Writing for Fun: Creating a Mystery Game. L. Melin. Writer’s Digest PP. 37-39 Human Communication Handbook: Simulations and Games. Vol. 2 (1978) B. D. Ruben Human Communication Handbook: Simulations and Games. Vol. 1 (1975) B. D. Ruben and R. W. Budd.

The following articles are from the Journal of Legal Education although this publication is intended for instruction at law schools many of the ideas and suggestions are directly applicable to the teaching of law to business students.

Developing Legal Problem-Solving Skills, S. Nathanson, Journal of Legal Education, vol. 43, 1993, p.215, In this article the author gives a methodology to teach law students problem solving skills.

Since this is also vital in business law, many of the recommendations given are directly applicable to business law classes All I Ever Needed to Know About Teaching Law School I Learned in Teaching Kindergarten: Introducing Games Techniques into the Law Classroom, J. Rosato, Journal of Legal Education vol. 45, 1995, p.568.

.

151

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition The author’s recommendations here on the use of games to teach law are just as applicable to a business law course as law school courses.

Joining Hands and Smarts: Teaching Manual Legal Research Through Collaborative Learning Groups, T. M. McDonnell. Journal of Legal Education vol. 40, 1990, p.363 The author discusses his positive experience using collaborative learning groups.

The Role of Legal Problem Solving in Legal Education. S. Nathanson, Journal of Legal Education vol. 39, 1989, p.167.

The author adapts the problem solving approach so successful in other disciplines to the study of law.

Fun and Games in the First Year Contracts by Role-play, K. Hegland, Journal of Legal Education vol. 31, 1981, p.534.

In this article the author advocates that the students role-play a conflict in a contractual relationship (dispute) from the point of view of the participants (among others).

Skills Training in the Torts Course, J.W. Little, Journal of Legal Education vol. 31, 1981, p. 614.

The author advocates the use of role playing and simulation techniques to teach a torts course. This can be easily adapted for use in an undergraduate business law course. Simulation materials are provided in appendices Research on American Law Teaching: Is There a Case Against the Case System, P.F. Teich, Journal of Legal Education vol. 36, 1986, p.167.

Although directed to the use of the case study method as used in law schools, this examination is also applicable to the use of legal case studies as used in business law courses. The author examines the value of the case study method, looks at alternatives, and suggests more research has to be done.

An Analysis of Legal Education and Business Education Within the Context of a J.D./MBA Program, J.W. Kindt, Journal of Legal Education vol. 31, 1981, p 512.

This is a good discussion of the role of law in business education generally and worth reading.

Symposium on Simulations. Journal of Legal Education vol. 45, (1995) In this volume of the Journal of Legal Education a number of articles are presented on the value and use of simulations in law classes. All of the following articles have value and contain ideas that can be adapted to business law, but L. Dallas article has the most direct application.

Simulations: An Introduction, J. Feinman, p.469 Use of Simulations in a First-Year Civil Procedure Class, R. Vaughn, p.480 Limited-Time Simulations in Business Law Classes, L. Dallas, p.487

.

152

Appendix 1: Recommendations for Teaching Business Law in Canada Learning and Learning To Learn by Doing: Simulating Corporate Practice in Law School, K. Okamoto, p.498 Teaching Students How to Practice Law: a Simulation Course in Pretrial Practice, L. Snyder, p.513 In Journal of Legal Education 40 (1990) pp. 1-250, is reported a symposium on the pedagogy of narrative. There are 14 articles on the use of story telling in legal education and they are as useful to those teaching business law as to those teaching in law schools.

Note the book, The Quiet (R)evolution: Improving Student Learning in Law, Sydney, Australia: Law Book Company 1994, by M. Lebrun and R. Johnstone. Although written for Australia this text provides many suggestions on how to improve the teaching of law that will be helpful to those teaching business law (reviewed by A. Zariski, in Journal of Legal Education vol. 45, 1995, p. 309.

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

153

Appendix 2 The Yates Cases These cases are not primarily business cases with a legal twist; rather, they are law cases with a focus on legal issues that can be approached from a business point of view. The focus is on the legal issues. One recommended methodology is to take a team of managers from the particular business involved (to be role played by selected students) and ask them to solve the problem or deal with the dispute from the business’ point of view. An essential part of this process is for that management team to determine the nature and significance of the problem and in the process, to assess the legal issues involved. It is only with a good understanding of the legalities surrounding the problem that the team can recommend a business solution. In the examination of any of these cases a solution that ignores the legal issues will not be acceptable under any circumstances.

It is suggested that the team should first get a clear grasp of the facts, determining precisely what happened. In the process it may also be important to predict what is likely to happen. Next, based on that examination of the facts, and predictions as to the future, the team must determine the legal issues involved. Depending on the case, the law surrounding the facts may be clear or ambiguous (uncertain, one of those areas of the law where a court’s decision could go either way).

This should form part of the evaluation and be taken into consideration in assessing the risk.

The next stage is to assess the impact or likely impact on the firm. This means to look at what would likely to happen if the matter were to go to court; what decision is likely to take place and what the damages or other remedy might be. Risk must be assessed. For example, it is likely that when the Loewen Group entered into their agreement with the Mississippi funeral business, they never dreamed a court might award punitive damages of $500,000,000 for their dealings over an $8,000,000 dispute. Ford, on the other hand, likely did anticipate that even if the jury were to award a huge judgment in a Pinto disaster, it would be reduced on appeal to something they could manage, as it was. The team should consider the business risk involved, not just in terms of this one case, but also what the decision and attendant publicity would mean to the rest of the business. Ford failed to anticipate this in the Pinto case.

The following questions should be considered when approaching all of these cases. In addition there may be other specific questions that are attached to the individual case.

-

What are the legal issues that arise in this problem?

Why are they important?

What are the applicable legal rules?

Is there a clear answer as to the operation of the law?

If not, what are the potential legal outcomes and which is most likely?

What is the objective or purpose behind the rules being applied?

Will the purpose or objective behind the rule being applied likely affect the outcome of a court action?

What effect can these outcomes have on the business involved?

What is the best course of action for the business? (Why?) Discuss the potential impact of the various possible courses of action that can be taken on the business.

.

154

Appendix 2: The Yates Cases -

What should have been done (if anything) to avoid this problem in the first place? (risk analysis) What steps (if any) should be taken to avoid similar problems in the future? (risk avoidance)

Organization To conduct a case study in a class of 30 students I divide them into 6 or 7 groups of 3-5 students each. Each group chooses a different case to present to the class. Once one group has chosen a case, another group will be assigned the task of critiquing the presentation. The critiquing group will be expected to look at the content of the presentation, the thoroughness of its examination of the legal and management issues and recommendations, not the style or skill of the presenters.

This ensures that two groups have prepared for the presentation of each case. All students are required to read the case in preparation for the class. Where several positions are present in a case (for example, a manager, the employee and the firm in a wrongful dismissal action), I recommend that each student in the presenting group look at the problem from the point of view of one of those positions, but that is only one approach and I leave the method used to the students.

Assuming a 50 minute class, there would be one presentation per class. The presenters would have a maximum of 25 minutes and the other group a maximum of 10 minutes to critique. The rest of the time would be for class discussion and debate. I usually make the presentation worth about 25% of the course mark, thus placing a considerable amount of pressure on the students to take it seriously. The critique would be worth about 10%. Unfortunately, I usually only have time for one presentation and critique per group in my class. I would prefer to do more.

I may also direct some groups to give presentations on specific topics that relate to their area of specialization. They are assigned to teach the class about that topic or to develop some other way to present the concepts such as by role play or simulation. For example, instead of a case I might ask one group to give a presentation on harassment in the workplace. Instead of critiquing another group’s case, this group would hand in a paper on their topic for the added 10%.

Note that this is just one of the methods of using cases or problems in a business law course.

A more effective method requires all of the students in a class to examine a carefully selected case and participate in a discussion of that case usually over several class periods. This allows the instructor to guide the students to ever higher levels of analysis as shallow ideas and simplistic solutions are presented by the group and rejected. This provides opportunity for the development of critical thinking skills, but it is time consuming. Where the objectives of the course require conveying significant amounts of information and teaching numerous rules and concepts as is usually the case where there is only one business law course, this more intensive approach is not possible. The result is a trade off between developing analytical skills and learning about the law.

The case presentation strategy described above is a compromise that does not usually generate this higher level of discussion. When there is enough time or where there is more than one course available, I suggest that the case method approach described and recommended in Selma Wasserman’s Introduction to Case Method Teaching: A Guide to the Galaxy (Teachers College Press, New York, 1994) be adopted.

There are 8 case studies set out in Appendix below: 1. Adams v. The Royal Vancouver Hospital 2. Valley Homes v. Ace Minerals Corp.

3. Busy Bee v. Joe Student et al

.

155

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 4.

5.

6.

7.

8.

O. Mann v. The Builder’s Friend et al (Torts) Joe v. Everybody I’m a Lumberjack and I’m O.K. Something Fishy Software the Hard Way

1. Adams v. The Royal Vancouver Hospital The Royal Vancouver Hospital (RVH) needed a givings officer. This is a person who seeks donations on behalf of the hospital from private donors. Their old givings officer was retiring on June 1 and with government cutbacks private donations promised to be much more important in the future. A perfect candidate is brought to their attention, Mr. Adams. He has worked very successfully for a large American hospital for 10 years. This was a private institution largely dependent on donations from business and so the role of the givings officer was much more significant than was presently the case at RVH which relied largely on government funding and only to a very small extent on private donations. But times are changing. RVH like all such federal and provincial institutions are currently facing huge cutbacks in government funding and so they need people like Mr. Adams with his American experience.

Mr. Adams came to Canada 2 years previously at a time when the federal government was encouraging research and development projects by giving substantial tax credits for funds spent on those projects. Mr. Adams and several other people from the US came here to take advantage of this favorable research climate. Mr. Adams has been involved for the last two years in developing a successful containment system for fighting oil spills. That project came to an end because changes in the Canadian tax laws ended the tax credits for such projects and because there were no oil spills where the newly developed technology could be put into practice.

In February it came to the attention of one of the assistants in the personal office at RVH that at the end of March Mr. Adams’ job would end and that he intended to return to the US to find employment. The assistant brought this to the attention of the personal manager who brought it to the attention of the president and those two, with the approval of the chairman of the Board of governors, decided to explore the possibility of hiring Mr. Adams. After several interviews it was decided that Mr. Adams should come to work for RVH on a contract basis for the months of April and May and that on June first he would take over the permanent position of givings officer for the hospital, which would then be vacant because of the former officer’s retirement.

Mr. Adams agreed to this and had been working for the hospital quite competently in his position for a month and a half when in mid April an article appeared in the Chronicle, a very influential national paper directed primarily at the business community. The topic of the article was the shameful abuse by some parts of the business community of the special tax advantages given for research and development in Canada. The article not only pointed out that the reason the program was stopped was because of the abuses that had taken place but went on to outline some examples of not only abuses but of outright fraud. The article referred to several people by name who had come to Canada from the US and set up phony research projects but never did any research; however, on the basis of falsified claims they still obtained the tax credits. The article speculated on the likelihood that these people would be prosecuted. Unfortunately Mr. Adams was specifically named and described along with 5 others as one of these “carpetbaggers from the US, fraudulently taking advantage of the Canadian tax system.” Because the article was published and distributed across Canada and was specifically directed at the business people that Mr. Adams would have to approach for donations in his new position of givings officer for the

.

