This Document Contains Chapters 16 to 17 Chapter 16 The Corporate Form: Operational Matters Instructor’s Manual–Answers by Dorothy DuPlessis I. TEACHING OBJECTIVES After studying this chapter, students should have an understanding of • the liabilities of a corporation • the duties and liabilities of corporate directors and officers • the rights and liabilities of shareholders and creditors • how the corporation is terminated Chapter 16 continues the discussion of issues pertaining to the corporation. The preceding chapter introduced the stakeholders in a corporation and examined various organizational matters, including pre-incorporation issues, the incorporation process, and share structure. Additionally, the regulation of securities was reviewed. This chapter focuses on the liability of the corporation and the rights, duties, and liabilities of the corporation’s major stakeholders, namely, the directors, officers, shareholders, and creditors. Emphasis is on understanding and managing the many and varied liabilities of the corporation and its directors. II. TEACHING Strategies The following is a list of questions and text material that can form the basis of class discussion. • Describe the structure of the corporation. • Who is liable when something goes wrong in the corporation? Situation for Discussion (SD) 3 (page 410) • What is the liability of the corporation under criminal law? Under contract law? Under tort law? SD 2 (page 410) • What are the problems with holding a corporation liable under criminal law? Business Application of the Law: Death in the Workplace (page 383), Question for Critical Thinking (QCT) 1 (page 409), QCT 6 (page 410) • What are the duties of directors? To whom do directors owe their duties? Environmental Perspective: The Liability of Directors and Officers (page 394), Canadian Aero Services Ltd v O’Malley (page 388), Peoples Department Stores Inc v Wise (page 390), QCT 2 (page 409), QCT 4 (page 410), SD 4, SD 5 (page 411), SD 8 (page 412) • Why are more duties being imposed on directors? Should a professional act as a director? How can a person protect against liability? QCT 3 (page 409), QCT 6 (page 410), SD 7 (page 411), Business Application of the Law: Avoiding the Risk of Personal Liability (page 395) • What are the duties of shareholders? What are the rights of shareholders? • When are shareholders liable for the actions of the corporation? SD 6 (page 411), Chan v City Commercial Realty (page 397) • What remedies are available to shareholder? SD 1 (page 410) Corporate Liability The liability of the corporation and its stakeholders for actions committed in the course of carrying out business activity can be a confusing area for students. For example, consider the commission of a tort by a corporation’s director. It is not entirely clear when the liability is the director’s personal liability and when the liability is the corporation’s. To explain the various theories that impose liability on the corporation and its major stakeholders, it is useful to examine specific examples. In this regard, the Business Law in Practice scenario involving Time-in Team Management Inc. could be used. Students could be asked to determine who might bear liability and on what basis in the following situations: • There has been a major slump in the leisure sector and Time-in is unable to pay its trade creditors. • The major slump in the leisure sector turns out to be a major depression and Time-in fails to pay its taxes and employee wages. • Time-in produces and sells a product that involves the infringement of another manufacturer’s patent. • A director of Time-in bribes a government official to get a contract. • An employee of Time-in, while fooling around on a computer sends a defamatory email to a competitor. Students are encouraged to consider • what area of law is relevant to each incident: – contract – tort – criminal – regulatory • who might be liable in each incident: – corporation – directors – employees – shareholders • what the basis of liability is: – identification theory – agency theory – vicarious liability – limited liability – statutory liability – personal liability Conclusions about liability for each incident could be formulated. Examples are as follows: • Failure to pay debt is a contract matter; the corporation may be liable on the basis of agency. • Bribing a government official is a criminal matter; the corporation may be liable on the basis of the identification theory. • Failure to pay taxes and wages can be a regulatory matter; the directors may be liable on the basis of statutory provisions. Shareholders’ Agreements The last part of the chapter considers the position of the shareholder. A shareholders’ agreement is most commonly used in closely held corporations. The agreement is used to clearly define the rights and obligations of the shareholders and to set out guidelines for the administration of the corporation. There are many purposes for having an agreement, and the Business Application of the Law: Managing Risk through Shareholders’ Agreements (page 404) sets out the most common ones. The reasons can be conveniently classified into dispute resolution, share-transfer control, and corporate planning. Dispute resolution: in small, family-owned corporations, the potential for conflict is great. When there is a dispute and there are only two shareholders who each own 50 percent of the voting shares, the result is shareholder deadlock. A shareholders’ agreement can provide that any deadlock be resolved by a third party or set up a buy-sell arrangement, discussed just below. Share transfer: subject to corporate legislation and the company’s constitution, shareholders are free to transfer their shares to