CH-22-25 Professional Services – Canadian Business and the Law : Chapter Notes

This Document Contains Chapters 22 to 25 Chapter 22 Professional Services Instructor’s Manual–Answers by Philip King and Steven Enman I. Teaching Objectives After studying this chapter, students should have an understanding of • how business uses the services of professionals • the legal responsibilities of professionals to their clients and others who rely on their work • the role of professional governing bodies The objective of the chapter is to introduce students to the legal and ethical obligations of members of professions. Students should readily understand the concepts of privilege and status that are attached to the professions and the responsibilities that flow from them. The legal concepts introduced in this chapter go beyond those of contract, tort, and fiduciary duties. It also introduces the governance of the professions: where the authority of the professions comes from, how self-regulation operates, and what rights flow to the users of professional services. The teaching objectives for this chapter will vary according to the background of the students. Upper-year students or students already in professional programs will need to devote the most attention to these materials. All students, however, will benefit from a general overview of the interrelationship between the professions and society, that is, how professions acquire their legal authority and what are their reciprocal responsibilities. Further, learning about the governance of the professions will lead to an understanding of how managers can use professional services effectively and maximize their value. II. TEACHING STRATIGIES Here are two possible teaching strategies for this chapter: The Traditional Approach The traditional approach to teaching law related to professional services focuses on the responsibilities and liabilities of the professionals themselves, especially their tort liability. This approach follows a business law course design that concentrates on the traditional areas of law. Although issues of contract and fiduciary duties are important, professional liability arises typically as an extension of the principles of negligence. Chapter 11 outlined the principles of negligence and of negligent misrepresentation in particular. This chapter provides a fuller explanation of these principles. It also completes the package of responsibilities of the professional by extending coverage to contractual and fiduciary liability. Alternatively, an instructor can refer to the materials in this chapter when teaching those topics at an earlier stage in the course. They will provide another context in which students can consider, for example, the application of contractual principles. Fiduciary concepts are introduced in earlier chapters, such as those on partnership and corporation law. This chapter provides a more complete explanation of how the principles apply in professional relationships. A Broader Approach A broader approach to using this chapter relates to the following basic questions: What is the fundamental understanding that future professionals need of the principles governing their legal environment? What do future managers need to know about the legal principles governing professionals? The authors chose to answer to these questions by going beyond their own experience and research, and asking those in professional organizations what they need in a textbook such as this. When adopting this approach, it is important to consider the composition of the class—those planning to enter the professions and those going into business. Begin with a discussion of what makes professions different from occupations in general. Focusing on such basic issues as why we feel comfortable describing law or medicine as a profession but feel less certain about whether we mean the same thing when we hear the term “professional mechanic” provides a useful introduction. Students will quickly recognize the use of “profession” as a synonym for “specialist” or “expert.” They can then begin to identify what qualities in addition to expertise make a profession as we traditionally understand that term. This discussion leads logically to the following issues: • Do people and should they expect more in terms of the responsibilities owed by a professional than by another service provider? • Do users of professional services feel intimidated by the expertise and the trappings of the professions, such as the terminology and the need to disclose highly personal information? Do users approach the contractual relationship differently than those with other service providers? • Where does the legal authority of professions come from? What is meant by self-regulating? What rights do users of professional services have? The key points for students are that this is provincial legislation, and there is commonality between Acts in terms of how they establish the various self-regulating professions. Students tend to think of accountants and lawyers as the professionals most relevant to business law, but a broad range of professional groups are subject to the legal principles discussed in this chapter. Examples are doctors, nurses, engineers, land surveyors, architects, and real estate appraisers. The Business Law in Practice scenario illustrates the many types of issues that can arise when a business is under stress, and it identifies typical interactions between business and professional service providers. Stress in business often leads people to take risks in their personal affairs that, under calmer circumstances, they might avoid. In turn, they become dependent on the quality and affordability of professional services. III. Student Activities Task 1: Have students prepare before class for the discussion described above by defining the term “profession.” They will refer to the definition in the text, but encourage them to go further. What makes a profession special? Have them list the characteristics that make a profession different from an