This Document Contains Chapters 23 to 24 Chapter 23 The Sale of Goods Instructor’s Manual–Answers by Philip King and Steven Enman V. CHAPTER STUDY Questions for Review, page 601 1. What is the general law that applies to the sale of goods? Answer: The general law that applies to the sale of goods is contract law. However, the law is augmented by legislation such as the Sale of Goods Act. 2. How did sale of goods legislation originate? Answer: In the early nineteenth century, English judges generated the basic principles that inform the modern law concerning the sale of goods. The legislation codifies the basic principles. 3. What is the purpose of sale of goods legislation? Answer: The purpose of sale of goods legislation is to protect buyers and thereby encourage trade and commerce. The law also provides certainty and predictability which benefits both buyers and sellers. 4. How does the law distinguish between a contract for the sale of goods and one for the supply of services? Answer: The distinction will depend on the primary purpose of the contract. 5. Does the Sale of Goods Act apply to a meal served at a sit-down restaurant? Answer: Yes. In Gee v. White Spot, the court held that a contract for a meal at a sit-down restaurant was primarily a contract for the sale of goods. 6. What is the difference between an implied condition and an implied warranty under the Sale of Goods Act? Answer: An implied condition, if breached, gives the buyer the right to repudiate the contract and sue for damages. Breach of an implied warranty gives the innocent party only the right to sue for damages. 7. What is an example of a condition implied by the Sale of Goods Act into a contract for the sale of goods? Answer: The goods will correspond with a description of the goods provided by the seller. 8. What rules decide when title to goods passes from the seller to the buyer? Answer: If the contracting parties do not specify when title passes, five rules in the provincial Sale of Goods Act determine when title to goods passes from the seller to the buyer. The relevant rule is determined by the circumstances of the situation. 9. What is a bill of lading? Answer: A bill of lading is a shipping document that serves as a contract between the seller and the carrier. 10. What does f.o.b. mean? Answer: f.o.b. means that the buyer will specify the means of transportation and the seller will arrange for transportation and delivery of the goods at the buyer’s expense. 11. What are “specific” goods? Answer: Specific goods are goods that are identified and agreed on at the time a contract of sale is made. 12. What are “unascertained” goods? Answer: Unascertained goods are goods which cannot be identified at the time the contract of sale is made. 13. When do the rules in the Sale of Goods Act regarding the transfer of title apply to a sale of goods transaction? Answer: The rules will apply when the intention of the parties regarding the transfer of title cannot be determined. 14. How do the rules in the Sale of Goods Act determine when ownership of goods passes from the seller to the buyer? Answer: If the intention of the parties cannot be determined, then the Sale of Goods Act contains five rules which will determine when title passes from seller to buyer. Questions for Critical Thinking, page 602 1. Why do we need sale of goods legislation? Why not simply rely on the free market to protect buyers and sellers of goods? Answer: Prior to the introduction of sale of goods legislation, the law was overly protective of sellers and did not provide adequate protection for buyers. The result, in many cases, was that buyers were intimidated into withdrawing from the commercial marketplace, which does not achieve the goal of promoting trade and commerce. The sale of goods legislation is an attempt to balance the interests of sellers and buyers in a way that is both commercially practical and rational. 2. Why do businesses need to be familiar with the law relating to the sale of goods? How does a knowledge of this area of law relate to risk management? Answer: Sale of goods legislation applies to every contract for the sale of goods. Therefore, this area of law has potential application to a very wide variety of commercial transactions, including very large and very small transactions, and transactions involving a variety of goods and many different parties. In order to manage risk appropriately, a business should be aware of its rights and obligations under sale of goods legislation. 3. When should a business exclude or modify the contractual terms that are implied by the Sale of Goods Act? Answer: The answer to this question depends to a large extent on the facts of the specific case. Typically, businesses will exclude or modify the terms implied by the Sale of Goods Act when the transaction involves a large amount of money, the parties are sophisticated and have access to legal counsel, or the nature of the transaction suggests that conditions and warranties more specific than those in the Sale of Goods Act are required. 4. Should parties to a business transaction for the sale of goods be allowed to exclude or modify the terms implied by the Sale of Goods Act? Answer: Although some businesses may be vulnerable to being taken advantage of, it is generally thought that businesses, as opposed to consumers, are sufficiently informed and have access to adequate resources to enable them to protect themselves. Note that the provisions of the Sale of Goods Act cannot be excluded or modified in a consumer transaction. 5. Why do we need statutory rules to determine the point at which ownership of goods transfers from seller to buyer? Why not simply rely on the express terms of the contract of sale? Answer: In some cases, the intention of the parties as to when title is to transfer cannot be determined. In those cases, it may be clear that the parties intend for title to transfer, but the precise point at which title is to transfer cannot be ascertained. Since the party who has title to the goods is generally the party who bears the risk of loss or damage to the goods, it is important to know when title to the goods transfers from seller to buyer, even if that cannot be determined from the contract itself. 