anyone they want. This can be an untenable position when shares are transferred to an unpalatable outsider. A shareholders’ agreement can address this issue by setting out certain share-transfer restrictions, such as the right of first refusal (grants to a shareholder the right to match any outsider’s offer to purchase another shareholder’s shares) and a buy-sell arrangement (grants to a shareholder the right to offer to buy the shares of another shareholder and, if that shareholder refuses to be bought out, to require that shareholder to buy out the offering shareholder on the same terms). This is the classic shotgun clause. Corporate planning: a corporation can be tremendously affected by the death, bankruptcy, mental incapacity, and so on, of a shareholder. Share valuation and management issues are also significant. For example, how should share transfers be handled when the shareholder dies or is otherwise incapacitated? Should certain corporate actions require unanimous approval first? How should shares be valued, particularly when there is no real market for the shares in question because the company is closely held? For more information on negotiating and drafting shareholder agreement, see Brian Graves, “Shareholder agreements” (Paper delivered St. Andrew’s Club and Conference Centre, Toronto, 21–22 February 2005) at McCarthy . III. STUDENT ACTIVITIES The material in this chapter dovetails with material that business students will be exposed to in business and society courses. This chapter provides an opportunity for students to broaden their knowledge and understanding of the role of the corporation in society. Some of the material could be covered in a debate format, as suggested in Task 1. Task 1: Have teams of students do 10- to 15-minute presentations on both sides of an issue. Examples of topics include the following: • Legislation should impose social responsibilities on corporations. • Small, closely held corporations should not enjoy limited liability, • Directors should owe duties to all stakeholders in the corporation, • Courts should be prepared to pierce the corporate veil in a broader range of situations. • The imposition of increased liabilities on directors has negatively affected business. Task 2: Have small groups of students respond to the questions posed in the Corporate Liability section above. Have each group prepare an answer to one or two of the situations posed. Task 3: The DVD that supports the Instructor’s Manual has a segment on “Women on Corporate Boards.” After viewing the segment have students read Business Application of the Law: Corporate Governance and Women on Boards (text page 385). Have students consider why it is important to have women on the boards of directors of companies. Follow up with a discussion of the Ontario Securities Commission’s “comply or explain” approach to increase the representation of women on boards. Is this the best approach or is there a better alternative? Task: Have students prepare an overview or study of Peoples Department Store v Wise (text page 390). Direct students to the full case at www.canlii.org. In their overview have students consider the following questions: • What are the duties owed by directors? • To whom do the directors owe duties? • What is “in the best interests of the corporation?” • What is the business judgment rule? Why do courts use this rule? • How does this decision affect the duties of directors? How does it affect the remedies of the creditors? • Should directors owe duties to all the corporation’s stakeholders? Why or why not? IV. EXPLANATION of selected features Page 383 Business Application of the Law: Death in the Workplace Critical Analysis: What are the lessons for employers from this case? There are a number of lessons: • Companies can be criminally liable for actions of supervisors, not only the actions of senior executives. Thus there is an onus to ensure that all supervisors are fully aware of their safety obligations; • Criminal conviction is more likely where the company, through a supervisor or executive is aware of a hazard and does not immediately remedy it. Thus hazard identification and remediation training is crucial. Cheryl Edwards suggests the following practical steps to ensure all those in position of authority at worksites are abiding by workplace safety standards: • ensuring supervisors are trained in and fully understand applicable company policies and procedures addressing the health and safety risks at the workplace • reviewing and qualifying the safety-related background and experience of anyone who will hold a position of authority within the company before the person is hired • ensuring ongoing monitoring of job sites by supervision and reporting of that monitoring to designated management personnel • ensuring that all visits to the workplace by more senior management or another party (such as safety personnel or a consultant) are thoroughly documented and include any discussions or concerns about health and safety and corrective action • ensuring follow up to achieve prompt corrective action respecting noted safety deficiencies • incorporating the monitoring of job or site health and safety compliance into the performance standard, measure and review for all supervisors • taking immediate action to address any supervisor’s substandard health and safety practices. Sources: Adrian Miedema, “Metron/Swartz sentencing decisions now online: Company criminally liable for site supervisor’s actions,” Canadian Occupational Health & Safety Law (14 August 2012) online: Dentons ; Cheryl A. Edwards, “Metron decision reveals employers can be bankrupted by criminal penalties,” Canadian Occupational Safety (15 November 2013) online: Canadian