occupation: specialized training, codes of ethics, ability to set educational requirements, right to discipline members, and so on. Then ask if they would be comfortable with the same status being given to another occupation (such as teachers), provided that occupation could have equivalent attributes. The purpose of this exercise is to illustrate just how difficult it is to define the term “profession” satisfactorily. It leads directly to the question of what qualities or responsibilities we should expect from professionals. Task 2: As an in-class exercise, have students role-play the negotiation of a professional services contract. Provide them with a scenario, such as that of Ted Dalmo needing to hire a lawyer for the claims against DT. Ask them to identify the appropriate terms and conditions for the contract. The exercise reinforces the need for consideration of key terms and how, even with relatively little experience, a well informed user of professional services can identify key issues and ensure they are included in an agreement. Instructors can point out that, in practice, handling these contract terms might be as simple as ensuring that a letter from the lawyer addresses each point to the client’s satisfaction. Task 3: Today, most professional rules of conduct, or codes of ethics, are available online. Likewise, the enabling legislation can be easily accessed. Have students prepare the following for discussion in the next class: Pick a profession. What provincial act governs this profession? What code of ethics or rules of conduct apply? Task 4: When discussing the issues of potential conflicts of interest for employed professionals, extend the discussion to the pressures facing professional service providers. Ask students to compare the issues raised with employed professionals with those raised in private practice. For example, how independent can a lawyer in private practice be if 30 percent of her work comes from one client or if one client is a major source of income for partners within the firm? IV. Explanation of Selected Features Page 569 Business Application of the Law: Professional Service Contracts Critical Analysis: What are the risks if a formal professional service contract is not in place? How can a client properly assess a contract prepared and submitted to the client by its own lawyer? The professional and the client may make different assumptions and have different expectations about various aspects of the engagement: fees, deadlines, and so on. The questions in the box can be used as a basis for discussion of the importance of negotiating clear contracts with a professional service provider, with terms that address key concerns that may arise. Students may not have considered these issues before, but they should readily engage in the discussion, since the issues are likely of interest to them. Page 571 Photo caption: Who is responsible for the losses and injuries resulting from this disaster? This scenario raises many questions. Who did the engineering design? For whom? When? What were the circumstances of the disaster? Who suffered loss from the disaster? Did the designers take reasonable care with their design? Was the design properly constructed by the builders? Answers to these questions will help to determine responsibility. Page 573 Business Application of the Law: Accountability for Auditors Critical Analysis: How does the risk of litigation affect the viability of professional firms? Should public company auditors owe a duty of care to investors who rely on their audited financial statements? How can auditors manage this potential risk? Professional firms may face litigation on such a scale that it brings down the firm, as was the case with Arthur Andersen and its involvement with Enron. The Livent case was not of a sufficient magnitude to bring about the demise of Deloitte, but the amount of the judgment was substantial. If firms abide by the rules and are diligent in their practices, then in most situations they need not fear litigation that would be of such magnitude that it would destroy a firm. However, firms must understand their professional obligations and must be vigilant regarding potential major claims. Canadian courts have not imposed a general duty of care on auditors, but many critics feel that such a duty of care should be owed. Students should be able to outline the arguments for and against imposing such liability. Page 574 Photo caption: How should Deloitte have managed its legal risk? Auditors should manage the potential risk inherent in providing professional opinions in the same manner that all professionals manage the risk of being sued for negligence. Deloitte should have been more diligent in its review of Livent’s finances. Throughout the chapter there are examples of how professionals have successfully, or unsuccessfully, tried to manage that risk. Page 575 Case: Hodgkinson v. Simms, [1994] 3 SCR 377 Critical Analysis: It could be argued that Hodgkinson’s losses were caused by the failure of the real estate market in British Columbia. What is the justification for transferring the losses to Simms simply because he assisted in the selection of the particular MURBs? What is the message for professionals? For clients? The justification arises from the fiduciary relationship and the strict enforcement of fiduciary duties. In addition, the court accepted Hodgkinson’s evidence that he would not have bought the MURBs had he been aware of Simms’ involvement. The court judged this lack of disclosure to be a serious violation of the fiduciary obligation. The message for professionals is clear. Ensure full disclosure of all relevant involvement and information to clients. Failure to do so can result in significant financial and professional consequences. The message for clients is less clear. It might appear based on this case that clients can fully rely on their professionals and seek compensation if fiduciary duties are not fulfilled. Clients are likely more interested in avoiding questionable decisions and