156

Appendix 2: The Yates Cases hospital, it was clearly very damaging to him. In a discussion with Mr. Adams shortly after the article appeared he made it clear to the Vice President of Finance of the hospital that the allegations referring to him in the article were false, that he had proof of that and that he intended to sue the Chronicle for defamation. The VP of Finance conveyed this to the President, Chairman and Board of Governors. The matter was then handed back to the personnel office to make recommendations. Under these circumstances what should the hospital do with Mr. Adams and the full-time position that he had been promised, which would start in 2 weeks?

From the point of view of the Chronicle, after Mr. Adams complained and threatened to sue, the reporter who did the article was questioned about it. She made further inquires and concluded that the facts were all correct and there was no question about the accuracy of the allegations as far as the other 5 men specified in the article and that if they were prosecuted they would likely be convicted of fraud. It was also clear that Mr. Adams was associated with them in the US and came to Canada as part of that group intending to take advantage of the friendly Canadian tax environment for research and development, which explains why the mistake was made. However, Mr. Adams in fact did do the research and development claimed and obtained from the Canadian taxation department a letter stating that they are entirely satisfied with the validity of the project with which he was associated and that Mr. Adams was in no way in any difficulties with the department and that there were no outstanding complaints against him. The taxation department has only rarely supplied such a letter. In a meeting with the Editor of the paper the reporter submitted copies of this letter as well as documents detailing the nature of the oil containment system developed by Mr. Adams and acknowledged her mistake with respect to Mr. Adams.

What should the Chronicle do in these circumstances?

From Mr. Adams’ point of view, he has presented proof to RVH of the inaccuracy of the report and they still fired him. He has presented proof to the Chronicle of the falsehoods in the article, and the untold loss suffered (the loss of his job and ultimate damage to his career). He has requested a retraction and an apology and neither have come. What courses of action are available and what should be taken into consideration before choosing what course of action to take.

2. Valley Homes v. Ace Minerals Corp.

Jones is a young, recently hired salesperson working for Valley Homes, a small company manufacturing and selling prefabricated dwellings. They sell primarily to people wanting to build their own cabins and summer homes. Jones’ job consists of working out the designs with the customers, pricing that design and then working out the specifics with the engineering section, which develops plans and sets out the exact specifications for the productions of the dwelling. She then follows up with the customer, even providing a contractor to build the dwelling if needed.

A large mining company, Ace Minerals Corp., as part of the development of a huge mineral deposit in northern Manitoba, had to build a townsite for the miners and their families consisting of some 50 dwellings as well as a sports and recreation complex. Under the supervision of the vice president of finance, Brown, Ace Minerals published a request for tenders for the supply and erection of these 50 homes and recreation centre. Upon request Ace provided the specifications and the other details of the tendering process including a statement that once submitted the bid could not be withdrawn before the formal opening of all the bids, and that the lowest bid would be accepted following the standard practice in the industry. Jones obtained these details and brought them to the attention of the Valley Homes executive arguing that the company had to change their method of doing business from just servicing the residential retail market and get more into the growing industrial sector. This was consistent with conversations that had recently

.

157

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition taken place between the president of the company and major shareholders and so it was decided to submit a bid on the Ace Minerals project. Jones and Smith, the sales manager, were designated as the team to develop Valley Homes’ bid. They worked for several days enlisting the help of the engineering department completing and submitting the bid on the day specified as the deadline for the submission of the bids by Ace. That evening Jones was reviewing the bid and to her horror discovered a significant error in the calculations prepared by Smith. Jones quickly redid the calculations and found to her added horror that instead of making a 15% profit on the deal they would suffer a 20% loss. On such a huge order this could be enough to bankrupt the company. On further examination it became clear that Smith had intentionally structured the error and cleverly hid it in a way that made it very difficult to find. It was only by chance that Jones had discovered the error at all. It was later learned that Smith as sales manager felt threatened by this business brought in by the upstart Jones and set out to sabotage the project to make sure things stayed the way they were. He felt that when the deal lost money Jones would be blamed and he could then get rid of Jones with the blessing of the president.

Jones brought the miscalculations and conduct of Smith to the attention of the president of the company. The president called Smith into the office and confronted him with what he had done. It was at this point that Smith broke down, confessed his misconduct and explained that because of his age he felt threatened by Jones and worried that he would lose his position to her. The president fired Smith outright, and then went to the offices of the mining company. He met with Brown and presented him with a letter explaining the mistake and in a formal way revoking the bid that had been submitted the day before. Although the bids had not yet been opened, Brown declared that even though he was very sympathetic to the problems of Valley Homes, he could not interfere with the integrity of the bidding process once the bid had been accepted by the company for consideration. He said that they would simply have to wait until that afternoon when the bids would be opened to determine their fate. When the bids were opened not surprisingly, Valley Homes was the lowest bidder and their bid was then automatically accepted by Ace. The next day the president of Valley Homes and Jones met an Ace management team headed Brown, where the problem was discussed. The Ace group confirmed their position but did indicate an understanding of the difficult position that Valley Homes found themselves in. They also pointed out that they realized that it was not in their interests to see Valley Homes fail and not be able to finish the job. They therefore agreed that if the project was satisfactorily completed on time, a bonus of would be paid to Valley Homes of 1/2 the difference between their price and the next lowest bid. This would allow Valley Homes to do just a little better than break even on the job, thus avoiding bankruptcy. It was also understood that there would likely be future dealings between these two companies and because of the good relations created in this meeting Valley Homes would give Ace Minerals an especially good deal on the next project.

As the project proceeded, a series of payments were made to Valley Homes all 59 days after the date specified in the contract. As is normally the case with these kinds of projects there was a clause in the contract whereby Ace would not have to pay interest on any late payments so long as payment was received by Valley within 60 days of the day payable.

Eventually the project was finished on time to the satisfaction of all parities but the bonus was not paid. Valley Homes waited the specified 60 days and when the bonus was still not paid, they went to Brown’s office for an explanation. They learned at this time that Brown had been replaced and they were invited to meet with the new Vice President of Finance Mr. Grey. He explained that over the months Ace had carefully monitored the project and the health of Valley

.

158

Appendix 2: The Yates Cases Homes and had decided that they were in better financial shape than either party had anticipated.

Bankruptcy was not a threat and therefore the mining company had decided not to pay the bonus.

Mr. Grey went on to explain that they were entirely satisfied with the work that had been done and that Valley Homes should in no way take this failure to pay the bonus as an indication of dissatisfaction on their part with the their company, the personal, or the quality or timeliness of the work performed. In fact Grey’s final comment was that he hoped that the two companies would have many years of cooperative ventures in the future.

Discuss the options available to Valley homes in these circumstances.

3. Busy Bee v. Joe Student et al (Secured Transactions) After graduation as a business student at SFU and taking a year off to travel, Joe Student decided that he wanted to go into business for himself. He was attracted to the franchise business and chose one that requires very little initial outlay. This involved the opening of a hot dog stand to be set up in front of a major sports retailing outlet recently opened in Burnaby. The franchising company, Ace, arranged for the site and supplied the cart itself, with a cooler, stove and storage area. It also supplied jumbo and regular wieners, buns, and condiments as well as soft drinks for a fee only slightly higher than would be available through normal wholesale outlets. Although Joe has no choice but to get his supplies from Ace, he considered this slightly higher cost was well compensated for by the convenience of getting them all from the same source of a consistent and known quality, and because of the other services supplied by Ace. Ace insisted on supplying the food inventory as a matter of quality control and to ensure product consistency between all of their franchised carts at various locations around the lower mainland. The franchise fee to be paid

by Joe to start the business was $20,000 and for this in addition to the cart and an initial supply of buns and wieners, Ace would supply a limited amount of advertising and other services such as bookkeeping and tax preparation. Ace also was entitled to a set percentage of Joe’s sales to pay for this service.

Joe’s initial problem was to raise the $20,000. He had no money himself, having just finished his bushiness program and travels and in fact owed about $15,000 in government student loans.

He did however have a relatively new sports car worth in his estimation about $13,000. He also had an older cabin cruiser given to him by his grandparents, which he estimated to be of about $10,000 value. His mother had recently passed away and his father was a successful teacher in the Vancouver area. Although his father was encouraging in the business venture, he was not in a position to lend Joe any money. He did suggest, however, that Joe use a sound business approach to the problem and arrange financing through a company recommended by a friend, the Busy Bee Trust Company.

Joe took this advice and made an appointment to see June, a recently hired loans officer working for Busy Bee. When Joe showed up for his appointment she recognized him as one of her fellow students in the business program at SFU. She remembered him as an adequate student if not particularly a bright light. Joe did think to prepare a business plan and after some pleasantries presented it to June with a request for the loan. June could see that the business plan was quite optimistic, but recognized that there was a clear potential for success and leaned towards making the loan if she could be satisfied that the risk to Busy Bee was minimized.

It was clear that the assets of the hot dog stand itself including the cart was of little value and that the $20,000 being paid by Joe was for the franchising services provided by Ace. What steps should June take in these circumstances to make the loan and also minimize the risk of loss to Busy Bee?

.

159

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition Part 2 June made the loan to Joe, taking a chattel mortgage against the car and boat and getting Joe’s father to guaranty the $20,000 loan. Unfortunately when the chattel mortgage against the boat was registered (using the Finance statement under the PPSA) two numbers were inadvertently reversed and the security was registered under the wrong serial number.

Joe continued in the business for some six months and by that time it became clear that the business was not as profitable as he hoped it would be. He needed more money to operate and wanted to sell the boat to generate more working capital. He approached his friend June at Busy Bee to get permission to do so and after reviewing the file she determined that the guaranty and the remaining chattel mortgage against the car satisfied Busy Bee’s minimum requirements for security, and gave permission for the boat to be sold and the funds to be used by Joe in his business.

About four months later, with the business still not doing as well as he hoped, Joe got bored and decided to go back to school and get a masters degree. He had also heard a rumor that the health departments in the various municipalities were planning a coordinated crack down on these road side food vendors. Without informing Busy Bee he sold the car to Mary for $10,000, abandoned the cart in front of the sports complex and caught a plane for Ireland where he has been admitted to pursue his further education. Mary quickly resold the car to her friend George for $10,500 who used it for the 3 summer months and resold it to Sam for $9,500. By this time June at Busy Bee found Joe in arrears, checked and upon some investigation found that he had abandoned his business and left the country. When they took steps to repossess the car, they discovered their error, corrected it and reregistered the Loan. This re-registration took place while the car was in the hands of George. After the correction and changes to the registration were made, George resold the car to Sam for $9,500. Neither George nor Sam knew of the claim against the car by Busy Bee at the time of the sale, but had Sam checked with the registry, the corrected information would have made it clear that busy Bee claimed a charge or lien against the car. Busy Bee repossessed the car from Sam and demanded payment of the remainder of the $20,000 loan from Joe’s father on the guaranty. Discuss the legal position of the various parties.

4. O. Mann v. The Builder’s Friend et al (Torts) Joe had been recently promoted to the position of manager at one of the Lower Mainland outlets of a retail sales business selling home and garden supplies called The Builder’s Friend. This business had 20 retails outlets in western Canada concentrating on supplying the needs of the home owner and amateur builder. There had always been a considerable problem with shoplifting and this was particularly true at Joe’s location. Maters had been made worse in recent months with a serious downturn in the economy which showed a related increase in theft from the store.

All normal steps had been taken to reduce this problem including hiring floorwalkers, inspecting packages of customers as well as requiring all vehicles that came onto the premises to submit to a vehicle inspection as they left. When Joe became manager he was told that one of the major problems he had to deal with was the excessive shoplifting taking place at his store. Joe was also told that the old manager lost his job because of an inability to reduce such thefts and so he knew that his success in his new job depended to a large on the way he dealt with this problem.