Occupational Safety . Page 383 Photo caption: What is an appropriate punishment for a corporation convicted of criminal negligence causing death? The Criminal Code does not set a maximum or minimum penalty when a corporation is convicted of criminal negligence causing death. It does, however, require that the sentence be proportional to the gravity of the offence and the blameworthiness of the defendant. The legislation also sets out the following factors to be considered in sentencing corporations: • any advantage realized by the organization as a result of the offence • the degree of planning involved in carrying out the offence and the duration and complexity of the offence • whether the organization has attempted to conceal its assets, or convert them, to show that it is not able to pay a fine or make restitution • the impact that the sentence would have on the economic viability of the organization and the continued employment of its employees • the cost to public authorities of the investigation and prosecution of the offence • any regulatory penalty imposed on the organization or one of its representatives in respect of the conduct that formed the basis of the offence • whether the organization was—or any of its representatives who were involved in the commission of the offence were—convicted of a similar offence or sanctioned by a regulatory body for similar conduct • any measures that the organization has taken to reduce the likelihood of it committing a subsequent offence Page 385 Photo caption: What factors should the courts consider when fining a corporation that causes the death of wildlife? The Syncrude Canada case (page 384) provides some guidance on addressing this question. The maximum fine under the Alberta Environmental Protection Act is $500 000 and the maximum fine under the federal Migratory Bird Convention Act is $300 000. After the guilty verdict, the prosecutor mused that he might seek to apply the fine to each of the 1606 dead ducks—a $480 million fine. Rather than prolong the dispute (and the negative publicity), Syncrude agreed to a $3 million fine. Was this a fair result? Although it is the largest environmental fine ever handed out in an Alberta court, it pales in comparison to Syncrude’s 2009 annual revenue of $7 billion ($3 million represents about half-day profit for the company). However, the $3 million went go to a number of environmental organizations, as well as to the University of Alberta, which received $1.3 million for a series of studies on bird migration and how to keep birds away from industry. Perhaps some of the factors that could be considered are what the corporation did or did not do to prevent the death of wildlife, the total number of deaths, whether the corporation had previous infractions, the impact of negative publicity, and so on. Source: See Darcy Henton, “Syncrude found guilty,” The Edmonton Journal (26 June 2010) 1; Josh Wingrove, “$3-million fine a drop in the barrel for Syncrude,” The Globe and Mail (23 October 2010) A20. Page 385 Business Application of the Law: Corporate Governance and Women on Boards Critical Analysis: What is the advantage of the “comply or explain” approach? Do you think mandatory quotas would be a better option? The “comply or explain” approach is consistent with existing corporate governance disclosure requirements in other areas and have spurred progress in other areas. It provides companies with the flexibility to determine the manner in which they address representation of women on their boards and in high level positions in order to take into account their particular circumstances. Mandatory quotas would probably result in more women on boards more quickly but quotas are a hard sell in Canada as strict rules can result in a “one-size-fits-all” approach the fails to account for individual circumstance. It is not the Canadian way. Indeed some business leaders question the legitimacy of using regulation to control the composition of private-sector boards. Sources: Leah Eichler, “Board equality: Plenty of talk, no action,” The Globe and Mail (1 December 2012) B16; Janet McFarland, “Comply or explain—or else,” The Globe and Mail (30 May 2013) B7; Allison Greene, “Comply or explain why,” The Lawyers Weekly (6 September 2013) 17; Janet McFarland, “OSC proposes model to get more women in top jobs,” The Globe and Mail (16 January 2014) Online Globe and Mail ; “Women on boards: OSC proposes “comply or explain” model over quotas,” Davies LLP (17 January 2014) online Davies . Page 386 Photo caption: Why is it important to have more women on the boards of directors of companies? Allison Greene reports that Catalyst research “has shown that companies with more women on their boards tend to outperform their competitors on both financial and non-financial performance measures, such as a higher return on equity and sales, enhanced client insight, heightened innovation and a superior ability to attract and retain top talent.” It seems that the underlying premise is that a variety of opinions and perspectives lead to better discussions and better decisions, which results in higher returns for the company. Source: Allison Greene, “Comply or explain why,” The Lawyers Weekly (6 September 2013) 17. Page 388 Landmark Case: Canadian Aero Service Ltd v O’Malley, [1974] SCR 592, 40 DLR (3d) 371 Critical Analysis: When do you think a director of a corporation should be able to take advantage of a business opportunity? In other words, when is a business opportunity her own and when does it belong to the company she serves as director? In assessing whether an opportunity belongs to a director or the corporation, the court imposes upon the director a standard of loyalty, good faith, and