should be vigilant in their choice of advisor and the advice received. Page 580 Case: Barrington v The Institute of Chartered Accountants of Ontario, 2011 ONCA 409 Critical Analysis: Does this process provide adequate protection of the public? Is it fair to the auditors? The discipline process as adjudicated in this case went through five stages. The first three—the Professional Conduct Committee, the Discipline Committee, and the Appeal Committee—were under the jurisdiction of the professional body: the Institute of Chartered Accountants of Ontario (ICAO). Such a multistage process suggests a genuine attempt by the self-governing body to balance the protection of the public and fairness to the professional members. Further validation is found in the two-part judicial process in the Divisional Court and the Court of Appeal, as reflected in the comments of Justice Karakatsanis. The focus of the courts was on the integrity of the commercial system and the rights of natural justice and procedural fairness to which the auditors were entitled. In terms of access to the results of the process beyond the parties directly involved, the judicial decisions are public, while decisions of the ICAO may be less available. Chapter 23 The Sale of Goods Instructor’s Manual–Answers by Philip King and Steven Enman I. TEACHING OBJECTIVES After studying this chapter, students should have an understanding of • the principles that govern the sale of goods and the impact of sale of goods legislation • the effect of implied conditions and warranties on sale of goods transactions • how businesses use standard shipping terms to manage risk • when title will transfer from a seller of goods to the buyer • remedies for breach of contract in regard to the sale of goods This chapter and the next one (Chapters 23 and 24) are intended to provide business students and students of marketing with the basic legal concepts that affect the sale of goods and the provision of certain services. Many of the concepts in these chapters are related to the business field of marketing. Accordingly, many students will already be familiar with the basic commercial manner in which these transactions take place. The text provides the legal rules that govern these transactions. The challenge of teaching materials relating to the sale of goods and consumer protection law is to avoid presenting a list of primarily legislative provisions that students memorize and then forget. The objective of this part of the text is to provide a coherent storyline with which students identify and through which legal concepts can be introduced. With this technique, students will hopefully understand the concepts in a context that makes sense to them. Such familiarity will not only enhance learning but also improve recall when the concepts are needed in practice. The material in these two chapters has been substantially revised and reorganized in this edition of the text. Chapter 23 covers the law relating to the sale of goods. Chapter 24 focuses on consumer protection and competition law. There is necessarily some overlap in this material, but it is important for students to distinguish between the different legal regimes. It may be worth spending some time to ensure that student know the difference between a business transaction and a consumer transaction, as the rules that will apply will to a large extent depend on this characterization. This chapter discusses the legal issues relating to contract for the sale of goods, including the key provisions of the Sale of Goods Act, the effect of implied conditions and warranties, the rules and terms relating to the delivery of goods and the risk of loss, the transfer of title from seller to buyer, and the remedies available to parties when the contract of sale is breached. II. Teaching Strategies The emphasis to this part of the course should be on contract law. Contracts for the sale of goods are, first and foremost, contracts. Accordingly, all of the fundamental principles of contract law continue to apply. However, in a manner similar to other specialized contracts (e.g., contracts of employment, guarantee contracts), special rules apply to contracts for the sale of goods. In addition, as will be discussed in the next chapter (Chapter 24), contracts with consumers for the sale of goods have yet another set of rules applied to them. Here are two strategies for effective presentation of this material: The Short Form Instructors whose course does not allow more than a brief introduction to certain key concepts can “cherry pick” topics. For example, many instructors choose to teach material on the sale of goods contract in isolation from (or with only brief reference to) other topics such as shipping terms and the transfer of title. This approach is facilitated since all material relating to the contract of sale is at the beginning of this chapter. The following is a situation relating to the sale of goods: Brown Publishers sells textbooks to university bookshops on a sale or return basis. The first three weeks of the fall term form the peak period for most sales. Typically the bookshops return unsold books within the first five weeks of the term, as they take up valuable retail space. The bookshop at Suddaby University routinely places large orders with Brown. This year, however, its management practices can be described as confused. The long-time manager is on leave for illness, and the acting manager has little experience. Orders have been placed, but tracking of sales has been poor. After six weeks, staff are only beginning to count stock—a necessary step before sending books back. That same weekend, a pipe bursts in the store and all stock is effectively ruined. The acting manager calls the sales rep at Brown and relates this turn of events. Within two days, he receives by certified mail an invoice for the cost of the entire original order. Is the Suddaby bookshop obliged to pay? Where does the risk of this loss lie? There is no indication from the facts that there were terms in the contract