CH-13-14 The Agency Relationship – Canadian Business and the Law : Book Guide

This Document Contains Chapters 13 to 14 Chapter 13 The Agency Relationship Instructor’s Manual–Answers by Dorothy DuPlessis V. Chapter Study Questions for Review, page 317 1. What is agency? Give an example. Answer: Agency is the relationship that exists between two persons when one party represents another party in the formation of legal relations. A common example occurs when a stockbroker buys and sells shares on behalf of individuals and companies. 2. Why would a business use an agent to act on its behalf? Answer: A business would use an agent to act on its behalf if the principal did not have the expertise of an agent. Time constraint on a principal is another common reason for the use of an agent. 3. How is an agency relationship entered into? Answer: An agency relationship can be formed in a number of ways. The most common method is by way of contract, when the parties formally agree to create an agency relationship. An agency relationship can also arise by conduct, where, by words or actions, outsiders are led to believe an agency relationship exists. 4. What is the difference between the actual and the apparent authority of an agent? Answer: Actual authority is the authority the agent actually has. It can be either express or implied. Express authority can be granted by the principal in a written document or orally. Implied authority is present by implication only. Apparent authority is the authority that a third party or outsider would reasonably believe the agent has, given the conduct of the principal. 5. When will an agent have implied authority? Answer: An agent will have implied authority when that authority is inferred from the position the agent occupies and when it is reasonably necessary to carry out or otherwise implement the agent’s express authority. It also arises by virtue of a well-recognized custom in a particular trade, industry, or profession. Implied authority is also an authority that the agent actually has but is present by implication only. 6. What is meant by agency by estoppel? How does agency by estoppel arise? Answer: Agency by estoppel is an agency relationship created when the principal acts in a manner that leads third parties to reasonably conclude that the agent has the authority to act as agent, thereby leading a third party to believe that an agency relationship exists. Agency by estoppel arises through the representations of the principal. 7. How is an agency by ratification created? Answer: Agency by ratification is created when one party adopts a contract entered into on their behalf by another who, at the time of entering the contract, acted without authority. 8. Is a principal permitted to ratify any contract entered into by an “agent?” Explain. Answer: No. A principal may ratify a contract only if he does so within a reasonable time, the principal had the capacity to create the contract at the time the agent entered into it and at the time of ratification, and the agent identified the principal at the time of entering the contract. 9. Is a real estate agent a typical agent? Explain. Answer: No. Unlike most other agents, the real estate agent usually has no authority to make a binding contract on behalf of the principal, the homeowner. A real estate’s role is normally limited to listing, advertising, and showing the property to prospective buyers, and then bringing that party and the homeowner together. 10. What are the duties of the agent? Answer: An agent is required to perform in accordance with the principal’s instructions. An agent also owes a fiduciary duty to the principal, which requires the agent to act in good faith toward the principal. This usually requires that the agent fully disclose all information regarding transactions involving the principal, act only for one party in a given transaction, avoid any conflict of interest that affects the interests of the principal, not use the principal’s property to secure personal gain, and avoid accepting or making a secret commission. 11. What are the duties of the principal? Answer: A principal’s duties are normally set out in the contract that creates the agency relationship and are not as onerous as an agent’s. They usually include paying an agent a specified fee or percentage for services rendered, assisting the agent in the manner described in the contract, reimbursing the agent for reasonable expenses associated with carrying out her agency duties, and indemnifying against losses incurred in carrying out the agency business. 12. Do all business advisors owe fiduciary duties? Explain. Answer: No. It depends on the circumstances. For instance, if an individual contacts a business advisor for advice and, because of this relationship, that individual places a degree of trust in the advisor to act in good faith and look out for his best interests, then the advisor has a fiduciary duty toward that individual. A fiduciary relationship can arise in any relationship where the facts indicate sufficient elements of power and influence on the part of one party and reliance, vulnerability and trust on the part of the other. 13. When can an agent be personally liable on a contract entered into on behalf of a principal? Answer: An agent will be personally liable on a contract with an outsider when she exceeds her actual and apparent authority. An agent may also be bound when she contracts on her own behalf to be a party to the contract along with the principal. 14. Describe how an agent can be liable to the principal. Answer: When an agent exceeds his authority, the principal can sue the agent for breach of contract or negligence. Furthermore, an agent may be liable if he fails to meet the standard of a reasonably prudent and competent agent and must not breach the fiduciary duty owed to the principal. 15. When is a principal liable for torts committed by an agent? Answer: As a general rule, an agent is personally liable for any torts that she commits. The principal is liable for any tort committed by the agent while the agent is acting within the scope of the agent’s authority. Therefore, a principal is vicariously liable for an agent’s actions as long as the agent was acting with express, implied, or apparent authority given by the principal. 16. How can a principal reduce his liability for torts committed by an agent? Answer: To reduce the liability for torts committed by an agent, the principal could have an indemnity clause in the contract with the agent whereby the agent, and not the principal, is liable for losses caused by the agent’s commission of a tort. 17. What is an undisclosed principal? Answer: An undisclosed principal is one whose identity is unknown to a third party. This party has no knowledge that the agent is acting in an agency capacity. 18. How may an agency relationship be terminated? Answer: An agency agreement can be terminated in a number of ways: the parties may agree to bring the relationship to an end, one party may give notice of termination to the other, and an agency relationship can also cease to exist by operation of the law. This usually occurs because of the death, dissolution (in the case of corporate agents), insanity, or bankruptcy of one of the parties. Questions for Critical Thinking, page 317 1. In the insurance industry, the agent acts primarily for the insurance company, which is the principal. Typically, the insurance agent also advises the client on the needed coverage and the meaning of the insurance policy. Do you see any potential problems with this situation? Answer: Historically, an insurance agent was seen as agent for the principal, the insurance company, and as such owed a fiduciary duty to it. The insurance agent did not owe a fiduciary duty to the insured because the agent can only be a fiduciary to one principal in the same transaction. Customers, however, often rely on their insurance agent’s advice about the amount of insurance to carry, the type of coverage required, and the company that should hold the policy. In short, customers may view their insurance advisor as their own agent. In recognition of this reality, courts have held that an insurance agent owes a duty to the customer. The rationale is that the commission that is payable by the insurance company to the agent is really being made by the customer through payment of insurance premiums. Since the imposition of the fiduciary duty on the insurance agent in Fine’s Flowers (see below for a summary), there has been a trend to increase the duty owed by the insurance agent to the insured. The rationale for this is that the average insured puts faith and trust in the insurance agent when the agent secures insurance because the insured has little knowledge of insurance matters. The relationship between the insurer, the agent, and the customer appears to go against the general principle that an agent may only act for one party in a given transaction. The courts, however, have held that an agent can act as agent for both parties see: Systems Management v Royal Insurance Company of Canada et al, [1986] ILR 1-2059 (NBQB). For example, an individual can be an agent of an insurer for, among other things, the purpose of soliciting proposals for the insurer. In doing so, the individual is, in fact, an agent for the insurer. However, when he or she simply sells insurance to clients on demand and places those policies with various companies, he or she acts as agent for the insured, whose directives and instructions must be followed and executed. If he or she commits an error in effecting the instructions of the insured, it follows that he or she is liable to the insured. The insurer in such cases has made no error—it has simply contracted to the extent and in the manner that it was requested to do. In such circumstances, there are no principles of law to hold an insurer liable for more that it contracted for. Accordingly, the insurer will not be responsible for the agent’s conduct. The following case provides an analysis of an insurance agent’s duty to an insured. Fine’s Flowers Ltd et al v General