avoidance of a conflict of duty and self-interest. The director must act honestly and always try to advance the best interests of the company. The courts have not established precise tests for determining whether a particular opportunity constitutes a corporate opportunity. The general principles, however, include the following: • Opportunities or knowledge of opportunities that are obtained by reason of or in the course of the execution of the office of the director belong to the corporation. • A director is precluded from acting on an opportunity that the corporation is negotiating for or actively pursuing. • The obligation to refrain from pursuing opportunities does not terminate on the individual ceasing to be a director. • Whether a director’s involvement in an opportunity is a breach of fiduciary duty may be assessed in relation to the factors set out in Canadian Aero (page 376). Page 389 Ethical Considerations: Corporate Social Responsibility Critical Analysis: Should governments pass legislation requiring corporate social responsibility? Why or why not? This is, of course, a matter of opinion. Some feel that because of the political, social, and economic influence of corporations, and because of their sometimes less than stellar record on such issues as human rights, the environment, and developing countries, legislation should be imposed requiring social responsibility. Periodically, there have been legislative initiatives in this regard. For example, in 2009 a private members bill, Bill C-300—an Act Respecting Corporate Accountability for the Activities of Mining, Oil or Gas in Developing Countries passed second reading in Parliament before it was ultimately defeated (after fierce lobbying by the mining industry) by a vote of 140–134 in Parliament. The Act would have required corporate accountability guidelines for mining and oil and gas companies that are consistent with international environmental best practices and Canada’s commitments to international human rights standards. See Cristin Schmitz, “Lawyers take aim at mining companies,” The Lawyers Weekly (3 April 2009) 1. Others take the position that a corporation’s obligation is to make profits, and it has no social responsibilities. These people not only argue against legislation but also argue against social responsibilities for business. Others, however, recognize that corporations should at least consider the social impact of their activities and that it can be beneficial for them to do so. These people, however, argue against a legislative approach on the basis that legislation is not needed and would impose uncertainty, leave Canadian corporations at a competitive disadvantage in relation to international competitors, and impose huge costs on corporations. Page 389 Photo caption: What can businesses gain from being socially responsible? What are the risks? Stakeholders and the public are pushing corporations to be socially responsible and there is much to be gained for businesses from being socially responsible. Conduct that appears to be based on public welfare or humanitarian considerations can be geared toward increasing profits. In fact, such considerations are usually connected with attempts to maximize profits. For example, humanitarian acts can positively affect a corporation’s public image, resulting in more purchases by consumers. Moreover, corporations have readily made charitable donations that can usually be justified as “efficient advertising” or “public relations expenses.” See JS Ziegel et al., Cases & Materials on Partnerships and Canadian Business Corporations, Vol 1, 2nd ed. (Toronto: Carswell & Company, 1989) at 325. Also, corporations that fail to act in a socially responsible way will likely suffer from negative media attention—this, in turn, will adversely affect their public image and reputation. Such a corporation could be visited with negative publicity, consumer boycotts, a fall in share price, and disruption at shareholder meetings, to name just a few examples. On a related front, many people blame corporations for contributing to society’s problems—for causing pollution, for example. For this reason, a corporation may benefit if it is seen as ameliorating or attempting to ameliorate some of the harmful effects it may be responsible for. Furthermore, since society is constantly changing and growing, societal problems are becoming too numerous for governments to handle on their own. Many valid public interest objectives could not be achieved if corporations did not devote at least a portion of those resources to helping attain such goals as education policy. See JS Ziegel et al., Cases & Materials on Partnerships and Canadian Business Corporations, Vol 1, 2nd ed. (Toronto: Carswell & Company, 1989) at 324. One of the risks of being socially responsible is that taking a social position may cost the business money that is not recovered. Shareholders may not be as eager for a corporation to follow corporate social responsibility if the policy hurts the bottom line too much. Page 390 Case: Peoples Department Stores Inc (Trustee of) v Wise (2004), 2004 SCC 68, 3 SCR 461 Critical Analysis: Is the decision of Peoples v Wise good news for directors of corporations? Is it good news for creditors? The decision has good news for both directors and creditors. The court confirmed that directors and officers owe their fiduciary obligation to the corporation, and directors do not owe fiduciary obligations to creditors. This is good for directors but not creditors. Conversely, the case establishes that the directors’ statutory duty of care is owed not just to the corporation but also to its creditors. This is good news for creditors. The court also entrenched the