specifying when title to the books shifted. As such, the Sale of Goods Act provisions will determine when title shifts. The significance of identifying when title shifts is that it defines who owns the books at the time they were harmed. Whoever owns the goods bears the risk of the loss. Here the books were for “sale or return” and title does not pass until Suddaby accepts the order. Since there is no specified time for accepting, title will be deemed to have passed after a reasonable time—what that is will depend on prior practices between Brown and Suddaby (see Rule 4 on textbook page 597). In the past, Suddaby has returned books within the first five weeks of term. In this case, the damage has occurred outside this period. Suddaby will argue that its intentions were to return the books, and this was close enough to the normal period to be consistent with prior practices. Brown will argue the contrary. Although this is deliberately unclear in terms of final outcome, Brown probably has the stronger case. The Longer Form This approach uses the marketing law materials as a complete package. Adequate coverage of both Chapter 23 and Chapter 24 may take several classes, perhaps one for the sale of goods and another for consumer protection and competition law. This longer form approach relies on the Business Law in Practice scenario to take the student through the sale of goods and consumer protection legal framework. The materials in both chapters are presented in appropriate sequence. Another introductory approach for this material is through the various types of rules that a business must consider in developing its marketing strategy: the common law of contracts and torts, legislation and regulations at the federal and provincial level, and self-regulation through industry codes. Some instructors choose to cover Sale of Goods Act material in the study of contract law (see Part 2 of the text). This would reduce the time spent here on this material. Only a brief refresher of key concepts would be required to serve as a building block to consumer protection and competition law. III. STUDENT ACTIVITIES Task 1: To prepare the material on implied conditions and warranties in the Sale of Goods Act, have students contemplate the purchase of an article, such as a car or computer. Have them consider express and implied terms of the purchase transaction and refer to the conditions and warranties on pages 591–592 of the textbook. What happens if the item that is purchased is unsuitable, defective, or shoddy? Task 2: Have students do some comparison shopping before class. Ask them to select a common product, go to a store, and examine several brands of the same product. Have them look at the packaging—what are the first impressions of the value/amount of the contents of the package? Then look at the wording—does this confirm the first impressions? What information is provided to allow for an informed comparison? Task 3: Ask students to find an ad in the current media. Have them come to class prepared to discuss the ad from the perspective of whether there is any risk that this ad is false or misleading. If comparisons are being made with other products, could they be challenged by a competitor? What would it take to establish due diligence to justify the comparison? Ask students to consider the voluntary codes in advertising. Is there any possible violation? An easy example for discussion purposes is a beer ad with common sexual stereotyping. IV. Explanation of Selected Features Page 593 International Perspective: Contracts for the International Sale of Goods Critical Analysis: The CISG is a compromise agreed to by many nations and encompassing aspects of many different legal systems. How useful is this convention to Canadian business? Students can access the Convention on Contracts for the International Sale of Goods online (http://www.uncitral.org/pdf/english/texts/sales/cisg/V1056997-CISG-e-book.pdf). Students who are considering specializing in international trade will find this material of most relevance. It allows for discussion of public international law issues. A strong argument can be made for standardization of domestic and international terms and conditions of sale to enhance convenience and predictability. However, the contracting parties need expert advice regarding the differences from domestic law and the implications in practical terms. Page 598 Photo caption: What are the legal issues created by the shipping of goods? The key issues are the responsibility for the costs related to shipping and the risk of loss during shipping. The latter relates to the transfer of title to the goods. Page 599 Case: Chalmers Suspensions International Ltd v B&B Automation Equipment Inc, [2008] OJ No 1394 (Sup Ct J), aff’d 2009 ONCA 360 Critical Analysis: Commercial parties such as Chalmers and B&B are able to agree on their own terms and conditions by modifying or excluding the application of the applicable Sale of Goods Act. Why did B&B not transfer the risks to Chalmers in the contract? There are several explanations for the failure to transfer the risk. One is the matter of bargaining power: risk is transferred through superior bargaining power or a desire to compromise and deal with uncertainty through contract terms. Perhaps B&B was not aware of the risks involved and the advisability of addressing those risks in the contract. Perhaps the need to finalize the deal and get performance underway was more important than further negotiation of terms. Perhaps B&B relied on past experience: the particular problems had not arisen before, so why worry? Chapter 24 Consumer Protection and Competition Law Instructor’s Manual–Answers by Philip King and Steven Enman I. Teaching Objectives After studying this chapter, students should have an understanding of • the laws that protect consumers when they are purchasing goods or services • the obligations of manufacturers regarding product safety, and the packaging and labelling of products • the scope of competition law and the various