6. Why does title not automatically transfer from seller to buyer when the goods are delivered and paid for? What is the purpose of Rule 1, which provides that title may transfer when the contract is made, even though the parties have agreed that delivery and payment will be made later? Answer: The purpose for Rule 1 is to cover situations where a contract has been entered into for the sale of goods, but delivery and/or payment is to be made at a later time. In that case, since a firm commitment to buy and sell has been made, the law takes the position that the buyer is now the owner of the goods, unless a different intention appears from the facts. Situations for Discussion, page 602 1. Ralph wanted a portrait of his whole family. Ralph had seen a family portrait at his friend’s house which he liked very much. He asked his friend who had done the painting and was told that Margaret had painted the portrait based on a photograph the friend had provided to her. Ralph contacted Margaret, and they agreed that Margaret would paint a family portrait for Ralph, similar to the one she had painted for Ralph’s friend, based on a photograph which Ralph supplied to her. When the painting was finished, Ralph was very upset. The painting was cartoonish compared to the more lifelike painting that he had seen at his friend’s house, and it was much smaller. Ralph does not want to pay Margaret for the painting, and insists that she has breached their contract, including the terms implied by the Sale of Goods Act. Margaret insists that Ralph must pay for the painting, and argues that the provisions of the Sale of Goods Act do not apply to their transaction. How will this dispute be resolved? Does the Sale of Goods Act apply to the transaction? If so, what implied terms are relevant? Answer: The first issue in this case is whether the Sale of Goods Act applies to the transaction. Although there are goods being supplied, the facts seem too similar to those in Borek v. Hooper, where the court ruled that the supply of goods was incidental. It is likely that a court would consider this contract to be primarily for the purpose of providing services and not a contract for the sale of goods. Accordingly, the Sale of Goods Act would not apply. If the Sale of Goods Act did apply, then the implied condition which was probably breached would be the implied condition that the goods will match the description of the goods provided by the seller. Ralph may also argue that the goods did not match a sample provided, although it is questionable whether the sample was provided by the seller in this case. Note that this is a consumer transaction. Accordingly, even if the Sale of Goods Act does not apply, there is likely an implied term in the contract that the services will be provided in a reasonable manner, as will be discussed in the next chapter (Chapter 24). 2. Ace Manufacturing Ltd. agreed to manufacture and sell 5000 chairs to a convention centre. The contract contained detailed specifications for the chairs, and provided that the purchase price of $200 000 would be paid in two equal instalments: one-half when the contract was signed and the other one-half when the convention centre was notified that the chairs were ready to be picked up. The contract said nothing about when ownership of the chairs would transfer to the buyer. The convention centre paid the first instalment when the contract was signed. The chairs were manufactured by Ace and were in Ace’s warehouse when a serious fire destroyed the warehouse and all the chairs. Ace had not yet notified the convention centre that the chairs were ready for pick-up, because the person who ordinarily makes such phone calls had been away from work due to an illness. Ace has demanded payment in full for the chairs from the convention centre. The convention centre has refused to pay the balance and has asked for a refund of the first instalment it had paid. Has title to the chairs passed from Ace to the convention centre? Does the convention centre have to pay the balance of the purchase price? Can the convention centre obtain a refund for the amount it has already paid? Answer: This question requires that students apply the rules in the Sale of Goods Act regarding the transfer of title from seller to buyer. If title had transferred to the buyer, then the buyer was the owner of the chairs when they were destroyed and must pay the seller for them. If, on the other hand, title had not transferred to the buyer, then the seller remains the owner of the chairs and the buyer is not required to pay for them. The intention of the parties as to when title would transfer from seller to buyer cannot be determined. Therefore, students must turn to the five rules in the Sale of Goods Act. The chairs are classified as unascertained or future goods, because they cannot be identified at the time that the contract of sale was made (because they did not exist at that time). Accordingly, Rule 5 is the rule that applies. Rule 5 provides that title will pass when goods matching the contract description and in a deliverable state are unconditionally appropriated to the contract by one party with the assent of the other party. Here, although the chairs were manufactured and in the seller’s warehouse, the buyer was not notified that the chairs were ready to be picked up. Therefore, there was no assent on the part of the buyer and title remained with the seller. The result is that the buyer does not have to pay for the balance of the purchase price and can obtain a refund for the half of the purchase price that it had already paid. 3. Outdoor World sells new and used snowmobiles. Each January it has a major “blowout” sale that is heavily promoted and provides genuine savings. Morley was in the market for a used snowmobile. He tells the salesperson at Outdoor World that he wanted a basic machine and as good a deal as he could get. The salesperson showed him three snowmobiles, started each one, and told Morley that they were roughly equivalent. Morley took a quick look and picked one based on colour, since he knew little about snowmobiles. Morley purchased the snowmobile for $3500. The contract of sale said nothing about implied terms or the Sale of Goods Act. Two days later, there was a good snowfall and Morley takes the machine out for a run. Five kilometres from home, the snowmobile spluttered to a stop and Morley could not get it restarted. In the end, a friend of Morley’s rescued him, and he had the snowmobile towed back to Outdoor World. What are Morley’s rights under the common law? Do the provisions of the Sale of Goods Act help Morley? Answer: Morley’s rights under common law arise in contract. Since they do not know the terms of this contract, students should be encouraged to think of the types of terms in a contract that would assist each party in arguing for or against breach. Is there a provision that the machine was sold “as is,” for example? From Morley’s perspective, was a representation made that this machine had low kilometres, for example, or was of very good quality? Whether or not there has been breach of an implied term that