business judgment rule. Under this rule, directors will not be held to be in breach of the duty of care if they acted prudently and on a reasonably informed basis. The Supreme Court also stated that courts should be reluctant to second-guess business decision making. This is good news for directors. Page 394 Environmental Perspective: The Liability of Directors and Officers Critical Analysis: What can directors do to protect against environmental liability? What factors do you think are important in assessing whether directors and officers have been diligent? As most environmental offences are strict liability, meaning directors have the defence of due diligence available, directors, first and foremost, must undertake proper due diligence (discussed below). In addition, directors should have an indemnity agreement with the corporation and appropriate directors and officers liability insurance. See Business Application of the Law: Avoiding the Risk of Personal Liability (page 395) and a discussion of directors and officers (D&O) liability insurance (Chapter 28, page 715). A leading case on environmental due diligence is R v Bata Industries Ltd (1992), 7 CELR (NS) 245 (Ont Prov Div), sentence var’d on appeal (1993), 11 CELR (NS) 208 (Ont Gen Div), var’d (1995), 18 CELR (NS) 11 (CA). In this case, three directors were charged under Ontario’s environmental protection legislation, and the court assessed their defence of due diligence. The court considered, among other factors, the following questions (paraphrased): • Did the board of directors establish and monitor a pollution prevention system? Did the system include regular supervision and improvement in business methods? • Did each director ensure that the corporate officers were instructed to – set up the pollution prevention system so the operation complies with the industry practices and environmental laws? – report to the board on the operation of the system and any substantial non-compliance on a timely basis? • Did the directors substantiate that the officers were promptly addressing environmental concerns brought to their attention? • Did the directors review environmental reports? • Were the directors aware of the industry standards regarding environmental pollutants and risks? • Did the directors react immediately and personally when they noticed that the system had failed? These questions provide the basis for determining whether directors have been diligent in carrying out their environmental responsibilities. See Deborah Overholt, Borden, Ladner & Gervais LLP, “Environmental liability in business” (4 May 2007) The Continuing Legal Education Society of British Columbia at . Page 397 Case: Chan v City Commercial Realty Group Ltd., 2011 ONSC 2854, 90 CCEL (3d) 235. Critical Analysis: Despite the success of the plaintiffs in having the court “lift the corporate veil,” courts are generally reluctant to do so. Can you think of situations where it would be appropriate to lift the corporate veil? Lifting the corporate veil means fixing personal liability on the corporation’s shareholders who may be individuals or other corporations. Situations in which this occurs generally fall into one of the following: • when the court construes a statute or contract. For example, pursuant to tax legislation the separate personality of related corporations is sometimes ignored and the corporations are treated as one entity. • when it is established that the corporation is the agent of the shareholders, personal liability can be affixed to the shareholders. • when the court is satisfied that a company is a “mere facade” or sham. The third category is the one most often used by the courts to hold shareholders liable. In Gregorio v Intrans-Cor (1994), 18 OR (3d) 527 (Gen Div), the court stated that there were two elements that must be established to lift the corporate veil: • There must be complete domination and control by the person, human, or corporation sought to be made liable. • The corporate form must have been used as a shield for conduct akin to fraud that deprives claimants of their rights. For a helpful article in this area see The Honourable Mr Justice James Spence, “Lifting the corporate veil” (1998) 4 Advocates’ So J 19-20 (QL). Conduct that amounts to “oppression” is conduct that is “burdensome, harsh and wrongful,” or conduct that has the effect of thwarting the reasonable expectations of shareholders and other potential complainants. Indications of oppressive behaviour include • lack of a valid corporate purpose for the transaction • the presence of non-arm’s-length transactions • lack of good faith on the part of the directors of the corporation • discrimination between shareholders with the effect of benefiting the majority shareholder to the exclusion or detriment of the minority shareholder • lack of adequate and appropriate disclosure of material information to minority shareholders • a plan or design to eliminate minority shareholders See McCarthy Tetrault, Directors’ and Officers’ Duties and Liabilities in Canada (Toronto: Butterworths, 1997) at 78–79. Page 402 Case: BCE Inc v 1976 Debentureholders, 2008 SCC 69, [2008] 3 SCR 560 Critical Analysis: The Supreme Court’s decision rejects the view that directors have a duty to maximize shareholder value in the context of change-of-control transactions in favour of a director’s duty to treat all affected stakeholders fairly, commensurate with the corporation’s duties as a responsible citizen. Does this holding make it easier or harder for stakeholders to challenge directors’ decisions? This is a difficult question to answer. On the one hand, the court stated that directors are to resolve conflicts in accordance with their fiduciary duty to act