Joe decided to enlist all of his staff into this struggle and as a part of his regular weekly sales meetings devoted a significant part to a program encouraging all the employees to get involved in the theft prevention business. “To have a go,” as he put it. He also made sure that any new person

.

160

Appendix 2: The Yates Cases hired not only looked like, but could “take care of himself” He encouraged everyone working at the store to be watchful for any sign of shoplifting and a significant portion of the weekly training sessions were spent on how to spot such thefts. Within 6 months of taking over as manager Joe was satisfied that all of the employees were excited about the program. They seemed not only vigilant but eager to catch shoplifters and indeed in that time several shoplifters had been apprehended. Joe took a zero tolerance tough approach and made sure that all were prosecuted to the full extent possible, even kids. He further rewarded the employees involved in the apprehensions by recognizing their contributions on the staff bulletin boards and also in a more tangible way by giving them a day off with pay. He noticed that the other employees appreciated this and were further encouraged to participate in the program.

One Saturday afternoon Joe was walking around the floor of the store when he saw a well dressed customer (Oliver Mann) carrying an obviously full large brown paper bag in both hands, looking at merchandise in the store. Joe had noticed him because on another occasion one of the employees had pointed him out as a person who had been acting suspiciously but they had never caught him taking anything in the past. This time Joe saw him pick up a small but expensive power tool and put it into the bag he was carrying. Joe called over two of his new employees, both young vigorous athletic looking young men. He gave Sam the keys to his car and his cellular phone, telling him to drive around the block and call into the customer service desk to coordinate so that he could cut the customer off if he tried to get away. He and Harry the other young man, looked around and found the customer in another section looking at building supplies. This was near the supply entrance where there was no cashier located and sure enough the customer left the store through that open side door. Joe sent Harry off to follow and as he went out the front way to intercept the fleeing customer he told the customer service clerk to alert Sam in the car that the customer was fleeing and was heading across the intersection at the front of the store.

When Mr. Mann, the customer saw that he was being followed he started to run. Harry ran after him. Joe also ran after him cutting across at an angle from the front door. Harry caught up to him first in the intersection garbing him, but the Mann dropped his package shrugged off Harry and leaping away made a run for it. Just at this time Sam in the car drove into the intersection, jumped out of the car and made a flying tackle sending himself and Mr. Mann in a heap onto the street. Sam sat on Mann, and proceeded to hit him several times in the head. Harry joined the action at this time and added several of his own blows, all before Joe the manager caught up and arrived at the scene. All three then picked up Mr. Mann who was severely dazed by this time and half dragged and half carried him back into the store. When Joe returned to the store he immediately called the police. About the same time the police arrived at the store, Richard also presented himself at the store identified himself to the police and explained that he had been stopped at the intersection waiting for a red light immediately beside where Sam had parked his vehicle when these events took place. Richard had witnessed the whole thing from when the customer had left the store. His attention was first drawn to a well dressed man carrying a large parcel as he left the store hurrying across a right turn segment of the intersection just ahead of a right turning car. He had witnessed one person come after the man from around the side of the store and another come after him out of the front door. He had witnessed Harry’s initial attempt to subdue the customer and said he had had a “grandstand seat” for what he had described as a perfect “flying tackle” coming from the driver beside him who had jumped out of his car and brought the man with the package down. He had also described the blows that Harry and Sam had administered to subdue the customer on the ground and had seen the man being dragged back to the store. Richard left his name and address with the police and they said he would likely be called on later.

.

161

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition Mr. Mann at this time wasn’t making much sense and so the police arrested him and called an ambulance. The next day at the hospital Mr. Mann who had suffered a concussion in the fray, explained to the police that he had simply been looking at what was in the store, and although he had at first intended to buy a small tool he had decided it was too expensive and had changed his mind. Because he was not purchasing anything, he had left by the most convenient exit. When asked why he ran, Mann replied “wouldn’t you run if you saw several big men chasing you?” The police went back to the store and asked to look in the bag that Mann had been carrying. Joe realized that in the excitement they had not brought it back to the store with them. They went out into the street looking for it but by that time of course it was gone.

5. Joe v. Everybody Joe, a recently graduated business student decided to start his own business. After attending a franchising and small business opportunity conference he was particularly persuaded by a franchising opportunity involving a pot and pan repair and refurbishing business. After the conference he researched out the business getting all of the information he could from the people selling the franchising opportunity “Tinker’s Damn” Inc. He talked to Ted, the salesman trainer and area representative for “Tinker’s Damn” and found that the services offered involved the company providing training in the repair of pots pans and other such utensils as well as training in a new technique of refurbishing such items to almost new condition. The company would also provide the specialized equipment necessary, a designated area in which Joe was entitled to carry on the business involving both residential and commercial premises and a commitment to provide a certain amount of advertising in the local paper, on billboards and the like. Ted also promised that they would solicit sufficient appointments in the first two months so that the business would not only break even (including a salary for Joe) but would generate a modest profit as well. After these first 3 months the “Tinker’s Damn” would provide a list of 500 potential clients but other than that and some advertising, Joe would be on his own other than use an ongoing bookkeeping service that would be supplied by the head office. Part of Joe’s training involved where to look for customers and how to solicit business. The fee to be paid to “Tinker’s Damn” was $20,000 and 15% of all revenue earned by Joe. These provisions were clearly stated in a written contract between Joe and “Tinker’s Damn” Inc., which Ted signed on behalf of the company.

In addition Joe had to purchase a truck in which to house the equipment and from which he would do his business. This was a further $25,000 investment. He borrowed enough money from his father to pay the franchise fee and to make a $3,000 downpayment on the truck. They agreed that this should be done in a business like way and so Joe incorporated a company and on behalf of the company agreed to repay the loan at a rate of $500 per month until repaid with 9% annual interest. Joe gave his father a promissory note on behalf of the company to that effect. Without consulting Joe’s his father gave the note to Joe’s recently married sister to use as a downpayment on a house.

Joe also felt that he needed to establish a small office in his home. For this he needed a computer, printer, fax machine, a telephone answering machine and photocopier. He felt that he would like a scanner as well. Based on the projected sales and income figures supplied by the franchise company and his own needs he calculated that he had enough income to be able to carry the extra debt and went to “Tomorrow Town” a retail electronics store to see what kind of deal he could get on these items. When he entered the store he was approached by the salesman Sam who after listening to him for a few minutes told him “he had just what he needed”. Sam showed Joe a computer, monitor hard drive etc. which was on sale with a printer for $2,500. The salesman explained that this was the most up to date technology available anywhere. He said that the

.

162

Appendix 2: The Yates Cases computer was not only the leading edge of computer development and would be current for years to come but that it was upgradeable when advances beyond its capabilities finally were developed, “not that Joe would ever need anything better” Sam also pointed out that the computer would run all current software that was available even the most advanced, and would run any software that might be developed in the foreseeable future. Sam also pointed out that the printer supplied with it was the most recent high impact 24 pin design and that nothing was better. For the other equipment, Sam showed Joe a Concord 100, which was a special combination fax, scanner, and photocopier that was available for only a further $1,700. Sam said that this was what everyone was using nowadays and that they were extremely fortunate to find one in the store that had not yet been sold. Joe was told that he had better decide to take it right away as it would not likely be available later in the day they were going so fast. Sam said that if he bought the package he would throw in one of the new “brother” answering machines they had on sale that day for no extra charge. Joe was impressed with what Sam had to say and agreed to buy the computer printer and combination fax/scanner/photocopier. He also agreed to purchase an extended warranty as well as a management contract for a further $500 which provided that any repairs and servicing necessary would be done by the provider of the service for only a “small fee” at Joe’s office. He also agreed to purchase a packaged “office” software bundle. The price came altogether to $5,800 including PST and GST. Joe paid his last $500 as a down payment and agreed to repay the loan at a rate of $150 per month for 5 years. He had no worry about being able to afford this as the sales projections and costings that he and the advertising company had done had assured him of a monthly income high enough to not only pay a substantial salary to him but also cover the franchise payments, the payments of the truck and this further debt to Tomorrow town electronics. Because Joe had incorporated his business, and wanted to put the purchase in the company name for tax purposes, Joe had to sign a promissory note in his own name for the money owed as well as a conditional sale agreement in the name of the company secured against the computer equipment purchased Joe took the computer home hooked it up and found when he tried to run the standard software he had purchased the hard drive was not big enough to load it all. He also found out that while the computer was able to run some of the software supplied it did so very slowly. He further discovered that some of the software purchased that he didn’t really need for the business (a presentation program) would not run on the computer at all. He asked a friend knowledgeable in computers to come over and have a look. The friend pointed out that the computer that he had been sold was an older model (a “386”) which had been sold as a special package (CPU, monitor, hard drive etc.) and while it could be upgraded to run some of this newer software it would require a complete removal and replacement of the motherboard, in effect a replacement of the whole heart of the computer. Even then the monitor (and video card) and other internal components which was packaged with it were really designed for this outdated technology and would not operate with the new CPU that efficiently. Joe was further disappointed that some video games that he had hoped to use on the computer were incompatible with such an obsolete system. He was also disappointed to find out from his friend that although the combination fax/scanner/photocopier worked it required special paper and special ink that made any kind of volume work prohibitively expensive compared to the alternative. For this reason the Concord 100 was no longer being sold in other stores and was being sold off at “Tomorrow Town Electronics” at a sales price in order to get rid of them. The main difficulty wit this is that the special paper and ink were used only with this unit and it would be extremely difficult to get them in the future. The printer itself was completely compatible with the computer because it too was an old obsolete system. He found that he should have purchased a laser or inkjet printer which would have provided better resolution, much greater speed with modern software, and less noisy operation. His friend also noticed that the telephone answering machine he had been “given” was used not new.

.

163

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition Joe went back to “Tomorrow Town Electronics” in an irate mood to demand the return of his money. He looked for the salesman but Sam was not there. He demanded to talk to the manager.

The manager, Ruth, was sympathetic upon hearing Joe’s story. She explained that Sam was not a salesman but only a sales trainee who was on the floor that day only to get exposure to the “real world” of sales. Sam had not been authorized to make any sales without the direct involvement of one of the regular sales staff. Despite that when the sales manager had realized what Sam had done he had decided to honour the sale even though they didn’t have to, and Ruth had supported that decision and so would not demand the return of the computer. Ruth explained that she could not help Joe because earlier that day they had assigned the conditional sales agreement along with the promissory note to Ace Finance Ltd. “Tomorrow Town Electronics” was no longer involved, Ruth explained, and so any problems Joe had (“except warranty problems of course”), would have to be taken up with Ace. Ace was a special independent finance company that “Tomorrow Town Electronics” had set up to handle all of their installment sales. The manager also pointed out the small print in the contract which stated that “all sales were final,” that “unless the product was actually defective in which case it would be repaired or replaced, there was no other warranty express or implied with respect to the product, its performance or its quality”.

The contract also stated “That any statements made by salesperson or otherwise that were not specifically included within the written contract were void and of no effect.” The manager expressed sympathy for Joe’s position and stated that for another $1,000 they would upgrade the mother board of the computer which would solve “many” of Joe’s problems but otherwise since there was nothing actually wrong or defective with the computer he was “out of luck”.

Joe was extremely angry by this time and feeling cheated said that he would not make any further payments and that he wanted his downpayment back. The manger Ruth feeling that she had been more than generous and feeling that Joe was not only ungrateful but insulting, managed to hold her temper and simply told him he would have to take that up with Ace as she ushered Joe out of her office. Later that Week Joe received a letter from Ace, informing him of the assignment of the conditional sale agreement along with the promissory note and requesting him to make any further payments to Ace at a specified address. Joe wrote a letter back stating what had happened, demanding hat the computer be replaced or that his downpayment be returned.