the snowmobile will function will be determined by the nature of the failure. Was this an isolated event, easily corrected? Is there a serious flaw that can only be overcome by costly repairs? Should the vendor have been aware of such a flaw? Morley could also argue misrepresentation—he was induced to enter into the contract based on representations made about the quality of the machine (see Chapter 8). There appears to be no evidence of fraudulent intent, so he will rely on innocent misrepresentation. Since he wants to cancel the contract, innocent representation is sufficient. Morley will argue the four elements required for innocent misrepresentation (false statement, fact not opinion, materiality, and an inducing factor). Outdoor World will deny that Morley was induced to enter into the contract because of this representation. He chose this machine over others because of colour and price. There is an obvious Sale of Goods Act claim here. This is a consumer sale, so conditions and warranties cannot be excluded. We can assume that Morley wants the remedy of rescission since he wants to return the snowmobile and get his money back. If he is in a province in which the Act has not been amended to change the original distinction between conditions and warranties and remedies for their breach, he will have to claim for a breach of condition, since this alone will allow for rescission. Two provisions are relevant. Morley will argue that the snowmobile was not of merchantable quality and that he made known to the salesperson the purpose for which he wanted the snowmobile, that he relied on the salesperson’s opinion, and that the goods were not fit for that purpose. Students can suggest the factors that would influence the decision either way. If Morley is in a province in which the original distinction between remedies has been amended (for example, New Brunswick), the availability of rescission depends on the seriousness of the breach. In this case, the breach would probably be considered serious and rescission would therefore be allowed (assuming the fault cannot be easily and cheaply corrected). 4. McAsphalt Industries Ltd. is a supplier of asphalt and cement for use in road paving work. Chapman Bros. Ltd. is a road paving company. Chapman ordered some modified asphalt cement from McAsphalt who assured Chapman that the material could be used with its conventional equipment. When Chapman used the material, it broke into chunks, requiring the removal of a filter and the alteration of its equipment. Much of the paving had to be redone. Chapman refused to pay McAsphalt for the material and claimed compensation for the cost of repaving and profit lost on other jobs. Who is responsible for the quality of the material and its suitability for Chapman’s equipment? How will the conflicting claims be resolved? [footnote deleted] Answer: Resolution of a commercial dispute, such as this one, will depend on three main factors: the terms of the contract between the parties, the application of the legislation to those terms and the events that occurred, and the losses suffered by the two parties. In the case on which the situation is based (McAsphalt Industries Ltd v Chapman Bros Ltd, 2008 NSSC 324), Justice LeBlanc decided the following: • McAsphalt was aware of the purpose for which Chapman ordered the paving material—that it could be used in conventional paving equipment. • The product was unfit for that purpose. • The usability of the product after significant adjustment of equipment by Chapman did not render the material merchantable in the circumstances. • Representations by McAsphalt that the material could be used with conventional equipment were express warranties in the contract. • McAsphalt was entitled to payment for the uncontaminated material. • Chapman was entitled to compensation for the proven cost of remediation related to the contaminated material. • Chapman’s claim for profit lost on other jobs as a result of the adjustment was dismissed for lack of specific evidence. 5. Bravo Limited and Good Enough Inc. (GEI) agreed that Bravo would purchase a large amount of surplus construction materials from GEI. The contract of sale, signed by both parties, stated that “the materials are sold as is, where is,” and further provided that “all statutory and implied warranties, including without limitation those contained in the Sale of Goods Act, are hereby excluded.” After delivery of the materials to Bravo, Bravo realized that most of them were cracked and damaged, rendering them unusable and unsaleable. Bravo tried to return the materials for a refund, but the representative for GEI told him that “a deal is a deal.” The owner of Bravo feels taken advantage of and wants to know what Bravo’s possible remedies against GEI are. Answer: This is a good case to illustrate to students the difference between a business contract and a consumer contract, and the consequences of that distinction in terms of the sale of goods legislation. Since this is a business contract, the parties are free to modify or exclude the terms implied by Sale of Goods Act. The terms of the contract suggest that this is exactly what the parties had done. Accordingly, Bravo will not have a remedy under the Sale of Goods Act. If Bravo is able to prove that GEI breached an express term of the contract, then Bravo may be able to obtain a remedy for breach of contract. However, since the contract stated that “the materials are sold as is, where is,” it is unlikely that a court would find the cracked and damaged materials to amount to a breach of contract. In this case, Bravo should have either inspected the goods prior to agreeing to purchase them, or should have refused to enter into a contract which provided that the terms implied by the Sale of Goods Act would be excluded. 