in the best interests of the corporation, having regard to all the relevant considerations, including the need to treat all affected stakeholders fairly, commensurate with the corporation’s duties as a responsible corporate citizen. This statement would appear to open the doors to stakeholders to challenge directors’ decisions. On the other hand, by requiring the directors to consider the interests of all stakeholders, the effect may be that the directors are not accountable to anyone. As well, the decision gives a high degree of deference to directors’ decisions. As long as directors follow a proper process and have regard for the interests of all stakeholders, their balancing of interests will be treated as a matter of business judgement not to be overturned by the courts. This may make it harder for all stakeholders, including shareholders, to challenge the board’s decisions. Page 404 Business Application of the Law: Managing Risk through Shareholders’ Agreements Critical Analysis: When should the shareholders of a corporation consider entering into a shareholders’ agreement? A shareholders’ agreement should be entered into before business begins. The longer the shareholders wait, the more difficult it will be to obtain the consent required. This may be due to an increase in the number of shareholders or because there is tension between the shareholders or because a conflict has arisen between them. Chapter 17 Introduction to Property Law Instructor’s Manual–Answers I. TEACHING OBJECTIVES After studying this chapter, students should have an understanding of • the meaning of property • the different forms of property • how property can be acquired • the types of legal rights and obligations associated with property This first chapter on the law of property is intended to introduce some general concepts as well as address issues that relate to all forms of property (real, personal and intangible), such as: • what counts as property? • why does the law not permit everything of value to be ‘owned’ • how does the law protect property? • what sort of rights are associated with ownership of property? • what sort of obligations are associated with real and personal property? • how does the law deal with special situations where one person has possession of someone else’s property, such as when a customer leaves property with a business to be repaired or a business is hired to transport a customer’s property, or goods are stored or left with an innkeeper. II. TEACHING STRATEGIES The following is a series of suggestions for presentation of the chapter material: • Use the first Business Law in Practice (BLIP), Should Everything Be Capable of Being Privately Owned? Ownership of Water Rights? to introduce the concept of what legally counts as ‘ownable’ property and to explore some of the policy issues raised by this seemingly straightforward question. The instructor may explore how governments have historically placed restrictions on ownership of certain valuable commodities, such as fresh water supplies because we consider that some commodities should be available to everyone and that if owned privately, its owner could limit access to something that is an essential human need or right. This BLIP illustrates some of the benefits and also the pitfalls of these policy decisions. Students might be asked to consider whether there might also be benefits to society resulting from private ownership. • Use the second Business Law in Practice (BLIP), Can Human Tissue Removed for Medical Tests Become Property, and If So, Who Owns It? to illustrate the some of the unexpected issues that arise when something is categorized as property and thus capable of being owned. • Outline the different ways that property is categorized and the unique features of the different categories. • Emphasize that one of the roles of property law is to provide a means for protecting property rights and explain that these rights are protected in Canada primarily through statutory law such as the Patent Act or the Alberta Personal Property Bill of Rights. Emphasize that registry systems also exist to protect ownership rights of certain types of property but there are practical limitations to registering all forms of property. • Review the ‘bundle of rights’ concept, including the right to exclude, the right to use and possess and the right to transfer or dispose. Explain that sometimes these rights are held by different individuals, such as in a lease where the right to use and possess might be held by someone other than the property owner. • Emphasize that property ownership may also entail legal obligations. Illustrate this with examples, such as the statutory obligations that are sometimes imposed on owners of environmentally or culturally sensitive property. This point can also be illustrated by reviewing the obligation of landowners in most jurisdictions to permit certain intrusions onto their lands, such as to permit the development of crown owned resources below the surface of land. • Explore possible business situations where possession of personal property, may be separate from ownership, such as when a business is in possession of a customer’s property in order to conduct repairs. • Emphasize that if the owner and possessor of an item of property (as in the case of bailment) are not the same person, it is important for each party to understand its rights and obligations. • Use Situations for Discussion 3 and 7 to introduce the concept of bailment and, in particular, to explain that a bailment can be created informally, or, more ideally, by specifically setting out the rights and obligations of each party. • Explore the importance of the bailment contract (page 426). These four