He also clearly stated that he would be making no further payments until the mater was rectified to his satisfaction.

Part 2 Joe makes no payments. Ace does not return any money paid by Joe. “Tomorrow Town Electronics” refuses to have anything more to do with the mater or with Joe. A bailiff attends at Joe’s house to repossess the computer but Joe refuses to let him take it until he “at least gets his down payment back”.

Ace sues Joe and “Tomorrow Town Electronics”, Joe sues “Tomorrow Town Electronics” and Ace. How would the situation be different if Joe had signed a personal guarantee instead of a promissory note?

To make matters worse for Joe, he was in no financial position for carry on these court actions. It turned out that the business he had started was not anywhere near as profitable as he had anticipated and been lead to believe by “Tinker’s Damn” Inc. If it weren’t for the help of his father he would have lost the truck say nothing of the electronic equipment he had purchased from “Tomorrow Town Electronics”. He had considered just not making any further payments on

.

164

Appendix 2: The Yates Cases the Promissory note he had given to his father but when he learned that it had been used as part payment on a house for his sister, he was unsure what effect not paying would have on his sister and father.

Upon further investigation he discovered that Ted, the salesman and trainer for “Tinker’s Damn” had misled him. Joe went to the appointments made by Ted, he found that half of them had never been contacted and about half of those that had, said no to the appointment. Only about 25% of the appointments he had been given by Ted were in fact valid and he was now scrambling to drum up enough business to keep afloat. As a result he had to immediately turn to the list provided of potential customers and to his dismay he discovered this list was simply the restaurant section extracted from the of the yellow pages and consisting of only 200 names listed twice. Joe has discovered that with a lot of hard work over several months he could build up a sufficient client base to “do OK” in this business but that it would be “touch and go for quite awhile.” It was clear that he had not received anywhere near the value he had expected from “Tinker’s Damn” Inc. What should Joe do in these circumstances?

6. I’m a Lumberjack and I’m O.K. Jack owned and operated one of a multitude of small logging operations in western Canada called Lumberjack Inc. A few of these small operators had their own allocations of timber (as licensed by the provincial government) but most including Jack, were “contractors” working for larger companies (the Majors). This meant that for a negotiated contract price they would go onto the areas licensed to the major company and harvest that timber for them. They also occasionally harvested timber for private landowners who had stands of timber on their own land. They would contract to purchase the standing timber, cut these logs and sell them to one of the major companies to be made into pulp or sawed and sorted for lumber depending on the type of timber and the quality and size of log. There were only a few of these major companies and the small loggers usually had no choice but to sell their logs to the one operating nearest to them because of the prohibitive cost of transporting the Logs.

The value of working together was clear very early and years ago a small loggers associations (SLA) was formed to handle the problems of Jack and other small loggers like himself. A great problem that Jack and the other small loggers had was that they could usually only sell their logs to one buyer, the one nearest their operation. Because of this and the fact that there are only one or two major companies interested in purchasing their logs the market is very restricted and the Majors can dictate the price. Jack and the other small loggers don’t really have much choice. As a result one of the major concerned of the SLA was to ensure that they get the best price for their timber. One of the main purposes of the SLA was to provide a monthly forum for Jack and his friends to get together and discuss the prices they should get for their logs. They invited representatives from the major logging companies (the purchasers) and together they would discuss and set prices for the timber to be sold in the following month. The members of the Small Loggers Association agreed that they would sell exclusively to the Majors and the representatives of the Majors in turn agreed on behalf of their companies to purchase a set amount of timber from those small loggers at a specified price. The major companies agreed to this because they were not happy about the control they had over the pricing in the past, feeling that they had too much power to control the market and as a result were vulnerable to prosecution. Also this kind of arrangement created a certain security of supply that they had never had before.

These major companies had another problem that this arrangement solved. The Majors were all divided into different divisions and the divisions that purchased logs and chips from the small logger often found themselves selling those same logs and chips or logs and chips they had

.

165

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition produced themselves to other divisions of their own company or they were purchasing from those other divisions, and it was required that this be done at fair market price or they would again be vulnerable to prosecution. Because of this arrangement with the SLA they had a price they could use in their internal dealings. Thus the representatives who attended these monthly meeting of the SLA were both the customers and the competitors of Jack and the other small loggers.

The Chips purchased are either used locally in the pulp and paper division of the Major, or are if there is an excess, they are sold offshore. The logs also may be sawn up by the timber division of the Major for export or be exported offshore in their raw state. But often these logs are also sold to private specialized sawmills for use in the local building industry. One of these private specialized sawmills Busy Bee enterprises, learned of this arrangement and was irate at what they saw as price fixing. Busy Bee approached three of the smaller loggers including Jack and demanded that they sell logs directly to Busy Bee for the same price they sold logs to the Majors. Jack didn’t know what to do and took the matter to the next SLA meeting.

Jack has another significant problem that he has to deal with as well. In one of his deals he agreed to log a stand of timber covering 1/3 of Sam’s ranch. This was a nice property located on the wall of a small valley near a lake which Sam intended to convert into a guest ranch in the near future although he never told this to Joe. The ranch covered 150 acres and was worth on the open market about $200,000. This was a little higher than normal because of the nice location of the ranch. In fact this is what Sam had paid for the property 6 months earlier. One of the reason’s Sam bought the ranch was because he knew he could sell the timber. Sam’s deal with Jack required Jack to pay Sam $100,000 for the standing timber. Jack then would come onto the property with his men and equipment and remove the trees “with as little disruption to the rest of the property as possible.” In addition to this provision included in the contract the agreement also required that after the trees were harvested the property be “restored” within 2 years of the harvest.

Jack’s worker’s cut down the trees in June 1993 using clear cut methods and Jack resold the timber for $200,000 which after considering his costs left a profit to the company of $25,000.

Unfortunately the property was left in a very disreputable condition. Roads had been made crossing other parts of the ranch, stream beds were destroyed in the process and the clear cutting itself left that part of the property in a miserable mess with the land not only dug up by the equipment used but covered with all sorts of unsightly debris. No attempt was made by Jack’s company to “restore” the property after the removal of the trees. Jack explained to Sam that there was “just not enough money in it.” Sam had expected this part of the ranch to be cleared and then to be landscaped giving a dramatic view of the valley and lake making it ideal for use as a guest ranch. Instead he was left with a blasted landscape looking as bad as any clear cut extending beyond the original tree stand and making it impossible to develop the property as he intended.

When Sam inquired he discovered that it would cost him $150,000 to clean up the property and put it into the shape that he had envisioned when he started the project.

Sam complained to Jack and threatened to sue. He demanded that the property be restored as agreed or that he receive compensation so that he could have the work done by someone else.

Jack was surprised when Sam told him he intended to develop the property as a guest ranch. Jack had assumed he would be using it as a cattle ranch like all of the others in the areas and that the esthetics were “no big deal.” He investigated and found that if the property were used as a cattle ranch as he thought it would be, the increased market value had it been landscaped as Sam wanted would only go from $200,000 to $215,000. One the other hand if the property were developed as a guest ranch the restoration and landscaping would be a vital part of the project and would have increased the value dramatically. Explain the legal position of the parties in these situations and explain what should be done by them.

.

166

Appendix 2: The Yates Cases 7. Something Fishy Joe had operated a very successful chandelling business supplying the needs of the fishing industry on the west coast of British Columbia for 20 years. Unfortunately because of over fishing drastic cutbacks had to be made to the west coast fishing fleet and to the overall fishing industry on the west Coast and his business suffered as a consequence. In an effort to save his business, Joe set his mind to other related fields but realized he knew very little about other types of businesses. Joe’s operation consisted of about 20 employees. Joe was the “boss.” Five employees worked in the store ordering supplies, doing the paperwork and servicing the customers. The rest manned the dock and the fueling facilities, or worked in the machine shop.

Joe’s particular talents were in obtaining supplies at reasonable rates and in operating the machine shop. When Joe understood that the impending cutbacks in the west coast fishing industry would severely affect his business he realized he needed expert help in order to survive.

He decided to hire a sales and marketing manager who would run the sales and generally market the business finding them something else to do. He interviewed Pat, a recent graduate of Simon Fraser University. Pat had graduated top of the class and had concentrated in Small business Entrepreneurship with a specialty in sales and marketing and was just what Joe needed. Pat had also worked on fishing boats before going to university and during summers and knew the industry. He offered Pat a Job and this offer was accepted. The terms of the employment were that Pat would agree to work for 4 years in this position at a generous and increasing yearly salary. At the end of that period both parties would review the situation and if they agreed would negotiate a new and continuing contract. As is the case with most contracts of this type there was included a 3 month probation period where Pat could be let go if Joe was not satisfied with the level of performance. Pat had a similar right to leave during this period.

Pat knew the business and after a few weeks working with Joe and getting to know what they had to offer Pat suggested that they turn to the offshore fleet taking great amounts of fish off the west coast of B.C. “We might as well try to get something back from them since they likely caused this problem in the first place.” Pat explained that when fishing they often would see many ships of other nations working the fishing grounds and that these ships would have to go home or to long distant ports for supplies or to make repairs. “Why not offer the service of supplying and making minor repairs to those ships right here. We have the equipment, the talent and the facilities. It would not be much different from what you have been doing all along with our own boats.” Joe liked the idea but had no idea of how to go about starting the business. Pat did and under Joe’s signature sent a series of letters to Companies operating these offshore fleets offering their services. They received several serious replies and after some further negotiating by mail 3 viable potential agreements looked certain. Of these one of the companies was Japanese and another was from Algeria owned and operated by Arab, Muslim interests. The next stage was to do in person negotiations to clinch the contracts.

Pat was eager to go but Joe had a conversation with several friends in the lumber industry who had done business with the Japanese and they explained that the Japanese were extremely conscious of the status of the people they dealt with and might consider dealing with Pat an affront. Pat was female and of black African American heritage. Joe made some inquires and discovered that the problem might be even more serious in dealing with the Algerian company.

Because of the size of Joe’s operation he couldn’t afford to hire another person to do the negotiations especially since he realized that an on going relationship would result and the person he originally sent would have to be kept on to service the contract. After serious soul-searching Joe called Pat into his office and explained to her that because she couldn’t do this part of her job he would have to let her go. He explained that even though he was not required to because her

.

167

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition probation period wasn’t up he would pay her 3 months wages if she would stay and help her replacement get started. Joe then hired Sam, another Simon Fraser graduate, second in the class and of a white, European background. But Sam did not have the same specialization in small business and sales that made Pat so attractive to the business, but Joe felt that with Pat’s help, these limitations could be overcome. Pat reluctantly agreed to help and while angry, said she understood Joe’s dilemma.

Sam did successfully carry on the negotiations with the Japanese and Algerian companies and agreements were signed giving Joe’s business exclusive rights to do minor repairs and supply these ships. The only difficulty that Sam had was when dealing with the Algerian Company. He was in fact dealing with an agent of that company and that agent insisted on a payment of 15% of the value of the contract to cover “advanced promotional expenses.” Joe and Sam did some further investigation and found that this was nothing more than a kickback or bribe. They also found out that it was a common and expected aspect of doing business in that part of the world.

If they wanted the business Joe felt that he had no choice and so reluctantly made the payment.

Joe’s only potential rival in this new business was another person in the same town who had also supplied the west coast fishing fleet. This business was run by George, who was in fact an old friend of Joe’s and had struck up a great friendship with Pat as well. He had faced similar problems when the west coast fishing industry went down the tubes, but had taken another way out. Instead of looking to the offshore fleet, George turned his interest to the still viable recreational fishery. George went into the business of providing supplies for the recreational fishermen as well as the many resorts and boat rental facilities catering to these sports fishers.