6. Marco and Sammy agreed that Sammy would purchase 300 barbecues from Marco for resale in Sammy’s retail store. The specific barbecues that were to be the subject of the sale were identified at the time the contract was entered into and they were set aside from Marco’s large inventory of barbecues. The contract of sale was entered into on April 15 and provided that Sammy would pay for the barbecues in full on or before June 15, and Marco would deliver the barbecues to Sammy’s store between July 1 and July 10. The contract of sale also said that ownership of the barbecues would pass from Marco to Sammy when the goods had been paid for in full. Sammy paid Marco the full purchase price on June 10. On June 29, three days before Marco was intending to deliver the barbecues to Sammy, burglars broke into Marco’s warehouse and stole all the barbecues. When did title to the barbecues pass from Marco to Sammy? Who will be responsible for the loss of the barbecues? Answer: This can be a tricky question for students, because, having learned the five rules regarding the transfer of title, students will often rush to apply Rule 1 to this scenario. If Rule 1 did apply, then title would have passed from Marco to Sammy when the contract was entered into on April 15. However, the facts make it clear that the intention of the parties, as expressed in the contract, was that title would pass from Marco to Sammy when the goods had been paid for in full. Since the intention of the parties as to the transfer of title can easily be determined, there is no need to apply any of the five rules. Instead, the clearly expressed intention of the parties is given effect and title in the barbecues passed to Sammy when he paid for them in full on July 10. Therefore, Sammy was the owner of the barbecues when they were stolen and he will not be entitled to a refund of the purchase price that he paid. Chapter 24 Consumer Protection and Competition Law Instructor’s Manual–Answers by Philip King and Steven Enman V. Chapter Study Questions for Review, page 632 1. In what ways does consumer protection legislation expand the application of the Sale of Goods Acts? Answer: The Consumer Protection Act prohibits the modification or exclusion of the terms implied by the Sale of Goods Act in consumer transactions. In addition, the Consumer Protection Act applies to contracts for the provision of services to consumers, whereas the Sale of Goods Act applies only to contracts for the sale of goods. 2. What is a consumer? Answer: A consumer is an individual who purchases goods or services primarily for domestic, household, or personal purposes. 3. What is an unfair practice? Answer: An unfair practice is an illegal business practice that exploits the unequal bargaining position of consumers. 4. How are door-to-door sellers regulated? Answer: There are different rules for door-to-door sellers among the provinces. For example, many provinces require door-to-door sellers to be registered or licensed with the province and require that they pay a performance bond. In Ontario, door-to-door sales are subject to a 10-day cooling-off period. 5. Provide three examples of false or misleading advertising. Answer: See page 607 of the text for a list of claims or representations which will be considered to be false or misleading. 6. What are two primary concerns of consumers buying online? Answer: Consumers will be concerned about providing personal information, such as credit card information, to online retailers when they do not know where they are located or by whom they are operated. Consumers will also be concerned about product features and quality, when they do not have the opportunity to inspect the goods, or a sample of the goods, in person. 7. What are the key provisions of the Consumer Packaging and Labelling Act? Answer: The CPLA tries to ensure that consumers are provided with sufficient information to compare the price and quality of products in the marketplace. The CPLA sets out minimum packaging and labelling requirements for all prepackaged goods sold in Canada (other than drugs, cosmetics, and medical devices which are regulated by the Food and Drug Act). 8. What is the purpose of the Consumer Products Safety Act? Answer: The purpose of the CPSA is to protect the public by regulating consumer products that might pose a danger to human health or safety. 9. What does Advertising Standards Canada do? Answer: Advertising Standards Canada provides a voluntary code of advertising industry guidelines as well as a complaint mechanism for alleged violations of the code. 10. What are the main purposes of competition law? Answer: The main purposes of competition law are to promote a fair, competitive, and efficient marketplace and provide consumers with competitive prices, product choices, and the information they need to make informed buying decisions. 11. What is a due diligence defence? Answer: Due diligence is a legal defence based on having adopted reasonable steps to avoid the violation of a legal duty. 12. What is deceptive telemarketing? Answer: Deceptive telemarketing is providing false or misleading information in connection with a telemarketing activity. 13. What a conspiracy to fix prices? Answer: A conspiracy to fix prices is a criminal offence in which competitors agree to fix the prices charged for goods or services. 14. What is abuse of dominant position? Answer: Abuse of dominant position is when a dominant company, or group of companies, engages in activity that unduly lessens competition. 15. When is it acceptable to state “recommended retail price” on a product? Answer: Producers may state the “recommended retail price” on a product if they are concerned that widely advertised low prices for its products will damage its product image. 16. What is bid rigging? Answer: Bid rigging is a conspiracy to fix the bidding process to suit the needs of those submitting bids. 17. What is the meaning of “ordinary price” in evaluating the promotion of goods? Answer: See page 619 of the text for the formulae which are used to determine whether a product is legitimately “on sale” compared to the ordinary price of the product. 18. How can a corporation use the provisions of the Competition Act against a competitor? Answer: The Competition Act allows for civil actions to be brought by individuals or commercial complainants who are harmed by the actions of competitors. 19. What is the selling practice known as “bait and switch”? Answer: This practice involves advertising a product at a very low price to attract customers, then encouraging them to buy another product that is more expensive. 20. What is the difference between legal multi-level selling and pyramid selling? Answer: Multi-level marketing involves a product distribution structure with multiple layers of distributorships. Commissions are paid upward throughout the structure. Pyramid selling, which is a criminal offence, involves participants paying money in order to receive compensation for recruiting new participants. Questions for Critical Thinking, page 632 1. Why do we need consumer protection legislation? Are all consumers really in need of greater protection than all businesses? Answer: This question raises the issue of whether consumers need or deserve special treatment under the law. Arguments for consumer protection legislation include: the relative vulnerability of consumers, their relative lack of access to information, the inequality of bargaining power, and the need to provide a certain degree of protection in order to encourage consumers to participate enthusiastically in the commercial marketplace. Arguments against consumer protection legislation usually focus on the cost of compliance and the effect that regulations can have on efficiency and competitiveness. It is probably true that some consumers are far more sophisticated and knowledgeable, and therefore less in need of protection, than some businesses. 