Accident Assurance Co et al (1978), 2 BLR 257 (Ont CA) The Business Context: An insurance agent acts on behalf of the insurance company and as such owes duties to it. An insurance agent, however, is also seen to owe a duty to the insured. The standard of performance required in this context is the subject of this case. Factual Background: Fine’s Flowers operated a greenhouse in Ottawa. Over the years, it had established a close and continuing relationship with Mr. Ault, an insurance agent. Fine’s relied on Ault to keep it insured against all foreseeable and normal risks to its business. One of these risks was the loss of heat in the winter. Ault placed insurance for Fine’s boilers but not for its water pumps, which were part of the heating system. The water pumps seized, causing the heating system to shut down. As a result, the greenhouse crops were destroyed. Fine’s brought action against Ault for failure to arrange insurance to protect against this event. The Legal Question: Was Ault liable for Fine’s losses? Resolution: Ault was held liable for failing to provide proper coverage. The court described Ault’s obligations in the following way: An insurance agent’s duty when asked to obtain a specific type of coverage is to use a reasonable degree of skill and care in doing so and to inform the principal promptly if such coverage is not available. If the principal gives no specific instructions, but relies on the agent to see that he is protected, then the agent, if he agrees to act on such terms, must inform himself of the principal’s business in order to assess the foreseeable risks and to insure his client against them. If such coverage is not available, the principal must be informed. 2. Is it reasonable to hold principals responsible for contracts formed with only apparent authority? What are the trade-offs? Answer: Principals are liable for contracts that are created as a result of an agent’s apparent authority. In Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd, [1964] 2 QB 480 (CA), the court noted that the representation that creates “apparent” authority may take a variety of forms. The most common representation is by conduct of the principal, that is, the principal permits the agent to act in some way in the conduct of the principal’s business with other persons. By allowing this, the principal represents that the agent has the authority to do so. Therefore, if the principal is aware of the conduct and allows it to continue, it is not unreasonable to hold the principal liable on the contract. In most cases where an agent exceeds his authority, an innocent third party will suffer. The question then becomes who ought to bear the loss—the principal or the third party? The general view is that the third party should not suffer the loss as the third party has relied on the apparent authority of the agent. All the third party knows about the agent’s actual authority is what he or she has been told by the agent or the principal. Further considerations in holding the principal liable include the following: • The agent owes a fiduciary duty to the principal, and if it is breached, the principal has a cause of action against the agent. • Liability usually follows control, and the principal has the most control over the agent. • Since it is the principal who hired the agent, the principal should bear the loss over an innocent third party. The principal should know that an agent is capable of overstepping her authority. The downside to holding the principal liable for contracts formed with only apparent authority is that she will be liable for a contract she did not truly enter voluntarily. This runs contrary to the voluntary nature of contracts. 3. Is a “real estate agent” an agent in law? Explain Answer: An agent is a person who represents another in such a way as to affect the latter’s relationship with the outside world. The usual way that an agent affects a principal’s relations with the outside world is by entering into contracts with the outside world on behalf of the agent. Real estate agents do not normally have the authority to enter into contracts on behalf of their principals; however, they are still agents in law because they can affect the principal’s relationship with third parties. For example, a misrepresentation about property made by an agent will affect the principal’s relationship with the third party who was a victim of the misrepresentation. 4. In the Ethical Considerations box (page 308), it was noted that life insurance brokers may receive a variety of compensation from insurance companies for the business that they direct to them. In the standard disclosure letter given to consumers at the time of purchasing a life insurance policy, there is usually a line stating that some companies may provide compensation to the insurance broker, such as travel incentives or educational opportunities, in addition to commissions. Does disclosure in this manner address the criticism that such travel incentives and educational opportunities amount to a conflict of interest? Answer: A conflict of interest may be acceptable if there is full disclosure and consent by the principal. The line in the insurance policy stating that some companies may provide compensation in addition to regular commissions is disclosure but it does not amount to “full disclosure.” It does not provide details of the compensation in terms of its value, how it is are earned, when it is earned, and so on. 5. It is critical to a fiduciary relationship that there was some undertaking on the part of the fiduciary to act with loyalty. The undertaking may be express or implied. What factors do you think are important in determining whether there has been an implied undertaking to act as a fiduciary? Answer: Justice Cromwell of the Supreme Court of Canada has indicated that it is critical to a fiduciary relationship that there was some undertaking on the part of the fiduciary to act with loyalty. He stated, “This does not mean, however, that an express undertaking is required. Rather, the fiduciary’s undertaking may be implied in the particular circumstances of the parties’ relationship. Relevant to the inquiry of whether there is such an implied undertaking are considerations such as professional norms, industry or other common practices and whether the alleged fiduciary induced the other party into relying on the fiduciary’s loyalty.” Sources: Galambos v Perez, 2009 SCC 48, [2009] 3 SCR 247; see also: Cristin Schmitz, “Supreme Court of Canada clarifies law of fiduciary duty,” The Lawyers Weekly (6 November 2009) 3. 6. The agency relationship creates considerable risks for the principal. What is the nature of these risks in both contract and tort? How can these risks be managed? Does the agency relationship create risks for the agent? Explain. Answer: See the discussion above in the Teaching Strategies section, Risks in Agency. Situations for Discussion, page 317 1. Perry Logan owned a small office building in suburban Halifax. As he was nearing retirement, Perry listed his building for sale with Alice Marshall, a real estate agent. While Perry was on an extended visit to Florida looking for a retirement property, he authorized Alice to sell the building on his behalf provided the offer was for at least $600 000. Alice showed the property to Dee Shannahan during the term of the listing agreement but Dee did not make an offer. Two weeks after the listing agreement between Perry and Alice expired, Dee made an offer to purchase the property for $625 000. Alice accepted the offer on behalf of Perry. Is there a contract between Perry and Dee? Explain. Answer: There is a contract between Perry and Dee if Alice had the actual or apparent authority to enter into a contract on behalf of Perry. Alice did not have the actual authority to enter into the contract on behalf of Perry because although Perry authorized Alice to sell the building on his behalf, presumably that authorization ended with the expiry of the listing agreement. Whether Alice had the apparent authority to act on Perry’s behalf is more problematic. A listing agreement normally does not provide for the authorization of a real estate agent to enter into a contract on behalf of the principal therefore on this basis Alice would not have apparent authority. However, if Dee was aware of Perry’s grant of authority to Alice to enter into a contract on his behalf and Dee has not been informed of the termination of that authority then it can be argued that Alice has apparent authority. This would be similar to the situation in Rockland v Amerada (textbook, page 301). 2. RCD Ltd. sells household appliances, including washers, dryers, dishwashers, stoves, and refrigerators. Most of RCD’s customers are developers of apartment buildings and condominium complexes. RCD’s sales representative is Alastair Du. He is authorized to make contracts with buyers, provided the value of each contract does not exceed $100 000. Alastair ignored the restriction on his authority and concluded a contract to sell 50 sets of washers and dryers to BES Developers at a price of $500 000. BES placed its order on RCD’s application form, which states that contracts over $100 000 require written approval of RCD’s vice president of sales, and Alastair on behalf of RCD accepted the order. RCD delivered the 50 sets of washer and dryers, and received payment from BES. Within a month of delivery of the washers and dryers, BES complained that the washers vibrate excessively and the dryers overheat, and they have caused damage to the apartments in which they were installed. RCD claimed to be protected from any liability for the faulty machines because Alastair had no authority to bind RCD to this contract. Does RCD’s argument constitute a valid legal defence to a claim against RCD by BES? Explain. Answer: RCD’s argument is that Alastair had no authority to bind RCD to the contract. Alastair did not have any actual authority to enter into the contract for $500 000 as his authority is limited to $100 000. Also, Alistair did not have any apparent authority to enter into the contract for $500 000 as buyers had notice of the limitation on Alastair’s authority. RCD’s application form stated that contracts over $100 000 required written approval of RCD’s vice president of sales. Therefore, RCD’s argument does constitute a valid legal defence to a claim against RCD by BES. However, RCD, by delivering the washers and dryers to BSE Developers, has impliedly ratified the contract negotiated by Alistair. In other words, there is a valid contract between RCD and BSE based on agency by ratification. 