George and Joe had been rivals in the past and both feared that the other would go after their new business. After some conversation both agreed that there was only enough business in both areas for one. They prepared and signed an agreement to the affect that George would not carry on the business of supplying or offering services to any foreign commercial fish boats and Joe agreed to stay out of the recreational fishery business in any form. Both retained the right to continue to supply and service any B.C. fishboats as they had in the past. They agreed that if either violated this agreement the victim would be entitled to damages in the amount of $500 per day for each day the breach continued.

All went well for another season and then the recreational fishing business also began to go sour. About this time several other companies operating offshore fleets who now saw the advantage of the arrangement their rivals had with Joe came to town and approached George eager to obtain access to the same kind of services. George could not pass up the opportunity and made arrangements to provide similar services for them. Although this did not directly hurt Joe’s business since he had all he could handle just servicing the needs of the three companies that he had contracted with, he still felt that was in breach of this agreement even though and George had not solicited the business.

Joe had a falling out with George and threatened to sue. When Pat discovered how well Joe’s business was going and how he was treating George she also decided to sue.

8. Software the Hard Way Joe is a software developer working for Ace Development Company for the last 10 years. He has no management position with the company other than being a software developer, however because he is key to its operation and one of the original founders, he is one of the 5 directors of the company. He and 2 other friends (Sam and Harry) had originally set up Ace to develop some software they had created at the beginning of the personal computer boom. They had all been

.

168

Appendix 2: The Yates Cases employed by a major computer company but they had found the atmosphere, the suits, and the eight-to-five schedule stifling and decided to take the ideas they were working on and set up their own company. Originally 1,000,000 shares were issued in Ace Development Corp. Joe retained 30 % of the shares (300,000) and is a director of the company. Sam and Harry also have 30% each of the shares and are also directors. The remaining 10% are divided equally between Tom, the President/production manager and a Dick, the Marketing Manager who also hold director positions. Joe Sam and Harry all knew that their skills were in the software development aspect of the business, not the management and so from the beginning they planned to hire the management skills the company needed so that they could get on with their research and development.

This worked out to be a very successful strategy and over the years Ace developed into one of the most successful and influential companies in their field with 30 employees and annual sales in the millions. The next part of the strategic plan developed for Ace by Tom and Dick was to go public and sell shares on the stock market. This would require a further expansion of the business with an infusion of borrowed funds of about $1.5 M. from the bank. It is important to note that although Sam and Harry made important contributions, it was Joe that was considered the software genius. He was key to the whole Ace operation and had a great reputation in the industry. There is no question that the success and reputation of Ace was largely dependent on Joe’s role in the company. It is clear that the Bank’s willingness to provide the additional capital needed was on the assumption that Joe would continue with the company. Over the years the Ace had specialized in the development of communications software, particularly networking and more recently the company had directed its attention towards exploiting the exploding interest in the interment.

Joe was disinterested in the business aspects of Ace. He had a lab at home and a couch at work and he would wander in and out whenever he felt like it often not distinguishing between his personal and his work life. Certainly he was just as likely to be working or sleeping at his home as at the office. Everyone was tolerant of his eccentric lifestyle because of what he produced. But Joe was finding Ace in its new successful corporate status as stifling and as restrictive as the company he had left. He was not a happy camper especially when he felt the resentment of the other employees towards his “privileged position”. He couldn’t deny how successful the company had become however and so he just kept plodding along in what he considered his rut of a life.

On the Morning of June 18 Joe and his assistant George were summoned along with the other employees to a general meeting where it was announced that everything was now in place.

The funding had been obtained and the public share offering was to go ahead over the summer.

Every Employee of the company was to have the right of first refusal of the additional 1,000,000 shares to be offered to the public. Tom, the president, explained that they had borrowed $1.5 M from the bank and they intended to use this money to diversify. Joe knew vaguely about the intention to go public but he now realized that they had borrowed a considerable amount of money effecting the value of his shares, and that his percentage of Ace would also be severely diluted as well as any say he had in its operation with the sale of the new shares. He also realized that Ace was being diverted from its original purpose and now would be just another business, which completed his disillusionment. Of course he would have known all of this had he bothered to attend the directors meeting as he should have. The champagne was broken out and all began to celebrate. Everyone congratulated Joe and the role he had played in developing the successful company. All recognized the role that Joe’s expertise skill and genius had played. Tom Toasted Joe and his great accomplishments. Left unsaid was the fact that the reason the management of Ace wanted to diversify was to make the company fortunes less dependent on such an unstable character as Joe.

.

169

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition Joe’s son, Little Joe, had a lot of his father’s characteristics. There was that same flash of genius, and also much of the same instability. He had followed in his father’s footsteps and taken computer programming at university. But he became bored and found the regime required by university study stifling and dropped out after his third year. He said that THEY weren’t teaching him anything he couldn’t learn on his own anyway. He and two friends who had graduated decided to up their own development company just like Joe and his friends had done 20 years before. One of the projects that Little Joe had been working on at university was a new interface for working with the internet. This was cutting edge and promised to revolutionize the use of the internet and ease the connection with individual users. This new interface promised to speed up the process and the convenience of using the internet.

The idea had come from his father. Little Joe had been out with Joe on his boat one day and had complained to about needing a major project to work on as part of his studies. Joe remembered a conversation he had with one of his clients who had expressed a need for a faster and better internet interface and had also given some basic ideas as to how it could be accomplished. Joe had been too busy to follow up on it and had never told anyone else at Ace about the idea. Little Joe took the idea back to the university and got the permission and support of his supervisors to proceed with the project. In fact the university thought so highly about the idea that they provided a Lab and several other personal to work with Little Joe. They told Little Joe that if things worked out this could be the basis for a major part of the new product development and marketing strategy of the university. The two other students (graduate students) were the friends that Joe was working with and at the university they proved the workability of this new software. Those three were the only ones who had any detailed knowledge of the project.

When they decided to leave the university their main problem was how to take their equipment with them. They didn’t want to leave anything behinds so that their ideas and work could be stolen. They came to Joe. Joe advised them that even though they had assembled the equipment it was with university grant money and they couldn’t get away with taking the equipment with them. That belonged to the university. But they should erase all extra copies of their data that remain in those computers before they go. It was clear to Joe that a new business should be set up and that capital would have to be raised to recreate the lab that the boys had left behind. Other funds would be needed to market the new product. Joe even mentioned to the boys that they could go to Ace and enter into an arrangement with that company to co-develop the software. They had the market developed, the marketing expertise, and the production facilities and there was no question that they could successfully market the new product.

Although Joe was enthusiastic about the new enterprise his years of experience in the computer industry had taught him to be cautious. Many of these new ideas run into snags and never get anywhere. He understood that it was risky but that the potential rewards were great. He told this to Little Joe and his friends but they didn’t care about the risk. They knew it would work and anyway, they didn’t have anything to lose. They were just concerned about how to best complete the development of the product and how to best exploit it and get it out on the market.

Joe said that he would help as much as he could. After a considerable amount of thinking and after checking his finances, Joe decided that he could take some personal risk and told the boys to count him in. It was clear that they would need at least $900,000 to set up the lab and get the business going. He decided that he could risk $300,000. Since little Joe and his friends had no money the rest would have to be borrowed from other sources. Joe wanted to make sure that the rest of his fortune was protected and not at risk. He couldn’t start all over again. He also didn’t want to do anything to put Ace in danger as most of his wealth was tied up with his shares in that company. He had to

.

170

Appendix 2: The Yates Cases consider whether he would stay working for Ace and remain as a director or sell his shares, quit and go into business with Little Joe and his friends even with all of the negative impact that would have on Ace. One thing was sure and that is that if he left Ace he would take his sidekick George with him who was a technician and an absolute miracle worker with software and this would further damage Ace. Remembering his own experience with his own friends and Ace that they had started, he wanted to not only limit his liability to the $300,000 but also make sure that the had more control in what would happen with the new business. He wanted to have some say in management and he wanted to be assured of a share of the profits. He didn’t want to discourage or control the enthusiasm of the young people he was helping out but with his experience and age he knew that there had to be some guiding hand and that that guiding hand was going to be his.

A major difficulty was just what kind of business arrangement would be appropriate for him and the boys. Joe decided that he needed advice and although it was against everything he stood for he decided he had to talk to his lawyer. All of these were on his mind when he called on his lawyer to discuss his options. The lawyer talked about Companies, limited liability, limited and general partnerships, shareholder agreements, share structures, security arrangements, collateral, directors’ duties, personal liability, fiduciary duties and by the time that Joe left his head was reeling.

Examine this situation and discuss it from the point of view of Ace, the university, Joe, the bankers, and little Joe and his friends. In your answer look at the different methods of carrying on business that Joe, Little Joe, Tom and Dick might consider.

9. To Be or Not To Be Anthony was an officer, director and shareholder of ACI Inc. The company took a loan from the Bank of Nova Scotia and Anthony guaranteed repayment of the debt. His guarantee was limited to $350,000, although the amount owed to the Bank by the company was much greater.

The company default on its payments to the Bank and in October 2004, the Bank wrote a letter to Anthony advising him they had demanded payment from the company and stated that “[w]e have today demanded payment of the Borrower’s obligations to us…. If payment of our demand is not made as required, we will take steps to recover payment from you.”

The company went bankrupt in December 2004, and the Bank appointed a Receiver to sell the company’s assets. The sale was finalized in February 2007, but the Bank was not paid out in full. The company still owed over $1 million and as a result, the Bank’s lawyer sent a second letter to Anthony and demanded payment from him of the full amount of his guarantee. Anthony did not make payment and the Bank sued him for the amount owing.

When the matter came before the Court, Anthony defended and argued that he was not obliged to pay the amount of the guarantee because the Bank had not sued him within the 2 year period prescribed by the Limitation Act. Anthony argued that the limitation period started either when ACI Inc. defaulted on the loan or when the Bank sent him the first demand letter in October 2004.

On that basis, he argued that the limitation period expired at latest in October 2006, and the Bank had not sued him until July 2007. Anthony’s position was that the Bank’s claim was statute barred.

Not surprisingly, the Bank argued that the limitation period did not start in 2004, but that it started on June 12, 2007 when the Bank’s lawyer sent the second demand letter to Anthony. This argument was based on the premise that the guarantee was a “demand guarantee” and as a result the limitation period did not start until demand was issued. The Bank then argue that the first

.

171

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition letter sent in October 2004, was not a demand but merely a notice sent out of courtesy to inform Anthony that the Bank would look to him if the company did not pay the debt in full.

Both Anthony and the Bank conceded that the limitation period expired after 2 years and the only question was when did that period commence. For Anthony, the answer would determine whether or not he had to pay the Bank $350,000.

10. Fraud and the Mortgage Lender Mr. Gill owned a residential property in British Columbia. In November 2005, an unknown fraudster forged Mr. Gill’s signature and transferred the property to Gurjeet who was a participant in the fraud. Gurjeet then borrowed $40,000 from Mr. and Mrs. Bucholtz who registered a mortgage against the property to secure the repayment of their loan. The Bucholtz mortgage was registered against the property on November 10, 2005.

On December 8, 2005, Gurjeet mortgaged the property to 4337 Investments Ltd. (“4337”) to secure a second loan for $55,000. That mortgage was submitted for registration in the Land Title Office but before it was registered Mr. Gill discovered that the property had been transferred and he filed a caveat against the land and started legal proceedings to recover the property. Although the registrar at the Land Title Office refused to register 4337’s mortgage as a result of the caveat having been filed, the parties proceeded as if both mortgages were properly registered.