bulleted points can be applied to any of the types of bailment that appear later in the chapter. • Emphasize that the bailee’s liability is largely dependent on the applicable standard of care and that the standard of care may vary depending on which party is benefiting from the bailment, the nature of the goods, whether payment is involved and expertise of the bailee, for example. Question for Critical Thinking 5 can be used to make the point that the standard depends on the circumstances of each bailment situation. • Focus on the attempts of bailees to limit their liability through terms in the bailment contract. Use Melrose v Halloway Holdings Ltd (page 431) to illustrate the complexities. Explore how the risks could have been managed more effectively by the parties in that case. • Use the following textbook elements to explain the specialized types of bailment that are frequently encountered in business situations: – Situations for Discussion 4 and 7 relate to leases. – Melrose v Halloway Holdings Ltd (page 431) and Situations for Discussion 2 and 6 relate to storage. – Situation for Discussion 5 relates to repairs. – Carling O’Keefe v CN Marine (page 428) and Situations for Discussion 2 and 9 relate to transportation. • Use Figure 17.1 to review the key issues in relation to the various types of bailment. III. STUDENT ACTIVITIES Task 1: Before class, have students choose a business with which they are familiar and have them identify as many items of property as they can that are used in that business. They should classify each item as real, tangible personal, or intangible personal. What are the major risks involving the various types of property? How can those risks be managed? The first question invites students to revisit the process for creating a risk management plan (see Chapter 3). In particular, the assessment of risk involves steps one and two of that process. Have students identify and assess the risks applicable to each form of property. The second question relates to steps three and four of the risk management process. Students can consider the four possibilities for each identified risk. The results of this task can be used as the basis for a class discussion to explore the nature and classifications of property. Task 2: Have students access local bylaws online. Have them consider the legal ramifications of owning real property in their municipality. What sort of legal obligations do property owners face in their municipality? What implications might these laws have for owners of business properties? Task 3: Have students collect documents relating to common bailments, such as airline baggage receipts, repair tickets, or courier receipts. Have them consider the contractual significance of the documents and the meaning of the terms that they contain. Task 4: Have students obtain a vehicle-leasing contract from a local car dealer. Do a comparison of layout and types of terms. Have students write in their own words who is responsible for what under the terms of the lease. Task 5: Have students consider various everyday bailment situations (such as lending one’s car, having an acquaintance on campus watch one’s laptop for a few minutes or renting a tool or equipment from a local business). Have students evaluate the standard of care in each situation having regard to who is benefiting from the bailment, the nature and value of the property, whether payment is involved, the terms of any contract, any special circumstances and the expertise of the bailee. IV. EXPLANATION OF SELECTED FEATURES Page 416 Business Application of the Law: Should Everything Be Capable of Being Privately Owned? Ownership of Water Rights Critical Analysis: Should water as a resource be made the subject of private property? Would private ownership of water rights promote more efficient use of water? Why is the issue of privatizing fresh water supplies controversial? These questions all relate to the issue of what should count as property that is capable of being privately owned. What should or should not count as property is essentially a policy question and historically governments have place limitations on the ability to privately some goods, even though they clearly have commercial value. The case of fresh water supplies is controversial because some argue that water should not be seen as a commodity and instead, as an essential human need or right. Proponents of this view are concerned that private ownership could limit public access to water. On the other hand, those who favour private ownership of fresh water supplies argue that private ownership would result in better management and more efficient use our water supplies. Page 419 Business Application of the Law: Can Human Tissue Removed for Medical Tests Become Property, and if so, Who Owns It? Critical Analysis: Do you agree with the court’s analysis? If excised tissue becomes the property of the hospital and the hospital uses the tissue to develop a profitable patent, should the hospital have sole right to those profits? Should the hospital’s right to use Ms. Piljak’s tissue be subject to any limits? This case illustrates the complexity of property rights, particularly where the property in question consists of biological materials that originated from an individual human donor. The case also illustrates how ownership and control over of human tissue might be lost by the donor and raises a question of whether donors should nonetheless have some continuing rights in relation to the donated material. Page 427 Photo caption: Who is responsible for property damaged during delivery? Who is responsible for damage to a leased truck? Both questions concern bailments. Ideally, there will be a contract in place that