3. Atlantic Life Ltd. is a life insurance company. The corporation hired Toby Ryan as its representative in Newfoundland. Toby was provided with Atlantic Life business cards and brochures and a company car with the Atlantic Life logo on it. A clause in the contract between the parties provided The representative will not without the prior approval of the Company incur any liability or debt on behalf of the Company, accept insurance or other risks, revive polices, waive forfeitures, extend the time of payment of any premium or waive premium payment in cash, or make, alter or discharge any contract and will not make any expenditure on behalf of the Company. Toby negotiated on behalf of Atlantic Life the sale of a life insurance policy to Sadie Clements, insuring her life for $500 000. Shortly thereafter, Sadie died and her beneficiaries claim benefits under the policy. Atlantic Life refuses to pay on the basis that Toby did not obtain approval of Atlantic for the sale of the insurance policy. Does Atlantic Life have to pay the benefits? Assuming that it does, how could they have prevented this situation? [footnote deleted] Answer: This situation is based on Schwartz v Maritime Life Assurance Co (1997), 149 Nfld & PEIR 234 (Nfld CA), leave to appeal to SCC refused, [1997] SCCA No 362. Schwartz invested in Maritime Life’s annuity plan through an independent estate planner, Rideout. Schwartz gave Rideout $100 000 to add on to the policy; however, Rideout kept the money and Maritime had no knowledge of Schwartz’s payment. Schwartz sued Maritime claiming that Maritime was bound by Rideout’s receipt of the money, as Rideout was Maritime’s agent. Although Rideout did not have the actual authority to enter into contracts on behalf of Maritime, Maritime’s earlier conduct in appointing Rideout as its regional superintendent for Atlantic Canada and providing him with company stationary were representations that Rideout was Maritime’s agent. As Maritime did not inform Schwartz that Rideout was no longer its regional supervisor or that Rideout was merely an agent for purpose of soliciting applications and no more, it is estopped from denying that Rideout had apparent authority (end of case summary). Sadie’s estate can argue that Toby had the apparent authority to bind Atlantic. The representation that creates apparent authority may take a variety of forms—one of which is permitting the agent to act in some way in the conduct of the principal’s business with other persons. Sadie’s estate can argue that Atlantic’s actions of supplying Toby with business cards and brochures, as well as a car, with Atlantic’s name may be taken as a communication to the general public that Toby is an agent of Atlantic’s. To prevent such an occurrence from happening again, Atlantic should ensure that all potential customers have notice of the actual authority of their representatives. 4. Imam Daud Malik, a community organizer, had connections and influence with Sudanese politicians and government officials. He was interested in using these connections to promote relations between Islamic states and American Muslims. Through mutual acquaintances, Malik met Khan, the president of State Petroleum Corp. Khan, along with other investors, had incorporated State Petroleum to pursue the acquisition of oil concessions in Sudan. At the request of Khan, Malik assisted State in its efforts. There was no contract in place regarding Malik’s services. A short time later, State entered into an agreement with the government of Sudan for the acquisitions of oil concessions valued at $18 million. Malik claimed compensation from State for his services, but State refused to pay. Is Malik entitled to compensation from State? Explain. If he is entitled, what factors are important in determining the amount of compensation? [footnote deleted] Answer: This situation is based on Malik (Representative Ad litem of) v State Petroleum Corp, 2009 BCCA 505, 98 BCLR (4th) 92 and the facts set out above are a serviceable summary. Both at trial and on appeal, Malik’s entitlement to compensation was not an issue; his entitlement is a straightforward application of agency principles. Because Khan, the president of State, asked Malik to assist State to gain oil concessions in Sudan, Malik is State’s agent and it is obligated to pay him for his services. The issue is the amount of compensation to which Malik is entitled. The Court of Appeal held that in the absence of an agreement for services rendered, the following are considerations in determining an appropriate fee: the value of the oil concessions gained (the value of the oil concessions to State was $18 million), the extent of Malik’s services (introductions and assistance in dealing with politicians and government officials in Sudan), the value of others’ services in obtaining the concessions (although he was not the sole finder, he was State’s principal contact with the government of Sudan), and the guidelines of the Vancouver Stock Exchange with respect to finders’ fees (the guidelines provide various percentages and state that where there is more than one finder, the fee must be shared). Mr. Malik was awarded $500 000, a little over half of the finder’s fee payable under the guidelines. Other parties were entitled to the rest of the finder’s fee. 5. Mollie Morrow was a real estate agent working for Commercial Properties. She was approached by Shane Jacobs to find a commercial building in downtown Halifax. She did some investigating and found a suitable property owned by Haldane Properties (HP). She approached the owners about selling and they agreed to pay a commission of 2 percent if she acted as their agent in the sale of the building. After considerable negotiations, the sale was concluded for $6 million. Unknown to HP, Mollie had agreed to pay half of her commission to Shane. When HP learned about this they refused to pay the commission. Mollie argued that HP had received what they wanted out of the deal; she had made a sacrifice by giving up part of her commission; and her sacrifice ensured that the deal went through. In short, her actions helped, not harmed, HP. Is Mollie entitled to the commission? [footnote deleted] Answer: This situation is based on Ocean City Realty Ltd v A&M Holdings Ltd, (1987) 36 DLR (4th) 94 (BCCA). Patricia Forbes was a licensed real estate salesperson employed by Ocean City Realty. Holm Halbower asked her to find a commercial building in downtown Victoria. After some investigation Forbes approached A&M Holdings, the owners of such a building. Forbes and A&M Holdings entered into an arrangement whereby A&M holdings agreed to pay Forbes a commission of 1.75 percent if she acted as their agent in selling the building. After some negotiations, the sale of the building was concluded for $5.2 million, but unknown to A&M Holdings, Forbes had agreed to pay back half her commission to the purchaser, Halbower. Forbes had agreed to this arrangement, otherwise Halbower would not purchase the property. In an action for payment of the commission, the court held that Forbes was not entitled to any commission because she had breached her fiduciary duty to her principal, A&M Holdings. The duty of disclosure of an agent to a principal is not confined to those instances in which the agent has gained an advantage in the transaction or when the information might affect the value of property or where a conflict of interest exists. The agent certainly has a duty of full disclosure in such circumstances. However, they are not exhaustive. Full disclosure includes everything known respecting the subject matter of the contract that would be likely to influence the conduct of the principal and would likely operate on the principal’s judgment. In this case, the secret negotiation between the purchaser and the agent for a percentage of the agent’s commission was information that pertained directly to the completion of the sale, and therefore the agent had a duty to fully disclose the details of the arrangement with her principal. The agent did not satisfy the onus placed on her to justify her failure to disclose to her principal the arrangement she made with the purchaser. The agent’s non-disclosure was motivated by her desire to earn at least a portion of her commission and constituted a breach of her fiduciary duty to her principal and is therefore not entitled to any portion of the commission (end of case summary). As indicated in the case summary, Mollie would not be entitled to the commission because of the breach of her fiduciary duties. 