Neither the Bucholtz nor 4337 were aware that the property had been fraudulently transferred and they had both sought and obtained confirmation of Gurjeet’s identity before they advanced funds. As a result, both lenders argued that their mortgages should be recognized as valid charges against the property. Mr. Gill obviously argued that the mortgages were invalid and he sought an Order from the court that the mortgages be discharged and the property be returned to him. The problem for the Court was that a basic tenant of the Torrens Land Registry System is that parties are entitled to rely on the state of the registry when purchasing property and acquiring other interests in land such as a mortgage. Those who suffer a loss as a result of an error in the registry are entitled to make a claim against the Registry Assurance Fund, but that does not invalidate the transaction.

How should the Court resolve this case given that both Mr. Gill and the two lenders were innocent victims of a fraud? Should Mr. Gill get the property back? Should the mortgages be discharged? Should either Mr. Gill or the lenders have a claim against the Registry Assurance Fund? Is there any other way that Mr. Gill or the lenders could protect themselves?

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

172

Appendix 3 Comments with Respect to the Yates Cases Note that these comments are not an attempt to respond to the general questions set out in the introductory comments for the cases but are some observations that show what I had in mind when I created the particular case in the first place.

1. Adams v. The Royal Vancouver Hospital This sequence of events actually happened to a friend of mine. The names of the parties and the institutions involved and some details have been changed, but the events are essentially as described.

Of course the dilemma here is whether Mr. Adams should sue or not. He has been defamed and he has lost his job. This case presents an opportunity to discuss the law in the areas of defamation and wrongful dismissal and to examine the advisability of the policies and actions of two large institutions First look at the article written in the Chronicle. Is there defamation? Discuss what constitutes defamation. In this case, to refer to a person by name and suggest that he along with others is eligible to be criminally prosecuted for fraud is derogatory and qualifies as defamation. But not all defamation is actionable. There are a number of defenses such as truth, absolute and qualified privilege and fair comment. None of these are available here. The fact that the newspaper reporter made a mistake and thought that what she was saying about Mr. Adams was true is also not a defense. In the US they have a constitutional provision that guarantees freedom of the press. This has been interpreted to mean in effect that such media organizations are not liable for defamation unless it can be shown that the publisher of the statement knew it was incorrect. We have a similar provision in the Canadian Charter of Rights and Freedoms, but thus far the Supreme Court has not extended this same kind of protection to the Canadian media. Newspapers and broadcasters are in the same position with respect to defamation as any private individual. Note, however, that there are provincial statutes in place in many provinces (including B.C.) that give some limited protection to the media and these should be reviewed with respect to this situation (see the B.C Libel and Slander Act RSBC (1979).

It should also be noted that as a mater of policy many large newspapers, and broadcasters, refuse to acknowledge they have defamed anyone, refuse to apologize and vow to fight any action against them very vigorously. They have established a “war chest” to defend such actions and make it clear to anyone suing that they better be prepared to face huge legal costs win or lose.

This policy is often justified on the basis that they feel that they ought to be in the same position as the US media and plan to do their job as if they were. Right or wrong, this policy places people like Mr. Adams in a very difficult position and when the actual person faced this problem and obtained legal advice he was discouraged from suing the newspaper involved. He was told that if he insisted on going ahead with the mater, the law firm would need at least a $15,000 retainer before they would start the process. He did not have access to this kind of money and discouraged, simply returned to the US to get on with his life.

As far as the RVH is concerned they really had no choice. He was hired as a givings officer and with his reputation ruined could not do the job. They had to let him go whether the dismissal was justified or not. Point out here that merely having a valid reason to let someone

.

173

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition go (e.g., no more work) does not necessarily excuse the employer from living up to certain basic obligations. In this case, a question that arises is whether Mr. Adams had ever been hired so that his leaving could be classified as wrongful dismissal. This is an opportunity to distinguish between working as an independent contractor and as an employee. Was he hired as an employee in April or not until June 1? What was his status in April and May? Did the fact that he was unable to do his job legally justify getting rid of him? What about the implications for the morale and loyalty of other employees. Should they have tried to find him another job in the hospital organization? What were the consequences facing the RVH if it was determined that they had wrongfully dismissed Mr. Adams. What is he entitled to? This is an opportunity to explain the employee’s obligation to mitigate, and what effect this will have on what he is offered in a settlement.

The basic questions here once the legal relationships have been established are what should Mr. Adams do now? What should the Chronicle do? What should the RVH do? Cost and further damage to his reputation must motivate Mr. Adams. The Chronicle must consider the broad business advantage of fighting such a defamation action though they have clearly wronged Mr. Adams. And the RVH must consider the damage having Mr. Adams in his position can do to the hospital and to their donations campaign against a wrongful dismissal action if in fact Adams was ever an employee and chose to sue? They must also consider how they treat Mr. Adams who is clearly a victim here will affect the moral and loyalty of their other employees and whether this is an important consideration to them.

2. Valley Homes v. Ace Minerals Corp.

The main problem here concerns the bidding process and whether the bid itself is legally binding and presents an opportunity to discuss not only the law concerning offer and acceptance but of consideration and mistake as well.

The standard position in contract law is that once an offer has been made it can be revoked any time before acceptance. An exception to this is where there is an option agreement to keep the offer open. This is essentially a subsidiary contract, where, usually for a fee the offeror agrees to give up the right to revoke the offer. In tendering cases the usual view of the request for tenders is that it corresponds to an invitation to treat or to make an offer not an offer itself. The bid is the offer and without such a subsidiary contract the offeror ought to be able to withdraw his bid anytime before the bids are open and one is accepted. But this seems completely inconsistent with the bidding process and so attempts have been made to alter the status of the request for tenders and the bid. In this case it can be argued that as a condition of the company considering the bid, the offeror agreed to give up their right to revoke their offer anytime before acceptance. The dilemma here is whether that requirement and subsequent promise amounted to a subsidiary contract similar to an option agreement with essentially the same effect (see Calgary v. Northern Construction). If so, Valley’s attempt to revoke is invalid, the offer has been accepted and a contract formed.

The other angle of attack by Valley is that they have made a mistake and that Ace knowing of it should not be able to profit by it. But likely such a mistake would only make the contract void or voidable if it went to the nature or substance of the contract. Here the parties knew the basic nature of what was agreed and the mistake went only to the profitability. This would likely not give Valley the right to end the agreement. Whether Ace’s knowledge of the mistake being made before they accepted the offer should prevent them from snapping up the offer in face of such an error is the subject of debate. Could estoppel apply here? Can an analogy be drawn to the

.

174

Appendix 3: Comments with Respect to the Yates Cases situation where the customer in a store is not permitted to take advantage of the mismarking of the price of goods and snap them at a lower cost? How is that different if in both cases the offeree is aware of the mistake?

The second major problem concerns the legal relations created by the negotiations that took place between Ace and Valley after the bid was accepted wherein Ace agreed to pay Valley a substantial bonus if the job was done on time. If the original bid was successfully revoked, there was no contract and the subsequent agreement where Ace agreed to pay a bonus would be binding along with the other terms on both parties as a new contract. If that bid was successfully accepted forming a binding contract, then the promise to pay the bonus was an attempt to change that contract and so there must not only be consensus but also consideration on the part of both parties to support that alteration. Valley was already obligated to get the job done on time and so what did Ace get for their promise to pay the bonus; the promise of future business, the promise of a good deal on the next project? These are not specific enough. What about the fact that Ace saved the interest normally payable on a higher amount of money (they were not obligated to and were not paying Valley until 60 days after the date specified in the contract, and now the payment of the bonus was also delayed.) (See University Construction v. Gilford Steel.) Could you argue promissory estoppel here? Likely not as Valley is suing Ace and Ace made the promise of the bonus (the promise is being used as a sword and with promissory estoppel can only be used as a shield.) Finally could Valley take the position that their acceptance of the promise of a bonus was by way of a settlement of a contentious matter and involved giving up the right to litigate over the question of their right to withdraw their bid? Would this constitute sufficient consideration to support the promise of the bonus? Would this have to be clearly specified? Note also that Grey on behalf of Ace said that they decided not to pay the bonus because Valley was not in as dire financial straits as originally thought. This could only make a difference if the payment of the bonus was conditional upon Valley being financially ruined without it or if Ace could argue that they only promised to pay the bonus because they were mislead about Valley’s financial situation.

Some other legal issues worth noting are first the status on Li and Grey the VP’s finance for Ace. They are agents and both likely have the power to bind the company. The fact that there is a change should make no difference as to the legal obligations of Ace; it just possibly explains the change in policy. Finally there is a question about the dismissal of Brundel the sales manager of Valley. How much notice is this long-term employee entitled to? Nothing! This is a mater of just cause and Brundel can be dismissed immediately without notice.

There are also a number of non-legal factors to be taken into consideration. Once we have determined the legal position of Valley, even if they do have a legal right to the bonus is it wise to insist on it in the light of Grey’s promise of a hope of “many years of cooperative ventures in the future”?

Also consider if it was wise of Ace to change their mind about the bonus even with the change of Financial VP’s? It also could be damaged by becoming known as a company not willing to live up to its obligations. What about the practices associated with the bidding process?

How should these be changed to avoid a reoccurrence of this problem? Was it a good idea to offer the bonus? Why? Was it wise for Valley to let Ace know about their problems in the first place this being their first venture into such large-scale construction contracts? Of course Valley had better clean up their accounting and accountability procedures so that they are not vulnerable to this kind of sabotage in the future. Note that the bid was sabotaged by the sales manager because he felt his position threatened. This is not as farfetched as it seems and is based on an actual event in my experience.

.

175

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 3. Busy Bee v Joe Student et al (Secured Transactions) The main area of focus here is how best to secure a business loan and then a look at the rights of the parties when the business goes sour. Note that this case can also be used as a good tool to introduce the subject of secured transactions at the beginning of a class.

As an initial observation, from a business point of view what is Joe Student getting for his franchise fees? Is Joe simply paying Ace an exorbitant fee for the privilege of being forced to buy supplies from them at an inflated price? What is the benefit of the bookkeeping and the tax preparation service? I suspect Ace is only supplying Joe these services as a method of ensuring that they know Joe’s financial picture so that they will be sure to get their “set percentage of Joe’s sales”. Remember Joe is paying Ace for this service as well. The only thing Joe seems to be getting out of this is the cart and the “limited amount of advertising.”

Joe has no funds himself and has to borrow the money. Are there other alternatives? What about bringing in a partner? In any case he decided to borrow the money needed for the venture and went to Busy Bee. From their point of view their main problem is to ensure they get repaid.

They need security. They try to get the best security possible. That means a chattel mortgage against the boat, against Joe’s car and a guarantee by Joe’s father against the loan. This they did.

The cart itself was not used because it was “of little value” Note that in order to properly secure the loan Gabrielle acting for Busy Bee must make sure that the proper financing papers are filled out and filed under the appropriate statute for the province. She must also make sure that if there is legislation governing the creation of a guarantee in that province that is also followed. This is an opportunity to discuss any unique statutory requirements present in your province.

Part 2. When the loan goes bad When the business started to go sour, Joe’s first impulse was to put more money into it. From a business point of view should he have put more into it or recognized that the business was not viable and cut his losses? From Busy Bee’s point of view it was a grievous error on Gabrielle’s part to allow him to sell the boat. There is no indication here that they got permission from Joe’s father for the sale of the boat. This is a common error. The lender thinks that they are only dealing with the debtor and forget bout the separate rights of the guarantor. Since the guarantor has the right to step into the shoes of the creditor if he has to pay the guarantee, it is vital that nothing is done by the creditor to weaken that position after the guarantee has been given. By allowing Joe to sell the boat, Busy Bee has weakened its position since it no longer has the boat to repossess if Joe fails to pay. And in the process they have weakened the position of the guarantor.