2. Are businesses generally familiar with the laws relating to consumer protection and competition? Do most businesses comply with these laws? Answer: Most businesses are probably familiar with consumer protection laws and, perhaps to a lesser extent, competition laws. Similarly, most businesses probably operate in compliance with these regulations. However, an important question is whether unscrupulous or disorganized businesses are aware of the regulations and operate in compliance with them. The legal rules are more important when it comes to unscrupulous businesses, although they may be the very businesses that are least aware of them and perhaps least in compliance with them. 3. Does consumer protection law place too great a burden on business? Is protecting consumers worth the additional regulation and the transaction costs that come with the additional regulation? Answer: This is another question that focuses on the policy behind the legal rules. Businesses often argue that “red tape” and compliance with various regulations make it difficult for them to carry on business efficiently and competitively. However, most people feel that some degree of protection is necessary so that consumers, who are particularly vulnerable, are not exploited. Where the balance should lie between these two policy interests makes for an interesting legal and political debate. 4. Why does the Competition Act focus on regulating the behaviour of business rather than providing remedies directly to consumers? Does provincial legislation serve consumers more effectively? Answer: The federal government has chosen to leave the field of private remedies primarily to the provinces. In part, this is a reflection of the constitutional division of power. It is also a function of the main purpose of the Competition Act. It is intended to address anti competitive behaviour. As such, its focus is on the discipline of businesses and restoration of competitive markets. This can lead students to a discussion of provincial and federal powers. Provincial legislation tends to be a complex web of specific provisions. The challenge for consumers is to become aware of and understand their rights and be prepared to persist with pursuit of their remedies. 5. Compare the criminal and civil approaches relating to deceptive marketing practices in the Competition Act. What are the advantages of one process over the other? Answer: This question calls for an understanding of the reviewable matters provisions of the Competition Act and the fast-track civil process. It can also provide occasion for a useful reference back to the materials discussed in Chapter 2 (The Canadian Legal System) and Chapter 10 (Introduction to Tort Law). The advantages of the civil process are the requirement for a lower standard of proof and the ability of the bureau to be more flexible in designing a remedy that will end the objectionable practice by encouraging compliance. This avoids the criminal law requirement of proof beyond a reasonable doubt. 6. Will Canada’s new anti-spam law finally deter spammers? How will we know if it is working? Answer: Time will tell whether the CASL will be effective in preventing or, more likely, reducing email spam. The three organizations responsible for administering and enforcing the CASL rules have promised to try and track the effects of the rules. It will be very interesting to see whether, or to what extent, the implementation of this regime has a significant impact on email spam. 7. Internet shopping opens up a broad range of risks to consumers. What recommendations would you have for federal and provincial governments moving to improve regulation to enhance consumer confidence? Answer: The regulation of Internet shopping is a rapidly changing field. The focus of attention is on the need to prevent and punish fraud. Who really is the seller? What will that seller do with information provided in the course of the transaction? How will the seller be pursued if it fails to deliver? What rights exist if the goods are less than expected? It is important for students to think of the limitations of the ability of the law to effectively prevent fraud. Ultimately, the primary protection customers have stems from the need for the business to maintain its good reputation and credibility. If a business sets out to be dishonest, there is a multitude of ways to deflect a dissatisfied customer. If a business wants to be a legitimate player, its success will be determined by its reputation. One piece of advice for regulators is to avoid a flurry of new law that may be difficult to enforce because of technology or other reasons. Situations for Discussion, page 633 1. Senior management of Superior Chemicals Ltd. has decided to revamp the marketing program for the company’s line of household products, which includes kitchen, bathroom, furniture, flooring, and all-purpose cleaners. They want to promote these products as more environmentally friendly than those of their competitors. The marketing department has developed a large number of possible messages such as “natural,” “nature clean,” “renewable ingredients,” “biodegradable,” “the environmental choice,” “the responsible choice,” and “We care about the earth.” What should management consider in developing the advertising campaign for their cleaning products? Which claims are appropriate? How must Superior be able to support its claims? Answer: This situation was prepared to illustrate to students the difficulties experienced with environmental claims in advertising and the reason the Competition Bureau introduced guidelines for these claims. Although the guidelines are voluntary, an advertiser that wants to establish due diligence and good faith would obviously want to comply. The following provisions of the Competition Act are relevant: • False and misleading advertising: the issue would centre on whether or not the new marketing approach is, in fact, better for the environment than the more traditional approaches used by competitors, since the clear message of the promotion is that it is. This is always a complex matter to prove, since a broad range of factors must be addressed. • The Competition Bureau’s decision whether to investigate potential misconduct as a civil or a criminal offence: compliance with the voluntary guidelines