6. Hamilton Utility Inc. appointed Juan Abrams as one of its corporate officers. Abrams rented cars from Quality Cars Ltd., a car rental business. The rental agreements named Abrams as renter, and he signed the agreements describing himself as company secretary of Hamilton Utility. Abrams, however, used the cars for personal purposes and not for company business. Hamilton refused to pay the charges as Abrams had not been given any authority enter contracts on its behalf. Is Hamilton liable to pay the car rental charges? Explain. What would be the result if Hamilton appointed Abrams to a secretarial position? [footnote deleted] Answer: This situation is based on Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd, [1971] 2 QB 711 (CA). Fidelis appointed Bayne as its company secretary. Bayne rented cars from Panorama, a car rental business. The rental agreements named Bayne as hirer, and he signed the agreements describing himself as company secretary. Bayne, however, used the cars himself and not for company business. Fidelis refused to pay the charges. Panorama sued Fidelis, alleging that Bayne was the agent of Fidelis and therefore it was liable to pay the charges. Fidelis argued that Bayne had no authority to enter contracts on its behalf and therefore Fidelis had no responsibility to pay the bill. The court held that Fidelis was liable to pay as a company secretary has apparent or ostensible authority to enter into contracts for the hire of cars on behalf of the company. A company secretary is an important person in the organization, with extensive duties and responsibilities. He is not a mere clerk. He can make representations on behalf of the company and he can enter into contracts dealing with the administrative side of the company’s business, such as employing staff and renting cars (end of case summary). Based on the above, Hamilton is probably liable to pay for the car rental charges. Abrams was a corporate officer with signing authority for the company, and, in particular, he described himself as the secretary. Even if Hamilton could argue there was not actual authority, it is very clear that there is apparent authority. If Hamilton appointed Abrams to a secretarial position, then the question still is whether or not Abrams has actual or apparent authority. If Abrams does not have actual authority, then apparent authority is determined by the representations of Hamilton. For example, did Hamilton lead third parties to believe the secretary had this authority? Had Abrams entered into these contracts in the past? Had Hamilton adopted these contracts in the past? 7. Srini Nair owns and operates a grocery store in Fort McMurray. He has a number of employees including Ragini Sharma who is his assistant manager. Ragini has very limited authority to act on Srini’s behalf. One day while Srini was out of town, a distributor of produce offers Ragini a great deal on fiddleheads, a delicacy from New Brunswick. Due to the perishable nature of fiddleheads, the deal is only available for one day. As Srini’s grocery store caters to many transplanted New Brunswickers, Ragini places an order. When Srini returns the next day and the fiddleheads arrive, he rejects them on the basis that he has never heard of anyone ever eating fiddleheads. Is Srini bound to accept and pay for the fiddleheads? How should businesses like Srini’s deal with the risk of employees exceeding their authority to act on behalf of the business? Answer: Srini is bound to accept and pay for the fiddleheads if Ragini has actual or apparent authority to enter into the transaction on his behalf. As Ragini has very limited authority to act on his behalf, it is unlikely that she has actual authority. But because Srini has appointed her to the position of assistant manager, then it is arguable that she has the apparent authority to enter into contracts on behalf of Srini. Srini can deal with the risk of employees exceeding their authority by doing the following: • act with care in hiring: check the background of prospective agents and only hire those who can be trusted to act within their authority • clarify authority: spell out the employee’s authority so that the employee understands what he can and cannot do on behalf of the principal • monitor the activities of the employee: require the employee to report on her activities to help ensure that she stays within the limits of her authority • review communications with third parties: make sure both direct and indirect interactions with third parties do not create apparent authority for the employee • inform third parties of the termination of an employment relationship: ensure third parties know that a relationship no longer exists 8. Ty Sharim has been employed as an agent for Farley’s Game and Fishing Lodge Inc. for the past 10 years. Farley’s runs an exclusive hunting and fishing camp in northern Ontario. Ty’s contractual duties include advertising the camp and soliciting customers at fish and gun shows and conventions in North America and elsewhere. One weekend, while on a fishing trip with his family, Ty came across a small fishing camp that was for sale. As Ty has always dreamed of owning and operating his own business, he is thinking of putting in an offer on the camp. Is Ty entitled to put in an offer to purchase the camp or must he inform Farley’s of the camp? Would you answer differ if Ty terminated his relationship with Farley’s before offering to buy the camp? Answer: Whether or not Ty can put in an offer on the camp depends, in part, on the terms and conditions of the agency agreement with Farley’s. The agency agreement may contain non-competition provisions, which would not allow Ty to enter into any business that competes with Farley’s business. Such provisions may also contain a survivorship period that would run after the termination of the agency agreement. In this case, Ty could not terminate the agreement and then buy the camp without being in breach of contract. Even in the absence of a non-competition clause in the agency agreement, Ty may still not be able to purchase the camp and start a business venture. He owes a fiduciary duty to his principal. The fiduciary duty requires the agent not to put himself in a conflict of interest without full disclosure and consent from his principal. In other words, Ty would be in a conflict of interest unless Farley gives fully informed consent to Ty’s venture. If Ty ended the agency relationship, his duty to his principal does not automatically end. His obligations extend for a time. Chapter 14 Business Forms and Arrangements Instructor’s Manual–Answers by Dorothy DuPlessis V. CHAPTER STUDY Questions for Review, Page 348 1. Define sole proprietorship, partnership, and corporation. Answer: • Sole proprietorship: an unincorporated business organization that has only one owner • Partnership: a business carried on by two or more persons with the intention of making a profit • Corporation: a business that is a separate distinct entity responsible for its own obligations 2. What are the advantages and disadvantages of a sole proprietorship? Answer: The advantages of a sole proprietorship are its simplicity and lower cost of licensing, that quick and independent decision making is possible, no profit sharing occurs, generally no legal fees need to be incurred, and tax benefits are possible as profits or losses are reported on the owner’s personal income tax return. The disadvantages of a sole proprietorship are that the risks and costs of the business are borne entirely by the sole proprietor, the sole proprietor has unlimited liability, generally there are low commitment levels among employees, the absence or illness of the sole proprietor can adversely affect business, the responsibility for all aspects of the business falls entirely on the sole proprietor, the business has limited access to capital, taxes may be favourable or unfavourable as there are no special tax rules governing a sole proprietorship, the business has a limited lifespan, and the business can’t be transferred or sold as it has no legal status. 3. How is a sole proprietorship created? Answer: To create a sole proprietorship, one simply commences business activity. The only requirement is that the business be registered or licensed. 4. What are the advantages and disadvantages of a partnership? Answer: The advantages of a partnership relate to simplicity, costs, access to capital, share in profits, and possible tax benefits. The disadvantages relate to unlimited personal liability, loss of speed and independence, limitations on transferability, profit sharing, and possible tax disadvantages. 5. How can a partnership come into existence? Answer: A partnership can come into existence through agreement or by implication, that is, by conduct that suggests a partnership. 6. Does the sharing of profits result in the creation of a partnership? Explain. Answer: The sharing of profits is one factor to consider in determining whether a partnership exists. The statutory definition of partnership covers people who expressly intend to be partners and people who may not but act as if they were. If people conduct themselves as if they were partners even if they did not expressly intend on being in a partnership, for example, by sharing profits, this is seen as a partnership in the eyes of the law. 7. How can a partnership come to an end? Answer: A partnership may end in the manner set out in the partnership agreement. If the agreement does not address this issue then the Partnership Act provides for termination under the following circumstances: • if entered into for a fixed term, by expiration of the term • if entered into for a single venture, by the termination of the venture • by any partner giving notice of termination • by death, insanity, or bankruptcy of a partner 8. How can the risks of the partnership form be managed? Answer: The risks of the partnership form can be managed by creating a partnership agreement, which gives the partners freedom to define the relationship. The risks can also be managed by choosing partners carefully, educating partners on their authorities and limits and the consequences of exceeding these, monitoring the activities of partners, and insuring against liabilities created by a partner’s wrongdoing. 9. What is the difference between a general and limited partner? Answer: A general partner has unlimited liability for the partnership’s obligations, whereas a limited partner has liability limited to the amount contributed to the partnership’s capital. As well, a limited partner has more narrowly defined rights. For example, a limited partner may not take part in the management of the partnership. 10. Explain the difference between a limited partnership and limited liability partnership. Answer: A limited partnership has one or more general partners with unlimited liability and one or more partners whose liability is limited to the amount of their investment in the partnership. A limited liability partnership is generally one in which the partners have unlimited liability for their own negligence and malpractice but limited liability for their partners’ negligence or malpractice unless they are in some way personally involved. 