There are three parties to this contract, Joe, Busy Bee and the father as guarantor. Since Joe and Busy Bee have changed the agreement without the father’s permission and to his detriment, there is a strong argument to be made that he is no longer party to the new arrangement and can no longer be required to honour the guarantee.

Another significant problem for Busy Bee is with the incorrect registration of the security.

The reversing of the serial numbers can be corrected under the legislation (check your particular province) but not so as to impair the position of anyone who has already obtained rights to the goods used as security. Lorenzo finally purchased the car from Hakeem after the correction of the registration. He failed to check the registration and had he done so he would have found the lien against the car and so it looks like he should take subject to the chattel mortgage, giving Busy

.

176

Appendix 3: Comments with Respect to the Yates Cases Bee the right to repossess. But there is a strong argument for Lorenzo taking the car free and clear. In these circumstances if Busy Bee is allowed to repossess the car from Lorenzo, Lorenzo has the right to sue Hakeem for breach of contract (the car was not free of charge or encumbrance as required in the Sale of Goods Act). Hakeem would in turn sue Kendra and Kendra would suffer the loss. Hakeem and Kendra are the ones intended to be protected by the requirement of registration since both acquired the car before the correction was made. In order to protect them Busy Bee must be prevented from retaking the car from Lorenzo.

4. O. Mann v. The Builder’s Friend et al (Torts) This capture actually took place in front of me as I was parked at a red light. I created the surrounding circumstances for the purposes of this case.

The main legal problem here involves assault, excessive force, and false imprisonment. The main business problem is the wisdom of this kind of policy and program with respect to shoplifters. The company itself placed tremendous pressure on its manager to correct a problem that he had few resources to correct and in the process they exposed themselves to considerable risk. The whole atmosphere of the store seems to be “to catch a thief.” The problem seems to be that all of the people involved, including the manger, are over zealous in this process with the danger that they see theft where there isn’t any, and then overreact. Consider the store’s policy of “zero tolerance” and “to have a go.” Many consultants advocate a non-confrontational, “Excuse me sir, did you forget to pay for that item?” approach. With this approach, while there might be more shoplifting, there is no danger of offending innocent customers and risking huge damage settlements for mistakes made by untrained employees. Consider the training the store employees received. It was mainly designed to get them excited about catching shoplifters, not how to avoid mistakes. Most stores have rules for employees to follow in such situations, such as not stopping the shoplifter until they leave the store and then only if they have kept them in sight at all times since they witnessed the taking of the item. This is not based any legal principle but is an attempt to ensure that no mistake will be made. The other side of the argument, of course, is that there are huge losses from shoplifting today and something has to be done. A good discussion can be generated in terms of what good business policy should be in these circumstances. At least make sure that if the policy is to pursue shoplifters the employees must be trained in what to do and when to do it. Note as well the preference given in hiring “thugs” and the danger this entails.

As far as this event itself is concerned, they never should have taken such a violent approach once they lost sight of the customer in the store. They had no way of knowing when he left whether he still had the goods or not. Similarly it was a big mistake not to have retrieved his bag when they took him back to the store. There is now no proof even if he did take the tool and if he sues there will be no way to establish that he was a shoplifter. In this situation the question arises whether the employees had the right to retain this person at all. They had to have reasonable grounds to suppose that he had committed the theft in order to detain him and in these circumstances it is likely that they did not. The fact that he had been acting “suspiciously in the past” did not create such reasonable grounds. It would be a good idea to look up and use the appropriate sections of the Criminal Code dealing with powers of arrest.

Even if they did have the right to hold this customer as a shoplifter it is clear that they used excessive force to subdue him. The chasing and the tackle likely could be justified if they had the right to hold him, but the blows that were administered when he was being held on the ground were unnecessary and thus excessive. I doubt that that police were guilty of false imprisonment here since after hearing the statement of the witness and the store personnel they had reasonable

.

177

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition grounds for arresting Mr. Mann as a shoplifter, but that does not relieve the store of the liability for the continuing arrest in the hospital since they initiated the process.

This kind of event often happens with overzealous and loyal employees but it puts the business at great risk. It is vital that employees be properly trained on when and how to deal with shoplifters to ensure that this kind of mistake does not happen. The damages and legal fees that can result from this kind of action can far overshadow any loss from shoplifting that might occur.

In terms of what constitutes false imprisonment look up Bahner v. Marwest Hotel. See text Chapter 4.

5. Joe v. Everybody This case raises issues in the area of breach of contract, misrepresentation, assignment of contractual rights, negotiable instruments, the sale of goods, consumer protection, secured transactions, agency and company law. Since so many areas of law are touched on it might be best to deal with this case towards the end of the course, as a review.

Joe’s problems with Tomorrow Town Electronics arise from the conduct of Michel, the salesperson he dealt with. Joe clearly relied on Michel’s statements and recommendations, and they were misleading at best and at worst outright lies. These comments and recommendations raise the issue of misrepresentation (fraudulent innocent or negligent) and also may bring into play the provisions of the Trade Practices Act, Consumer Protection Act and the Federal Competition Act. The contract states that any such statements of the salesperson are not included in the contract unless written into it. These statutes have provisions in them that may override such an assertion.

The Sale of Goods Act also comes into play here since Joe was clearly relying on the statement of the salesperson Michel that the computer equipment would do the job for which it was needed. This relates to the warranty provisions of the Sale of Goods Act and the requirement that the goods be suitable for the purpose purchased. There is an attempt to override this provision of the act in the contract, and so it is a good place to interject a discussion about whether such an attempt can be effective given the provision in the provincial Sale of Goods Act. In some provinces the act prohibits such attempts to override this provision where the goods are purchased not for resale. Does it matter that the sale was made to Joe’s company? Note that it might also be interesting to discuss the need for extended warranties here given the provisions of the Sale of Goods Act. The manager of Tomorrow Town Electronics seems convinced that since Michel was just a trainee they were not obligated to honour the contract. This begs a discussion of the law of agency including a look at apparent and actual authority as well as the principal’s liability for the acts of the agent. Here the agent entered into a contract and committed a Tort (misrepresentation) Is Tomorrow Town Electronics liable? Even if Michel is not an employee, (which he likely is,) because this is likely an example of fraudulent misrepresentation, it is likely that the principal would not only be liable on the contract (apparent authority) but vicariously liable for the tort.

The manager of Tomorrow Town Electronics also assumes that because the contract has been assigned to Ready Cash Finance Ltd. (and the promissory note negotiated) they are no longer responsible for the performance of the contract. There is an opportunity here to discuss what happens when contractual rights are assigned and to teach that only the benefits can be assigned,

.

178

Appendix 3: Comments with Respect to the Yates Cases not the obligations. Joe and his company entered into the contract with Tomorrow Town Electronics, and they are still responsible that it be performed properly. Also point out that any defense available against Tomorrow Town can be used against Ready Cash as well and so Ready Cash likely would not have the power to enforce payment or repossess the goods because Michel’s fraud could be used as a defense against them. This is an appropriate point to discuss the difference between negotiable instruments and the assignment of contractual rights. Ready Cash will succeed against Joe if they can show they are holders in due course on the negotiable instrument. (Two problems that arise here are whether this is a consumer transaction and has to be stamped on the promissory note as such. The answer is, probably not... and secondly whether Ready Cash is independent of Tomorrow Town enough to be a holder in due course?)

The use of the conditional sale agreement here also encourages a discussion about that subject and the personal property security act. Discuss the rights and obligations given to Ready Cash because this form of secured transaction was used.

In the discussion of negotiable instruments prompted by the promissory note given by Joe to Tomorrow Town above, also discuss the other promissory note given by Joe to his father, then to his sister, and eventually used for the down payment on her house. Is there consideration here?

Must Joe’s company honour it? What about Joe? If he fails to do so, what are the rights and obligations of the sister and his father?

The separate status of companies and limited liability of shareholders must also be noted here. All of these obligations assumed by Joe should also be looked at in terms of the separate corporation he set up. Unfortunately for Joe the fact that the corporation is separate will only help him where he gave the promissory note to his father, since in all other cases, he was a party to the transaction as well as his company.

Joe also has a claim against Tinker’s Damn. They have breached their contractual obligation to their franchisee. They were obligated under the contract to make initial appointments with potential customers this was not done or not done properly. They were also obligated to supply a list of customers and a reprinted list from the yellow pages does not qualify as proper performance. Even if it did the fact that the second half of the list was just a reprint of the first half is a clear breach. There is also a question of whether Theo’s statements and estimates that encouraged Joe to enter the agreement with Tinker’s Damn were misrepresentation and whether that was fraudulent innocent or negligent. The question of what remedies Joe is entitled to should also be discussed.

From a business point of view Tomorrow Town must review the training of their personal, including management. This should never have happened. When it did they should have looked very carefully before cutting their losses by trying to force an obviously inadequate deal on a customer. Much of these problems could have been avoided if the manager of Tomorrow Town had a better understanding of the law of sales. Allowing the matter to go to court was very questionable on the part of Tomorrow Town.

Joe’s understanding of business matters was naive at best. He relied on the salesperson for Tinker’s Damn when purchasing the franchise just as he relied on the recommendations of Michel when purchasing the computer equipment. He was misled in both instances. He also failed to make allowances for Theo’s over optimism with respect to his projected income incurring all sorts of debt he couldn’t afford. Now he must decide whether it is worth his while to pursue his rights against Ready Cash, Tomorrow Town and Tinker’s Damn. Is he just throwing good money after bad? Does he have a choice?

.

179

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition As far as Tinker’s Damn is concerned, their actions are highly questionable. Assuming this is not just a scam it is in their best interests to make sure that their franchisees succeed. These overoptimistic projections and incorrect or incomplete information is just as damaging to them as it is to Joe because of the nature of their continuing relationship.

6. I’m a Lumberjack and I’m O.K. This case is designed to focus attention on the problems associated with price fixing and the operation of the federal competition act. There are not as many varied issues brought up allowing the students to focus on the competition act in much greater depth. That legislation should be examined from its social economic as well as its legal objectives and effects.

The main problem here is that this is the reverse of a normal market place system. There are a number of sellers and only one or two purchasers and they have control of the price. Here the sellers have gotten together to agree on a price so that they can balance the power of the purchaser. Does this violate the competition act? Look not only at the legalities of this arrangement but ask how else these problems could be dealt with by the parties. Compare milk boards and egg marketing boards that have similar problems but have dealt with them in a different manner. What is the purpose of the Competition Act? How effective is it in achieving that goal?

The problem with one division selling at a lower price to their own company is that it could destroy other companies selling to those divisions as well by undercutting. This type of vertical integration can also violate the competition act and should be examined. These problems are brought to focus by Busy Bee wanting to purchase logs directly and their accusation of price fixing.

The other legal problem in this case deals with breach of contract and remedies for such a breach in Jack’s contract to clear Otto’s land. There is no doubt that Jack breached his contract with Otto. The problem is over the remedy to which Otto is entitled. Jack only made $25,000 on the deal and he failed to finish the Job because there was “no money in it.” This is a good place to interject a discussion about frustrated contracts and whether the fact that one of the parties will lose money is enough to frustrate a contract The question is whether Jack must pay the $150,000 that it would cost to “restore” the land and make it usable as a guest ranch as Otto intended. But Jack did not know of this use. He only thought the property was to be used as a ranch resulting in only $15,000 loss. Can Jack be allowed to knowingly breach his contract and leave the land in its devastated state or must he be required to pay to put it back in the shape it should have been in? Is “Restore” too vague or is the basic meaning of the contract clear here at least to the extent that it was clear to even Jack that he came nowhere near performing properly. Even if Otto had intended it to be left simply as a ranch wouldn’t he be entitled to have Jack perform his contract as agreed and not be left with a blasted landscape?