will be significant. If Superior can demonstrate an honest and conscientious effort to comply, this will favour a decision to proceed under the civil provisions. Likewise, a sound compliance program will assist Superior’s position. • Performance claims: Are the individual products being marketed better for the environment? It must be established that appropriate testing was conducted, that it confirmed that they are, and that it was performed before any claim was made. In evaluating Superior’s campaign, encourage students to consider the provisions of the guidelines. To what extent can Superior demonstrate it complied with these? Can Superior demonstrate that it did thorough testing before it made its representations? Students should recognize the extent of the scientific debate that will be relevant here. The positive aspect of this situation is Superior’s proactive approach to ensure the claims in its advertising campaign comply with the guidelines to minimize its risk of subsequent challenges. 2. Hammer and Nails Hardware, a nationwide chain, has devised a new product line. It has discerned a growing niche in the market among older “empty nesters” who are moving from houses into apartments or condominiums. It has devised a “We meet all your basic needs” campaign that prepackages tools, home repair products, and decorating products. It intends to introduce a series of 10 different lines over a six-month period. They will be boxed in an attractive, uniform style of packaging that includes “how-to” books. The packages will include the basic items needed for particular household tasks. What must Hammer and Nails consider in terms of its choice of package contents, packaging, labelling, instructions, and promotion in order to comply with legal requirements and avoid creating inflated expectations from customers? Answer: The Consumer Packaging and Labelling Act calls for the following: • A detailed listing of contents on the packaging. This is particularly important here as a range of goods are supplied, which may not be obvious from the general product description. • The quantity of each product included, in this case by number. • The identity of the manufacturer or importer (or likely distributor in this case), including return address. • The shape and design of packaging. This must not suggest that there is significantly more inside the package than there is. Some of this information must be in both languages, but since this is a national campaign, Hammer and Nails should, for practical purposes, put all information in both languages (it likely does not want to have different labelling across the country). The principal provisions of the Competition Act that are relevant here will be those relating to false and misleading advertising. The main area in which Hammer and Nails can run into trouble is in promoting the packages as containing more than they do. Further, it must be clear that the goods are of the quality necessary for the intended purpose. Wording should not suggest these are premium quality, for example, since they are not. 3. Softest Diapers is one of two leading producers of diapers for infants. It has spent several years researching and testing a new brand of super-absorbent diaper. It is now devising an advertising campaign that will make direct comparison with its competitor’s products. The marketing team has spent months comparing the two lines of products and genuinely believes that the new Softest diapers absorb significantly more moisture than do the equivalently priced products of the competitor. The team has asked the scientists to confirm their results, and after several months of testing, the scientists report that there is, on average, a 10 percent increase in absorbency. The campaign is an immediate success. The competitor, recognizing the threat, immediately seeks an injunction to stop this campaign under section 36 of the Competition Act. What provisions of the Act and what arguments will the competitor rely upon? What will Softest use in its defence? What are the possible outcomes? Answer: This case is based on Mead Johnson Canada v Ross Pediatrics, in which a competitor sought an injunction by using section 36 of the Competition Act and the false and misleading advertising provisions. The competitor will rely on two offences in the Competition Act: false and misleading advertising, and unjustified performance claims. Softest must prove that the overall impression of the advertisement is truthful and adequately backed by tests conducted before the representations were made. Since the representations are made specifically in terms of comparison with the competitor’s product, it is critical to substantiate their validity. While it is important that the statements themselves hold up, it is also important to determine whether or not it was misleading to adopt simulated conditions of use for the test. Students should be encouraged to consider the nature of the scientific evidence required and to what extent the competitor will fight this case. Encourage them to think about how competitive this industry is. How significant is a 10 percent increase in the minds of the purchasers? If the competitor is successful, Softest may be ordered to cease or alter the current campaign and compensate the competitor for demonstrated lost sales. 4. Great Buys Inc. imports a wide range of consumer goods from China for online resale in Canada. One of their most popular products are cell phone and laptop replacement batteries, which use lithium ion technology. In recent discussions with its Chinese supplier, Great Buys has discovered that one shipment of batteries was inadvertently shipped to Canada before quality inspection was completed and, as a result, may not be compliant with CSA standards. Great Buys has already sold the batteries to dozens of customers and no complaints have been received. While most lithium batteries are safe, some, mostly counterfeit and no-brand batteries, have overheated and caught fire. These fires are difficult to extinguish and product toxic fumes. What are the relevant rules for the import and sale of lithium ion batteries? What is Great Buys’ potential legal liability? What should Great Buys do about the one possibly unsafe shipment? Answer: Great Buys can take two approaches to this situation: the “legal” approach (in which it will do what the rules strictly require) or the risk management approach (in which it will go beyond the rules to deal with the situation in a preventive, consumer-focused manner). It is unlikely that Great Buys will be forced to recall the product, even under the new consumer product safety legislation, since there is no evidence of a danger to human health or safety. However, a voluntary recall by Great Buys would clearly be the safe option. The practicalities of such a recall present a challenge. The recall can be advertised and posted on websites, but it will require consumers to become aware and act accordingly. The worst option would be to focus on the absence of complaints and do nothing until an actual complaint or claim is received. 