11. What are the advantages and disadvantages of the corporate form? Answer: The advantages of the corporate form relate to limited liability, flexibility, access to capital, continuous existence, possible tax benefits, transferability, and potentially broad management base. The disadvantages relate to higher costs, public disclosure obligations, greater regulation, dissolution, possible tax disadvantages, possible loss of control, and the potential for bureaucracy. 12. How is a corporation created? Answer: A corporation comes into existence only if proper documents are submitted to the government and it issues, in return, a certificate of incorporation. Whether public or private, shares must also be issued to the owners of the corporation. 13. What is the difference between a business form and a business arrangement? Answer: A business form refers to a manner of owning a business. A business arrangement refers to a method of carrying on the business activity itself. 14. What is the basis of a franchise? What is the relationship between parties to a franchise agreement? Answer: The basis of a franchise is a contractual arrangement between a manufacturer, wholesaler, or service organization (franchisor) and an independent business (franchisee), which buys the right to own and operate one of the units in the franchise system. Normally franchises are based on a unique product, trade name or patent, method of doing business, or goodwill. A contractual relationship exists between the parties to a franchise agreement. Currently, in Alberta, Ontario, and Prince Edward Island, the contractual relationship is augmented by legislation. 15. How does franchise legislation change the relationship between a franchiser and a franchisee? Answer: The relationship between a franchisor and a franchisee does not normally create fiduciary obligations. However, franchise legislation imposes on the parties a duty of good faith and fair dealing in the performance and enforcement of the franchise agreement. The courts have also adopted this concept at common law. 16. Is a joint venture a partnership? Explain. Answer: A joint venture may be a partnership; usually it is simply a contractual arrangement. 17. What is the difference between a joint venture and a strategic alliance? Answer: There may not be a difference between the two. The term “strategic alliance” is sometimes used to include joint venture. The key feature of a joint venture is that it is usually limited to a specific project or period of time. 18. Is a distributor an agent? Explain. Answer: A distributorship does not normally involve an agency relationship, and some distribution contracts specifically hold that the distributor is not an agent. The relationship is one of contract, and the parties owe no other fiduciary obligations. Questions for Critical Thinking, Page 349 1. Franchising is a common method of doing business in Canada. The Canadian Franchise Association reports that there are over 78 000 franchise units in Canada directly employing over 1 000 000 people and that franchise business accounts for 40 percent of all retail sales. What are the benefits and risks of franchising? [footnote deleted] Answer: The potential benefits of franchising are relatively straightforward. For the franchisor, it a way of growing the business quickly and achieving market penetration without the corresponding capital cost and time of establishing each business location single-handily. For the franchisees, they have the benefit of the franchisor’s structure, know-how, procedures, trademarks, goodwill, advertising, promotion, and trade secrets. There are risks for both the franchisors and franchisees. The major risk, of course, for franchisees is that they will not be recipients of the anticipated benefits. For the franchisors, they put the goodwill and viability of their franchising business at risk each time they enter into a franchising agreement. Source: See: Philip B. Kerr “Franchise law in Ontario, Canada,” Kerr & Nadeau (accessed 30 January 2015) online: Kerr & Nadeau . 2. Joint ventures are appropriate in situations where a complex project requires the combining of the expertise and resources of two or more entities for a limited period of time. From a legal perspective, what are the risks associated with joint ventures? How can the parties manage the risk? Answer: The legal risk associated with a joint venture is the possibility that the venture is deemed a partnership, which results in increased liability exposure because of the liability each has for the acts and omissions of the other. There is also the risk of the parties to the joint venture being subject to fiduciary duties; breach of fiduciary duties may result in an award of damages. The joint venture may also result in an agency relationship, where a party may bind the other in contract. The parties can manage the risk, to some extent, with a properly drafted joint venture agreement that clearly spells out the intention of the parties. The agreement should also be careful not to create the indicia (power, dependency, etc.) of a fiduciary relationship and not to grant authority that results in an agency relationship. Also, the parties can retain appropriate insurance coverage. Source: Eric A. Dolten, “Partnerships, limited partnerships and joint ventures: Managing the risk,” Dolden, Wallace & Folick LLP (June 1996) online: Dolden, Wallace & Folick . 3. The limited liability partnership is a response to concerns about professionals’ exposure to liability for their partners’ malpractice. What is the nature of the liability created by the partnership form? How does the creation of a LLP address this liability concern? Is it appropriate that accountants and lawyers, for example, enjoy limited liability? Is there a downside for a law or accounting firm to converting to an LLP? Answer: The liability created by the partnership form is unlimited personal liability for partners. The creation of an LLP addresses this concern by giving partners unlimited liability for their own malpractice but limited liability for other partners’ malpractice as long as they have not been involved in the malpractice. In addition, in some jurisdictions the partners are also protected from the contractual obligations of the partnership. The question of whether it is or is not appropriate that professionals, such as lawyers and accountants, enjoy limited liability is difficult. On the one hand, it is understandable that lawyers and accountants would want to protect themselves from liability for wrongs that they did not commit or with which there were not involved. On the other hand, the risk of wrongdoing has been shifted from the partners to the clients and insurers. A client cannot look to partners’ assets to satisfy a claim of wrongdoing; he can still look to partnership assets, but in most accounting and legal partnerships, there is little in the way of assets. Hopefully, the firm carries sufficient insurance that covers the claim. The problem with a limited liability partnership is that it takes away a powerful incentive to adopt systems to prevent negligence and wrongdoing. A partner does not need to be as concerned about what her partner is doing because she is not liable for the partner’s actions. As Philip Slayton states: The general partnership structure was based on trust. Only someone who was trusted was admitted to the partnership and kept there. Trust in your fellow partners, and in the quality of their work, was signaled to the world by agreeing to joint and several liability. Trust fostered a congenial work environment, and enhanced the quality of a legal practice. But the partners are no longer “all in it together.” Trust is no longer required: indeed, it is ill-advised. The savvy partner will be very careful what work he takes on, avoiding large, high-risk transactions that could destroy him financially if they go wrong (his “partners” will look on with sympathy while he is destroyed, but need not and will not put their hands in their own pockets). Giving advice to colleagues on difficult problems arising in large transactions is something to avoid: a ten-minute chat in your office about the issues in an important legal opinion could wipe you out financially. One of the best features of traditional law firm life—the give and take on legal problems, the exchange of wisdom and experience—is severely discouraged by the LLP structure. And only someone very comfortable with personal risk would occupy a management position in an LLP—head of a practice group, for example, or member of an opinion committee—because such a position carries with it possible liability for everybody and everything. Source: Philip Slayton, “Lawyers, liability and the firm,” Canadian Lawyer (February 2006) at . 