There are really two principles here that overlap. Damages for breach are only supposed to compensate the victim for his loss, not be a windfall. As well, the breaching party is only supposed to be responsible for the damages that flow from the breach that he can reasonably foresee. The problem here is that Jack would have known all along that there was not enough money in the job and could have simply lead Otto along with his promise to “restore” the land. If he is allowed to get away with it would be a form of legal fraud. This would be true even had Otto intended to use the land only as a ranch. Just what should be the purpose of the award of damages in cases such as this? If damages cannot adequately compensate the victim of the breach what about some other remedy? Is this an appropriate case for specific performance?

.

180

Appendix 3: Comments with Respect to the Yates Cases 7. Something Fishy This case concentrates on Human rights, wrongful dismissal, the competition act, and breach of contract.

Does the fact that Liam seems to have a legitimate business reason for not retaining Maia in this employment, justify her dismissal. The argument that because she is black and female she can’t do her job is essentially the same argument used in the American south that refused service to blacks because it would upset the white customers. This is none the less discrimination on the basis of race and sex and under the various human rights statutes in the country Liam would likely be liable for letting her go for these reasons. This is a good opportunity to discuss the purpose of this type of legislation. People often think that if there is a good business reason to do what they are doing they’re conduct is proper but the various statutes in place make it a higher purpose to stamp out this kind of discrimination and so as a matter of policy Liam’s conduct towards Maia would likely be actionable. What about the fact that it happened in the 3 month probation period, does that make any difference? Is Liam free to get rid of her in this period for any reason? What about the fact that she agreed to stay on, does this take it past the 3 month probation period. Is there an estoppel here?

Another important question is raised here with the need to pay the 15% fee to the agent of the potential customer. This is likely a bribe, and although it may be common in those countries it may be a criminal offense for Liam to pay it? This is the case both in Canada and in the United States. Consider the wisdom of such a policy. Discuss how they may get around it. For example by hiring an Arab company to act as your agent in that country and let them pay the bribes. Is that ethical and does it avoid legal liability in Canada?

What about Liam’s contract with Nathan? Isn’t that a violation of the Competition Act? But why should this kind of arrangement be restricted, isn’t this good business for them to carve out their areas of interest as they service such a limited market? This is a good place to discuss the provisions of the Competition Act, its objectives and whether they are effectively reached by the statute. This is another situation where common sense from a business point of view will likely lead you into a violation of law and so it is a good opportunity to examine the validity of that law.

Even if the contract between Liam and Nathan were valid from a competition point of view what about the $500 a day to be paid in the event of breach? Is this a penalty or a valid example of liquidated damages? You might also examine whether the fact that the offshore people came to Nathan meant that he was not in breach of the agreement at all since he was not “offering services” to them, they came to him. This shouldn’t be taken too far as there is not enough information supplied in the case. Look also at the fact that although the breach caused Liam no damage as he had all the business he could handle, it could certainly be argued that Nathan’s supply of these services to the rivals of Liam’s customers wiped out the competitive advantage they had obtained over those rivals by dealing with Liam in the first place. Now instead of the Japanese company and the Arab company that Liam was servicing having a significant advantage, all of these offshore companies were in the same boat, so to speak, each being able to get services locally.

8. Software the Hard Way This case looks primarily at the nature of fiduciary duties, Different methods of carrying on business and intellectual property rights

.

181

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition Consider the problems of New Ware and their dependence on Noah. Have they taken the best path to solve that problem? Have they considered Noah’s reaction to these changes? Note the corporate and the control structure of New Ware? Was this destined to cause trouble given the parties? How could this have been set up to avoid these problems? Look at Noah’s reaction to the borrowed money and the share offering? Isn’t this just a way for Amir and Rasheeda to wrest control and ownership of the company away from Noah, Kyoshi and Catrina? What should he do to best protect his interest?

Look at Josh’s project with the internet interface. Did Noah have the right to give this idea to Josh instead of offering it to New Ware? Remember the idea had come from a client of New Ware in the first place. Just whose property is this? Is there a violation of Noah’s fiduciary duty to New Ware here? And what about Josh’s relationship with the university? Now who owns the idea, the university or Josh? Does Josh have a fiduciary duty to the University? The university funded the project, provided the facilities and now Josh and his assistants are stealing the idea.

Look at both ownership of the intellectual property here as well as the violation of Josh’s fiduciary duty?

The Boys didn’t want their idea stolen. Just whose idea and data is it to steal? What about the sabotage of the computers involving the erasure of the stored data? Is this actionable by the university? Fiduciary duty? What else? Under the new federal copyright act? Who owns the copyright here? Is it copyrightable or patentable?

What about Noah’s obligation to New Ware to bring this new idea and opportunity to them?

Consider the various types of structures that could be set up by Noah and the boys to work this project, partnerships, joint ventures, corporations, shareholders agreements, and shareholders loans (see the list at the bottom of the case where the lawyers lists a number of areas to be considered). Those looking at the case should consider unique and imaginative ways to structure the business so as to protect Noah from risk, and yet to ensure that he has an appropriate share of profits and a controlling role to play in management. But also look at this from the point of view of the boys and their interests, Can all interests be satisfied?

From the point of view of New Ware: Has Noah violated his fiduciary duty by disclosing the clients idea to the boys instead of New Ware, by supporting the boys and setting up and participating in a competing company, and by not bringing the opportunity to New Ware when the boys left the university? How should the management of New Ware have dealt with Noah to avoid their dependence on him and to keep him satisfied? Is the method they have now chosen appropriate or will it just cause them more grief?

From the point of view of the university: Who owns the property in this project? Who owns the data that has been destroyed? What can the university do about this? What should they have done to avoid this kind of problem in the first place? What about the broader problem of who has the property rights in the papers, research and commercially viable ideas that are generated by students, faculty and others in the university community as part of their role at the institution?

From the point of view of Noah: Has he violated his duty to New Ware? Does he owe a duty to the bankers? Is his interest in New Ware being diluted? How can the best protect this? What would he have done to avoid the problem in the first place? Does this action by the management of New Ware against him end any duty he has to New Ware? What about when they left the original company and set up New Ware, did he violate his duty to that firm by taking the ideas

.

182

Appendix 3: Comments with Respect to the Yates Cases they were working on with them? Just what can you do and what can’t you do as an employee?

Look also at how Noah can best protect his investment with the Boys and still maintain control?

Look at the various methods of carrying on business as well as the different combinations that may work better for him?

From the point of view of the Bankers: If Noah knows that they are lending money to the New Ware on the strength of Noah and his reputation, does he owe a duty to them to do all he can to protect that investment? Is he in violation of that duty by letting them loan the money and not telling them about his deteriorating relationship with New Ware?

From the point of view of Josh and his friends. Look at what they have done to the university? Is this theft? Who owns the data and the project? Is this a violation of their duty to the university? How should they set up the business so as to keep Noah happy but make sure that their interests are protected?

9. To Be or Not To Be This case emphasizes the importance of limitation periods and also addresses the issue of contractual interpretation. The case is based on the Ontario Court of Appeal decision in Bank of Nova Scotia v. Williamson 2009 ONCA 754.

As indicated in the case summary, the broad question before the Court was whether the limitation period began in October 2004 or in June 2007. To answer this general question, the Court of Appeal looked at three sub-questions: 1. Does a demand guarantee require a demand before it is enforceable?

2. Does the Limitation Act (Ontario) change the date for the commencement of the limitation period from the date of demand to the date the Bank knew or ought to have known that the debtor was not going to pay?

3. Did the Bank’s letter of October 2004, constitute a demand on the guarantor?

The Court reviewed the first question and determined that although there were earlier court decisions that stated that the limitation period on a guarantee ran from the date of the primary obligant’s default, those cases were restricted to situations where the guarantee itself did not require a demand. In this case a demand was required and as a result the limitation period ran from the date of the demand.

The second question was also answered in favour of the Bank. The Court reviewed the Limitation Act and concluded that “the intent of the legislature [was] that for all demand obligations, a demand is a condition precedent for the commencement of the limitation period.”

The common law rule thus remained intact and the limitation period would not commence until demand had been issued.

Having disposed of the first two sub-questions, the only remaining issue was whether the October 2004 letter constituted a demand on the guarantee. The Court determined that it did not.

That determination was based on the language of the letter, which the Court said “was sent merely to advise the guarantor that if the principal debtor … did not pay the debt, the Bank would look to the guarantor for payment.” It was not a demand on the guarantor. Accordingly, demand was not formally made until June 2007, and therefore the limitation period had not expired when the Bank sued Anthony in July 2007.

.

183

Instructor’s Manual for Business Law in Canada, 10th Canadian Edition 10. Fraud and the Mortgage Lender This case is based on the British Columbia Court of Appeal decision in Gill v. Bucholtz 2009 BCCA 137. It is an extremely important decision in that it reverses what most lenders assumed to be the state of the law.

Prior to this decision, most lenders assumed that if they dealt with the registered owner of land their mortgage would be enforceable against the land even if it was later shown that the registered owner became registered by virtue of a fraud. The logic was that even if the title was restored to the rightful owner, the mortgage would either remain in place or the lender would have a claim against the assurance fund as it would have suffered a loss as a result of having relied on the certificate of registration. This was understood to be the advantage of the Torrens Land Title Registration system.

The Court of Appeal ultimately decided that lenders cannot rely on title certificates to the same extent as someone acquiring a fee simple interest in the land. This is seen in the final wording of the judgment: It may be that in a perfect Torrens system, any person lending money bona fide on the security of a mortgage granted by the registered owner, would have a valid charge.

But there are sound policy arguments on both sides of the question. The Legislature of British Columbia would appear to have adopted the policy that the cost of frauds perpetrated against mortgagees and other chargeholders should be borne not by the public (as the funders of the Assurance Fund) but by lenders and other chargeholders themselves. Whether this policy choice is a good one or not is not for us to decide. We must give effect to the language of the statute in its ordinary and grammatical meaning.

In arriving at its conclusion, the Court conducted an extensive review of the relevant case law and legislation. The primary issue was the interpretation of section 23 of the Land Title Act. That section reads as follows: An indefeasible title, as long as it remains in force and uncancelled, is conclusive evidence at law and in equity, as against the Crown and all other persons, that the person named in the title as registered owner is indefeasibly entitled to an estate in fee simple to the land described in the indefeasible title, subject to the following: (i) the right of a person deprived of land to show fraud, including forgery, in which the registered owner has participated in any degree (emphasis added) From the wording of this section, the Court concluded that the section only provides protection to persons who acquire a fee simple interest in land from a person named on the title as a registered owner. It does not extend to lesser interests such as the interest that a mortgage lender acquires upon registration of a mortgage. Accordingly, if the registered owner of a property does not have a valid ownership interest he cannot create a valid mortgage of that interest. Moreover, since the lenders were not deprived of their interest in the land by reliance on the registry, they have no claim against the assurance fund.

.

184

Appendix 3: Comments with Respect to the Yates Cases Given the uncertainty that this decision creates for mortgage lenders, it is necessary to consider how they might protect their interests. The most immediate suggestion is that Canadian lenders follow the lead of their American counterparts and require that all borrowers obtain Land Title Insurance to protect against the possibility that there interest in the property is proven to be defective. Such insurance is now readily available in Canada, and is being heavily promoted despite the fact that the intent of the Torrens System was to remove rather than create uncertainty when dealing with land.

MyBusLawLab

Be sure to visit the MyBusLawLab that accompanies this book to find the decisions for each of the cases listed above.

.

185