5. Mega Goods Inc. is a major discount retailer operating throughout Canada. The Home Co-op is also a nationwide chain, but it is a cooperative buying group of smaller retailers that band together in order to achieve buying power. Both retailers buy large volumes of plastic food containers from the major manufacturer (PFC Inc.) in the market. The product line is an important customer draw and is often used in special promotions. Mega Goods is eager to increase its market share, particularly with the entry of a multinational, U.S.-based discounter into the Canadian market. It decides to attempt to eliminate the direct competition from Home Co-op in smaller centres. Mega Goods approaches PFC and requests changed conditions of purchase. Specifically, it asks for a significant drop in price in return for a reduced payment period. This change will place it at a distinct advantage over Home Co-op, as Home Co-op cannot pay quickly because of its membership structure. Mega Goods intends to approach all other major suppliers if this proposal works. PFC management is quite concerned, as Home Co-op is a long-standing customer. Would supplying on Mega Goods’ terms be legal? Is it a wise business practice? Answer: The relevant provisions of the Competition Act are those covering abuse of dominant position. Specific prohibitions of price discrimination and predatory pricing have been repealed. Such activity is now investigated—presumably after notification by Home Co op or PFC—and reviewed as possible abuse of dominant position by Mega. There will, however, be difficulties in proving that Mega has abused its position. There must be evidence that Mega and Home Co op are indeed competitors and that Home Co op is prepared to meet the same sales terms as Mega. It is likely that Home Co op cannot meet the same terms because of its structure. It cannot pay as quickly. The key, however, will be whether the drop in price is a true reflection of the economic benefit of a reduced payment period. The words “significant” and “distinct advantage” would suggest that it may, in fact, go beyond this benefit. To be legal, the price advantage cannot be any greater than the true reflection of the benefit of the payment terms, or the bureau may determine that the pricing is indeed discriminatory and constitutes abuse. It may be, for example, that if the price is a true reflection, Home Co op will find ways of obtaining financing to meet the terms. In terms of pricing, the bureau will look to the ability and desire of Mega to control prices in smaller centres. The Bureau must prove that Mega will use the price advantage to lower prices in smaller centres in order to drive out Home Co op. Once that competition is removed, it will be free to raise prices once more. Presumably, Mega does not expect the new competitor to enter these smaller markets and is therefore going to use profits gained there to sustain operations elsewhere. This will be a difficult argument to prove at this stage, since so much is speculative. PFC must establish that any price advantage is a direct and provable reflection of improved payment terms. It might also seek advice from the bureau. Clearly, PFC is facing a changed environment and one in which the pressure to reduce the cost of goods will increase. 6. There are three major suppliers of commercial diamond cutting equipment in Canada. They have all operated for many years, and they respect each other and the quality of their products. They recognize that the market, while profitable, is finite, and that for each company to survive, none of them can have a significantly greater market share than the share currently held. For many years, it has been accepted that when calls for commercial diamond cutting equipment are made by various customers, Western Cutting Ltd. will respond for Western Canada, Central Equipment Ltd. for Ontario, and East Coast Cutting Equipment Inc. for Quebec and the Maritimes. Recently, purchasers have been questioning why, of all the equipment that they regularly purchase, diamond cutting equipment seems to be subject to the least fluctuation in prices. The customers have made inquiries, and have learned from employees of the three companies of the arrangement that they have. What are the legal implications for the three companies, their employees, and their customers? What are the possible outcomes? Answer: There is reason to be concerned, since the three companies are likely engaged in some form of a pricing conspiracy. They can be accused of committing a criminal offence under section 45(1) or the more specialized form of conspiracy, bid rigging (section 47). Each is a serious offence and is punishable by a fine or a prison sentence or both. Penalties for conviction under section 45 were increased in 2009 to a maximum of 14 years imprisonment or a fine of $25 million or both. It is worth explaining to students that this is the classic form of conspiracy. It arises from what appear to be benign motives: none of the conspirators believes that the three can continue to operate with open competition. Whatever the motive, however, the actions (if proven) are illegal. In fact, there is nothing that says that each of the market participants cannot charge prices that reflect their true costs and allow for a reasonable profit. Indeed, it may well be that each has equivalent costs and that the final price each charges is similar. These are the arguments used by the gas companies to explain equivalent prices at the pumps. What is illegal is the conspiracy to carve up the market as they have done. Customers may complain to the bureau and initiate an investigation. It appears that the employees of A, B, and C may be willing to blow the whistle, hoping to be protected. Sections 66.1 and 66.2 of the Competition Act provide protection against identification unless they are needed to testify against their employers and the other companies. They also provide protection against reprisals, provided the employees were acting in good faith. If convicted of the pricing offences, the companies face the penalties mentioned above. 