4. What are the circumstances in which a partnership may be found to exist? What steps can be taken to avoid a finding of partnership? How can the consequences of being found a partner be minimized? Answer: A partnership is the relationship that subsists between people “carrying on a business in common with a view towards profit.” The provincial partnership acts usually contain the following definitions: • Business: includes every trade, occupation, and profession. • View to a profit: the undertaking is not for the purpose of carrying out charitable, social, or cultural purposes. A partnership need only have a view to profit. There is no need to actually make profit. • In common: the partners are carrying on business together, based on some kind of agreement. The agreement may be written, oral, or implied. According to Anthony VanDuzer, The Law of Partnerships and Corporations (Concord: Irwin, 1997) at 38, some factors suggesting a partnership relationship are • sharing profits • sharing responsibility for losses, including guaranteeing partnership debts • jointly owning property • controlling partnership business • participating in management • stating the intention to form partnership in contract • making government filings showing the partnership (i.e., registration under business names legislation, tax returns) • signing authority for contracts and bank accounts • holding oneself out as a partner • contributing money, services, or property as capital • being involved full time in the business • using the firm name • the firm having its own personnel and address The question of the existence of a partnership was discussed in Robert Porter & Sons Ltd v Armstrong, [1926] SCR 328. The court stated at 341, Partnership, it is needless to say, does not arise from ownership in common, or from joint ownership. Partnership arises from contract, evidenced either by express declaration or by conduct signifying the same thing. It is not sufficient there should be community of interest; there must be contract. Stating that the parties are not partners will not be enough to prevent the finding of a partnership. However, the parties may create contractual provisions stating the nature of the relationship that may help. It may also be possible to structure the relationship to resemble that of an employee–employer, for example. A contractual arrangement may be made for fixed periodic payments, like wages, to be paid. The partners may agree to indemnify this individual against any losses in the business. Doing so may make it difficult to determine whether the person is actually a partner or simply an employee being compensated out of profits. In the end though, the court will apply the legal equivalent of the maxim if it quacks like a duck, and walks like a duck, it is probably a duck. The consequences of being found partners can be minimized by partners having contractual provisions that indemnify certain partners against losses in the business. 5. In the limited partnership form of carrying on business, the limited partner’s liability is limited to her actual or agreed upon contribution to the partnership. To preserve this status, the limited partner must not participate in the management of the partnership business. What do you think is the reason for this prohibition? Can you think of situations where it would be useful for the limited partner to participate in management? Answer: Eric A Dolden explains: “The theory behind the prohibition is that imposing liability upon persons for the acts they undertake deters them from taking undue risks. Following this reasoning, persons who enjoy limited liability should not have the authority to take actions which may affect the risks to which others may be exposed.” It may be useful for the limited partner to participate in management when the limited partnership is encountering difficulties and the limited partner has the skills and expertise that could assist in addressing the limited partnership’s difficulties. Source: Eric A. Dolten, “Partnerships, limited partnerships and joint ventures: Managing the risk,” Dolden, Wallace & Folick LLP (June 1996) online: Dolden, Wallace & Folick . 6. The three basic business forms are sole proprietorship, partnership, and corporation. How is each of these formed? How is each owned? How does each form allocate the risk associated with doing business? Answer: A sole proprietorship requires little in the way of formation—one simply commences doing business. The person doing business is the sole proprietor. In this sense, the sole proprietor is the owner of the business and has all of the risk associated with carrying on the business. She is personally responsible for all of the business’s obligations because she is the business. A partnership is formed by parties entering into an agreement to carry on business together. A partnership can also exist by virtue of partners conducting themselves as if they were partners. In other words, a partnership can exist without an explicit agreement. The partners own the business in the sense that the partners are the business, as the partnership does not have an existence separate from them. As a consequence, the partners have unlimited liability for the partnership’s obligations. They bear all of the risk. A corporation can come in existence only through the federal or one of the provincial incorporation processes. A corporation essentially belongs to the shareholders. A shareholder owns one or more shares in the corporation, and the share represents an ownership interest in the corporation. The corporation, which is an entity separate from the shareholders, is responsible for its own obligations. A shareholder’s risk is limited to the amount she has invested in the corporation. Situations for Discussion, Page 349 1. Kennedy, Logan, and Morgan were avid hockey fans. They decided to put together an expression of interest for the purchase of a 50% interest in an NHL hockey team. They discussed some of the terms they wished to include in their proposal but did not come to an agreement as to the terms by which they were prepared to be bound. They also did not discuss the terms that would govern their relationship but all three understood that no member of the group could bind the others to any agreement during negotiations with the team owners. Over several months, the three put together a number of proposals but none were of interest to the owners. A short time later, Kennedy decided he no longer wished to pursue the joint acquisition and left the group. He did tell Logan and Morgan that he remained interested in acquiring a share in the team in the future should the opportunity arise. Logan and Morgan did not commit to including him as part of the group again and no conditions were imposed on any member of the group at the time of Kennedy’s departure. Logan and Morgan developed a proposal based on a different ownership structure than that proposed before Kennedy’s departure. It involved the purchase of a 75% interest in both the team and the arena. Negotiations based on this proposal did not progress significantly until Logan and Morgan offered to purchase 100% of the team and the arena. When Kennedy learned that Logan and Morgan were negotiating to acquire full ownership of the Canucks, he asked them whether he could participate in the deal. They said “no.” Logan and Morgan continued to negotiate with the team owners but were unable to reach an agreement. Kennedy, without informing Logan and Morgan entered into negotiations with the team owners and reached agreement to purchase 50% of the team and the arena with an option to purchase the remaining 50%. Ten days later, Logan and Morgan learned about the deal in the newspaper. They sued Kennedy alleging they had formed a partnership or joint venture with Kennedy and as a result Kennedy owed them a fiduciary duty, which he breached by acquiring an interest in the team and arena while Logan and Morgan were attempting to do the same. Was there a partnership or joint venture between Kennedy, Logan, and Morgan? Did Kennedy owe any duties to Logan and Morgan? [footnote deleted] Answer: The situation is based on Blue Line Hockey Acquisition v Orca Bay Hockey Limited where both the BC Supreme Court and Court of Appeal held that the relationship between the parties was neither a partnership nor a joint venture and consequently no duties were owed by the parties to each other. The case provides an excellent review of the law governing partnerships and joint ventures. Below is a summary of the trial decision, which as noted above was affirmed by the court of appeal. (1) Was there a partnership? A partnership exists only if there is a valid contract of partnership; and the members of the partnership are carrying on business in common and with a view to profit. As “partnership arises from contract”, it is necessary that there be certainty of the essential terms. If the parties have not entered into a written partnership agreement, there must be other evidence of their intention to be bound as partners. The statutory ingredients of a partnership require the carrying on of business in common with a view to profit. The business must be “carried out.” The parties involved must do more than simply agree to carry out a business; they must in fact carry it out. It must be carried out in common. A relevant consideration in determining whether the business is being carried out in common is the authority of any one partner to bind the partnership. Finally, the enterprise must be created or operated with the expectation by the partners of receiving a profit. Whether there exists a “view to profit” depends upon the intentions of the parties entering into the alleged partnership and the nature of the enterprise itself. In applying the law to the situation, the court emphasized that partnerships arise from contract and although the contract need not be detailed, it must contain the essential terms of the partnership. As the objective of the group was to acquire an interest in the Canucks hockey team, the three men required (at a minimum) an agreement among themselves as to the nature of their relationship, the rights and obligations they shared as a result of the relationship, and the business terms with which each of them was prepared to go forward to conclude a binding transaction involving a $250 million asset. The three agreed to work together to purchase an interest in the Canucks. They put together an expression of interest that did not require from any of them a commitment to one another or to Orca Bay. They agreed that one of them would be the spokesperson in the negotiations, but gave him no authority to enter into agreements or bind the other members of the group. These facts are not sufficient to create a partnership. The facts must establish both an intention to create a partnership and the actual creation of a partnership. An agreement to work together to pursue the acquisition of an asset does not, of itself, create a partnership. The three men did not discuss any terms that would govern their pursuit of the opportunity; none of these sophisticated businessmen, all of whom were familiar with limited and general partnerships, suggested entering into a partnership agreement; they did not ask a lawyer to draft a partnership agreement for them; no governance terms were