will determine which party is responsible in each situation. If not, the bailee in each case is required to exercise reasonable care in the circumstances. With regard to goods in transit, the rules of title may be applicable (see Chapter 23). Page 431 Case: Melrose v Halloway Holdings Ltd, 2004 CanLII 50135 (ONSC) Critical Analysis: Should there be a subsequent trial to determine damages? How could the participants in this transaction have better managed the risks arising from the locker rental? What changes in its business should HH make as a result of this case? A trial to determine damages will be an expensive and cumbersome process, but clearly the trial judge sees no other means of quantifying TM’s loss. Her claim of $60 000 is far in excess of the proceeds of the auction. If there is no settlement and a trial proceeds, then TM will be called on to produce evidence of the contents of the locker and their value. Other evidence will come from the auction house and perhaps HH. To better manage her legal risk, TM should have had her own contract with HH and retained a detailed inventory of the locker contents as she would do for insurance purposes. HH should manage risk better by making fundamental changes to its business practices. HH should strive for clarity in its rental agreements: identify the real renters and ensure that the contract terms are clearly written, reasonable, and brought to the attention of the renters. If HH wants to have renters contract out of the legislative protections, then there is a greater onus relating to the contract terms. Providing notice of the sale of locker contents and attempting to obtain a reasonable return should be of logical interest to HH. HH needs to appreciate that avoiding legal liability is not just a matter of drafting one-sided contract terms. Page 432 Business Application of the Law: Defining Liability in Contracts of Bailment Critical Analysis: Do these contract terms indicate that some businesses are exploiting customers who are less knowledgeable, less aware, or weaker, or do these clauses illustrate effective risk management? Are courts and legislatures justified in injecting ethical standards into business by applying standards, such as “unfair,” “unreasonable,” and “unconscionable”? It is arguable that these clauses are exploitative, particularly because there is little chance to negotiate the terms between the parties. They are standard form contracts that are used by most businesses. The consumer is at the mercy of such companies as they all have similar types of exclusion clauses, and there is no option to obtain the services elsewhere. In addition, the concept of exclusion goes against the common law principles of bailment. The courts and legislatures are injecting some ethical standards into business. However, unless the rules are part of strong consumer protection laws, they are not very reliable. In terms of risk management, companies should consider whether their use of bargaining power to transfer risk to consumers is the best approach for promoting positive customer relations. Page 428 Case: Carling O’Keefe Breweries of Canada Ltd v CN Marine Inc, [1990] 1 FC 483 (CA) Critical Analysis: Is the adoption of international rules an effective way to manage risk? How could CN have limited its liability to $1500 instead of $32 000? How could Carling have controlled its risk? Although this is a complicated bailment case, it is one to which students can relate. Everyone can picture a box (case) of beer and imagine several hundred of those boxes in three large containers on a ship. The photo on page 428 will help with the image. The final result in the case is also easy to present. Should the brewery recover the full value of the shipment or be limited to $500 per shipping container? First, the incorporation of international rules can work both ways. It can promote consistency among contracts and build harmony between domestic and international contracts. In addition, the standard set by international rules may be more reasonable than terms imposed by one party. However, it can put less sophisticated customers at a disadvantage if they are unfamiliar with international rules or lack the resources to become familiar. Second, CN could have accomplished its desired limitation through more careful and specific language. The challenge is to produce language that deals with a wide variety of goods and circumstances: the common method of shipping beer was a key factor in interpreting the language. The danger is that clauses that try to cover every type of shipment will be hopelessly complicated and create more problems than they solve. Third, if Carling were clearly subject to a clause that limited its recovery to $1500, presumably it would choose its carriers very carefully, in terms of reputation and reliability, and consider insuring the risk of loss (at additional cost, of course). Page 428 Photo caption: Transportation of goods involves many parties, contracts, and risks. What are some potential legal problems arising from this scene? There are at least three parties involved in the scene: the owners of the contents of the containers, the trucking company, and the shipping company. The potential legal problems are ownership of the goods and responsibility for loss or damage of the goods while in transit. These problems can be addressed through careful drafting of contracts and awareness of terms that may be standard in the industry. Legislation and international rules may also apply. Instructor Manual for Canadian Business and the Law Philip King, Dorothy Duplessis, Shannon O'byrne 9780176570323, 9780176509651, 9780176501624, 9780176795085
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