7. Textiles Inc. is a major chain of fabric sellers. In this market, there are a few high-end sellers of fashion designer fabrics, some small independents, and three chains, with Textiles being the largest and most profitable. Textiles thrives on its ability to attract customers, often through discount pricing. Every few weeks Textiles has a major promotion, with certain materials being sold at a reduced cost. The business sells both regular fabrics and fashion fabrics. Textiles tends to discount the regular fabrics while the prices of fashion fabrics retain their high markup. After a while, even though advertisements state that fabric prices are reduced by 30 percent and even 50 percent, regular customers have become so accustomed to these reductions that they seldom expect to pay the full price. These practices are attracting the attention of competitors, who have notified the Competition Bureau. Why is the bureau likely to be interested in Textiles’ pricing practices? Answer: The primary concern the Competition Bureau will have with these practices is whether or not the price is actually less than the ordinary price for the goods. If Textiles is promoting the commodity fabrics as sales or reductions, then they must be real reductions. The Bureau will apply the volume and time tests to determine whether there is a genuine ordinary price that is now being reduced for the purposes of this promotion. Specifically, Textiles must be able to establish that a substantial volume of its sales are at the ordinary price and that this ordinary price was the price charged for a substantial time before, or immediately after, the sale. This is a reviewable offence and the bureau will demand evidence from Textiles to back up any assertion that these were genuine reductions. In this case, Textiles will have difficulty establishing there was a genuine “ordinary price” because of the frequency of the reductions and because of the buying practices of regular customers. Textiles may have committed other offences under the Competition Act. The advertisements might be false and misleading. It is also possible that this is bait and switch behaviour. With the latter, Textiles might have a strong defence, since there is no evidence it is not willing and able to supply to customers the reduced commodity fabrics. It is common for retailers to promote their products in this manner. The illegality stems more likely from the misrepresentation: Textiles is falsely suggesting a sale, when the products are routinely sold at this price. 8. Two companies (WSI and CA) dominated the commercial waste collection service industry on Vancouver Island. Their customers were restaurants, schools, office complexes, and condominium developments. They jointly engaged in certain business practices to preserve their dominant position and discourage other small and medium-sized waste collection companies. These practices included the use of long-term contracts that locked in customers and contained highly restrictive terms such as automatic renewal clauses and significant penalties for early contract termination. One small competitor (UP) was frustrated by its difficulty in finding customers because it provided prices and services that were competitive with the two major players. UP eventually discovered the terms of the contracts used by WSI and CA. UP considered filing a complaint with the Competition Bureau. How would such a complaint be dealt with? [footnote deleted] Answer: The Bureau would investigate the complaint to determine whether WSI and CA were in a dominant position in terms of the relevant market. The Bureau would then scrutinize the agreements and behaviour of the two companies to determine whether they were abusing their position through anticompetitive behaviour. In the case on which this situation is based (see Competition Bureau Canada, “Competition Bureau cracks down on joint abuse of dominance by waste companies” (16 June 2009) at ), the Competition Bureau found that the contracts in place resulted in substantially less competition for commercial waste collection in central Vancouver Island, producing higher prices and reduced choice. The Bureau reached a seven-year agreement with the companies to rewrite their contracts to resolve the bureau’s concerns. The consent agreement is filed with the Competition Tribunal and can be found on its website (see CT-2009-03). 9. Smart Sales Inc. is a big box retailer, specializing in consumer electronics. Smart Sales intends to advertise that it will “Match any competitor’s price on all Orange brand computers.” The fine print at the bottom of the ad states that the price match guarantee only applies to identical products offered for sale in Canada. Smart Sales has negotiated an exclusive distributor agreement with Orange, whereby Orange manufactures and sells three particular models of computer only to Smart Sales. These three models, which have slightly different combinations of features than other computer models which Orange sells to retailers other than Smart Sales, are the only models of Orange computers that Smart Sales offers for sale. As a result, Smart Sales never actually has to honour its price match guarantee, because there are no identical products offered for sale in Canada. What legal issues are raised in regard to the exclusive distribution agreement between Smart Sales and Orange? In regard to Smart Sales’ promise to match competitor’s prices? Answer: It is difficult to see how Smart Sales has violated any provisions of the Competition Act, the Consumer Protection Act, or the Sale of Goods Act. Smart Sales is not engaging in tied selling or exclusive dealing, their advertising is not false or misleading, and they do not appear to be engaging in any other form of illegal or anti-competitive behaviour. Still, their campaign has an air of dishonesty about it, and customers, if and when they discover the truth, may feel that they have been treated unfairly. As price matching programs have become more popular, among both retailers and consumers, complaints have become more frequent. Consumers often find that price matching policies are applied inconsistently and are subject to numerous limitations and restrictions—the fine print of Target’s “low price promise” is nearly 1000 words long and includes more than a dozen exclusions. Price matching programs in and of themselves are legal, and may boost sales, but retailers should be careful not to create or administer their programs in a way that annoys or frustrates their customers. From a legal perspective, all representations made to customers must not be false, deceptive, or misleading. Solution Manual for Canadian Business and the Law Philip King, Dorothy Duplessis, Shannon O'byrne 9780176570323, 9780176509651, 9780176501624, 9780176795085
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