proposed; no partnership accounts were ever established to pay expenses; no contributions of capital were requested. The three were seeking to purchase a going concern in the nature of a professional sports franchise, its facilities and the underlying real estate. Yet there was no agreement concerning the multitude of business terms they would be required to settle in a complex transaction of this nature. There was not even agreement on the price they were ultimately prepared to pay. (2) Was there a joint venture? The ingredients of a joint venture are a contract and the following: (i) a contribution of money, property, effort, knowledge or other asset to a common undertaking; (ii) a joint property interest in the subject matter of the venture, which is usually a single or ad hoc undertaking; (iii) a right of mutual control or management of the venture; (iv) an expectation of profit and the right to participate in the profits; Like partnerships, joint ventures must be founded on contract. The parties must intend to enter into a joint venture and must have agreed on all essential terms. The necessary contract can be inferred from all of the circumstances. However, unlike a partnership, it is possible to commence a joint venture without actually carrying on a business. For substantially the same reasons as noted above, the evidence falls short of establishing a binding joint venture agreement. Not only was there no agreement as to the identity of the parties that would hold the interest in the team and property, should it be acquired, there was no certainty of subject matter because the scope of the acquisition had yet to be determined. The parties had yet to agree on the price they would ultimately be prepared to pay and the host of other conditions that required agreement in a complex acquisition of the kind they were contemplating. In short, the members of the group had not agreed to any of the terms necessary to bind themselves to one another in order to complete a transaction with Orca Bay. In summary, the relationship among the parties was not one of partnership or joint venture. None owed duties of loyalty or good faith to the others. Each was entitled to withdraw from the group at any time and pursue the opportunity for himself. 2. Edie, Alma, and Tim established a restaurant called EATs. Edie, a retired teacher, invested $20 000 in the venture, and Alma and Tim each invested $10 000. Edie, Alma, and Tim do not have a formal agreement concerning the allocation of responsibilities, but they each take turns doing the cooking. The serving and cleanup tasks are done by staff. One day, while Edie was doing the cooking, Juan got food poisoning from the food. Juan intends to sue EATs, Edie, Alma, and Tim for damages of $100 000. If Juan is successful, how will the damages be allocated among the parties? If the restaurant were incorporated under Eats Inc. and Edie owned 50 percent of the shares, Alma owned 25 percent, and Tim owned 25 percent, how would the damages be allocated? What do these two situations illustrate about risk? Answer: If Juan is successful, then each partner is responsible for all the damages caused by the partnership. All the partners are jointly liable for the loss and have unlimited personal exposure, in that their personal assets can be seized to cover the loss. Juan can pursue the partner with the greatest assets and collect the entire amount from him or her, because of the principle of joint liability, and then that person, in turn, would need to seek repayment from the other partners. If the restaurant were incorporated, then EATs would assume its own liabilities—each shareholder could lose only up to the amount that he or she had invested in the business. These two situations illustrate the risk and exposure involved in forming a partnership and indicate the relative security of incorporation. 3. Regan, Riley, Madison, and Mackenzie were partners in a law firm. Regan gave the other partners written notice that he was leaving the partnership on March 31. The other partners purchased Regan’s interest and agreed that he would not be liable for any future partnership debts. At the end of May, it was discovered that Riley had, during the previous month, made various investments on behalf of a couple of elderly clients. The investments were either unsecured or under secured and the elderly clients lost over $250 000. None of the other partners were aware of Riley’s activities although the law firm had occasionally invested funds on behalf of clients in the past. Who is responsible for the elderly client’s losses? What precautions could the partners have taken to prevent this situation? [footnote deleted] Answer: This situation raises two issues: the liability of the partnership for the actions of Riley and the liability of Regan for partnership debts. The first issue is based, in part, on McDonic v Hetherington. In that case the court noted that the Partnership Act provides that partners are liable for the wrongful acts or omissions of a partner committed in the course of the business of the firm. The partners argued that they were not liable as the firm was in the business of providing legal advice, not in the business of advising on investments. The court held that as the firm had invested funds on behalf of clients in the past, they were in the business of advising on investments. In other words, the partner’s activities fell within the scope of the firm’s ordinary business and on this basis the partners were liable. The court was also prepared to find the partners liable even if the activity fell outside the scope of the partnership business on the basis of apparent authority. As the partner worked out of the firm’s offices, used the firm’s letterhead, relied on firm employees to keep records of the investments and, the investors received cheques from the firm’s trust account, the investors could assume that the partner was acting as a partner of the firm. The retired partner, Regan, may also be liable for the partnership debts on the basis of apparent authority. Unless notice was given of Regan’s departure, third parties may continue to assume that he is a partner and he continues to be liable for the partnerships debts. Therefore all of the partners including Regan may be liable for the elderly client’s losses. To prevent this kind of situation from happening, partners need to keep abreast of what partners are doing. For example, if money is coming into the firm’s account, partners need to know the reason for this. This is particularly important because of the court’s willingness to expand the ordinary or normal scope of a firm’s business. Source: Canadian Lawyers Insurance Association, “Am I my partner’s keeper?” Loss Prevention Bulletin, No.68 (April, 1997) online: CLIA . 4. Review Strother v 3464920 Canada Inc on page 331. At the time of the dispute between Monarch, Strother, and Davis & Company, Davis operated as a general partnership. It only became possible for a British Columbia law firm to become a limited liability partnership (LLP) in 2005. At that time Davis, along with many other B.C. firms, became a LLP. Assume that Davis was an LLP at the time of the dispute with Monarch. How would being a member of an LLP affect Strother’s personal liability to Monarch? How would Davis being an LLP affect the liability of the other partners? How do you think the LLP structure affects the relationship between a law firm and its clients? How do you think the LLP structure affects the relationship between lawyers within a law firm? Answer: An LLP is a variation of the partnership form in which the partners have unlimited liability for their own malpractice but limited liability for other partners’ malpractice. In the Strother case, Strother was the partner who committed the wrong, therefore he would have liability for it. The other partners in the firm would have a “liability shield” if they were innocent or uninvolved in the wrong. Their personal assets could not be seized to satisfy the claim. The partners who supervised or were aware of the wrongdoing may lose their liability shield depending on the jurisdiction. The LLP structure affects the relationship between a law firm and its client in that it shifts risks away from the law firm to the client. Partners are not liable for their partners’ wrongdoing; they are not responsible for what other partners are doing. The concept of a law firm that is an LLP is not the same as a law firm that is not a LLP. For the client, the lawyer in a LLP is more important than the firm. The LLP structure affects the relationship between lawyers in the firm as they are no longer “in it together.” There is not as much incentive to become involved in the partners’ business because of the possibility of attracting liability, and similarly, there is not as much incentive to take on risky business because the partner is “on her own.” Source: Philip Slayton, “Lawyers, liability and the firm,” Canadian Lawyer (February 2006) at http://www.canadianlawyermag.com/9/Lawyers-liability-and-the-firm.html. 5. Jody Ingalls is a recent university graduate with a BSc in kinesiology. As she was having difficulty finding a job, Jody decided that she could create her own job by opening a fitness club. As luck would have it, she saw an advertisement in a Halifax newspaper featuring franchise opportunities in the fitness industry. Jody responded to the ad and the franchise owner showed her the financial statements for a “Fit for Life” fitness franchise in a Halifax suburb. The income statements indicated that the franchise had made $100 000 per year for the past several years. Jody was extremely excited and agreed to lease it for $50 000 per year for a five-year period. She signed the contract and started carrying on the business. Jody worked 12-hour days for a year but was not able to make a profit, and now she wants out of her contract. Can Jody get out of the agreement? Explain. Would your answer be different if the franchise was located in New Brunswick? Explain. What are the legal risks associated with “purchasing” a franchise? How can the risks be managed? Answer: Jody could get out of the franchise agreement only if she could prove one of the following: • breach of the franchise agreement (i.e., did the franchiser breach an express or implied term in the franchise agreement?) • misrepresentation in the negotiations leading up to the agreement (i.e., did the franchisee make any false statements of facts in the negotiations leading up to the franchise contract?) • negligence in the preparation of any information given to the franchisee by the franchise owner If she is unable to prove one of the above, Jody she will not have a remedy. If, however, she were in New Brunswick where there is franchise legislation, she would have more options. In particular, under the legislation, franchisers have a duty to disclose and a failure to disclose gives the franchisee a right to rescind the contract. There are no doubt tremendous benefits in purchasing a franchise: a turnkey operation, established reputation, proven product or service, territorial exclusivity, proven management system, product knowledge, training, and so on. However, purchasing a franchise, particularly in jurisdictions without franchise legislation is fraught with risks. Most importantly, there is the risk, as in Jody’s experience, that the franchise does not turn out to be profitable despite hard work and effort. This risk can be managed by becoming informed: carefully reading the franchise agreement, looking into the financial history of the company, checking that the forecasted earnings potential is accurate, getting sound legal advice, and talking to other current and former franchisees before investing. 6. Ragini and Rajiv were co-owners of a number of properties located in the suburbs of Surrey. They had acquired the properties for resale and planned to subdivide and sell them for a profit over the next few years. One property, known as “the Corner” was too small to meet the legal requirements for subdivision. Ragini and Rajiv hoped that they would be able to acquire adjacent property so that their subdivision plans could proceed. Rajiv did all of the work in the investigation of the surrounding properties while Ragini stayed in the background. She had recently been downsized out of her job and spent most of her time looking for alternative employment. Rajiv, through his investigative skills, learned that Ming, the owner of an adjacent property, would be willing to sell his property for the right price. Rajiv, also knew that Ragini, because of her job loss, would not be able to raise her share of the purchase price. He, therefore, purchased Ming’s property on his own behalf. Shortly thereafter, he offered to buy out Ragini’s interest in “the Corner” for $15 000 more than the fair market value. Ragini accepted the offer. Rajiv consolidated “the Corner” and Ming’s former property, subdivided them, and sold them for a $250 000 profit. When Ragini learned of Rajiv’s purchase of Ming’s property and the sale of the subdivided lots, she was very upset. Rajiv simply pointed out that she did not have the money or the means to share in the purchase of Ming’s property, and he had paid a premium price for her interest in “the Corner.” Besides, he argued, it was his investigative skills and hard work, not hers, that led to the profit on the subdivision sale. What is the nature of the relationship between Ragini and Rajiv? Does Ragini have any legal liability in these circumstances? Explain. Answer: Rajiv and Ragini are partners. A partnership is defined as the relationship between persons carrying on a business together with a view to profit. Rajiv and Ragini fit this definition in that they are in the property development business. They acquired properties together with a view to subdividing the properties and selling them for a profit. A partner owes his or her partners a duty of good faith; if the partner competes with the partnership without the consent of the partners, the partner is in breach of the duty of good faith and must account for any profits made. By purchasing the property from Ming without disclosure and without Ragini’s consent, Rajiv took advantage of an opportunity that should have been available to the partnership. He must account for the profit he made. It is immaterial that Rajiv did all of the work to obtain the opportunity or that Ragini may not be able to raise her share of the purchase price or that Rajiv bought out Ragini’s interest for more than fair market value. Fiduciary obligation of good faith is strictly enforced by the courts. 7. Thomas, a young entrepreneur, started a construction business. Ari, who owned and operated an ethnic radio station, agreed to run some advertisements for him. Unfortunately, Thomas was unable to pay Ari for the services. In the hopes of making the business profitable so that he could get payment under the broadcasting contract, Ari, without remuneration, assisted Thomas in his business. In fact, Ari signed a contract with Lopez on behalf of Thomas for plumbing and heating supplies. When payment for the supplies was not forthcoming, Lopez sued Ari claiming that Ari was a partner of Thomas and was therefore responsible for the debt. Ari claimed that when he signed he was acting as Thomas’ agent. What difference does it make whether Ari is considered to be Thomas’ agent or his partner? What factors are important in determining the nature of a relationship between individuals? [footnote deleted] Answer: This situation is based on the following case: Lampert Plumbing (Danforth) Ltd v Agathos, [1972] 3 OR 11, 27 DLR (3d) 284 (Co Ct). Agathos was the owner and operator of a Greek radio station in Toronto. He contracted with Magoulas, who owned and operated Alpha Omega Construction Company, for weekly advertising over the radio station for one year at $80 per week. Magoulas was just starting in the construction business and no payments were made at the time of the contract or at any time subsequent to its execution. A few months after the start of the contract, Agathos began to assist Magoulas in his business without remuneration in the hope that Magoulas would make his business profitable and be able to pay Agathos under the broadcasting contract. He met with suppliers of the construction company, signed a document on behalf the construction company, issued a cheque from Agathos’ bank account, and did not inform customers of Alpha that he was not the owner or not associated with the business. The court held there was no actual partnership agreement between Agathos and Magoulas but there was a holding out by Agathos of himself as a partner and this creates liability for him as if he were a partner. The Partnerships Act, RSO 1970, c 339, s 15(1) provides as follows: Every person, who by words spoken or written or by conduct represents himself or who knowingly suffers himself to be represented as a partner in a particular firm, is liable as a partner to any person who has on the faith of such representation given credit to the firm, whether the representation has or has not been made or communicated to the persons so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made. (end of case summary) If Ari is acting as Thomas’s agent and is not himself a party to the contract, then there cannot be any recovery from him. The principal alone, namely, Thomas, is liable. On the basis of Lampert, however, it seems clear that if Ari has held himself out as a partner, he will have the liabilities of a partner due to his own misrepresentation. This means that both he and Thomas are liable under the contract even though, subjectively, they probably do not consider themselves to be partners. The factors that are important in determining the nature of the relationship are what the parties say, what they put in any agreement, and how they conduct themselves. For a list of factors that may indicate the existence of partnership, see QCT 4, above. The fact that partners do not see themselves to be partners is not particularly germane because the test for partnership is functional. 8. In 2038724 Ontario Ltd v Quizno’s Canada Restaurant Corp, the franchisees brought a national class action against Quiznos and its designated supplier, Gordon Food Services, over alleged overcharging on supplies. The defendants opposed certification primarily on the grounds that damages were not common among franchisees and would have to be established individually. Despite the defendants’ arguments and a “class action waiver” clause in the franchise agreement purporting to prevent the franchisees from initiating or being part of any action, the Ontario Court of Appeal affirmed the certification of the class action. In certifying the class action lawsuit against the franchisor, the court strongly endorsed class actions as a means of resolving franchise disputes. What is it about franchising disputes that makes them suitable for resolution by class action? Why do you think the “class action waiver” failed to protect the franchisors from class action litigation? Answer: The factors that make franchising disputes suitable for resolution by class action are the commonality of the franchisees’ claims. These claims often arise from the same or a very similar agreement between the franchisor and the franchisees, the same or similar relationships between the franchisor and the franchisees, and the same or similar exercise of power by the franchisor against the franchisees. The court declined to enforce the waiver in the franchise agreement because to do so would interfere with the proper administration of justice. The court noted that the purpose of franchise legislation is to protect franchisees, and the legislation provides franchisees with a right of association, which includes the right to bring a class action. This right cannot be contracted away by the franchisees. See David Sterns, “Appeal rulings clear the path for franchise class actions,” The Lawyers Weekly (3 September 2010) 132. Solution Manual for Canadian Business and the Law Philip King, Dorothy Duplessis, Shannon O'byrne 9780176570323, 9780176509651, 9780176501624, 9780176795085