practices that are prohibited by competition legislation This chapter, along with Chapter 23, has been extensively revised and reorganized from the previous edition. The primary objective of this chapter is to introduce students to consumer protection law and competition law, both of which are bodies of law which regulate the commercial marketplace. This chapter can also be seen as an extension of the previous chapter (Chapter 23) in that it discusses how sale of goods legislation is applied to consumer transactions. Students are introduced to the rules that affect the pricing and distribution (place) aspects of the marketing mix. The Business Law in Practice (BLIP) involving Skin Renew Limited is continued from the previous chapter. This chapter also introduces the effect of regulation on the different ways goods can be distributed, from door to door selling to retail to online selling. A key function of this chapter is the introduction to the important and far-reaching provisions of the Competition Act and its administration by the Competition Bureau. Consistent with earlier chapters, the concluding focus is on risk management. To accentuate the importance of an effective risk management plan, the Competition Bureau strongly encourages the implementation of effective corporate compliance programs, to the extent that their existence is considered when the bureau makes key determinations, such as whether to proceed criminally or civilly, or whether the due diligence defence applies. To influence the bureau, a business must establish that the program not only was in place but was also consistently and effectively applied. II. Teaching Strategies The strategies an instructor might adopt here mirror those described for Chapter 23. Either the short form or a longer form can be adopted. The short form might focus on those areas of interest for the individual course. For example, the instructor could use Chapter 24 in the following ways: • to discuss with students whether consumer protection laws are necessary or desirable and, if so, how far they should extend. • to focus on competition regulation—for example, pricing conspiracies and regulation of discriminatory practices. Explore the major goals of competition law. How does the law and its enforcement achieve these goals? • to address technology, particularly online retailing. There are many topics for lively discussion: telemarketing, spam, and privacy. The longer form would cover both topics of consumer protection and competition law, which calls for a discussion of most of the materials in the chapter. Instructors can use the continuation of the Business Law in Practice scenario presented in this chapter. One approach is to begin with the proposition that sellers are free to advertise their products and set prices as they wish. However, some advertising claims and pricing strategies are limited or prohibited. Examples are false or misleading advertising, price fixing, and controlling retail prices. Discussion can focus on the strategies that should be employed by Skin Renew: how should they advertise their products? What price should they charge? How should they distribute their products? What limitations are there on their ability to do these things? This chapter concludes with consideration of ethical issues and a review of risk management for both chapters in this part of the book. A prudent business will consider the legal issues and limits related to its overall marketing strategy and its constituent elements during the development stage and not just when challenges arise. III. STUDENT ACTIVITIES Task 1: Have students browse the Competition Bureau website at http://www.competitionbureau.gc.ca/ and, in particular, the Media Centre, where recent activities of the Bureau are highlighted. Students should select a recent news item and be prepared to discuss and present it in class, in terms of the implications for business. Students can do this exercise individually or in groups. There are several examples of these news items in the references and footnotes in the chapter. Task 2: Have students review the Business Application of the Law dealing with price scanners (see textbook page 621). Were they previously aware of the code? Ask them to visit some local stores to see if the code is posted. Have them identify the challenges for shoppers to effectively use the code and challenges for retailers in complying with the code. Task 3: Ask students for their experiences with online retailing. Have they experienced any problems? If so, have those problems been satisfactorily resolved? Have problems affected their willingness to continue shopping online? Discuss to what extent the law can address their concerns. Ask those who have not engaged in online shopping why they have not done so. Task 4: Ask students to collect a variety of commercial advertising and examine it for breaches of consumer protection or competition law. Do the ads make false or misleading statements? Do they contain performance claims or testimonials? IV. EXPLANATION OF SELECTED FEATURES Page 609 Business and Legislation: Canada's Anti-Spam Law Critical Analysis: Is anti-spam legislation necessary? Are the benefits to be gained by prohibiting spam worth the significant costs to businesses? Can anti-spam laws really be enforced in the real world? Students will be very familiar with email spam, so it is not difficult to have a discussion about whether there is a need to regulate spam. Consistent with the focus of the entire chapter, the issue is whether the benefits of regulating spam are worth the regulatory burden that it places on business. Although it is relatively easy to delete spam, cumulatively spam has a substantial impact on individual recipients and businesses in general. In addition, a significant amount of spam is related to fraud or other deceptive marketing practices. However, compliance with the CASL regulations requires a considerable amount of effort. The legislation is very broad and therefore captures nearly all unsolicited emails. Related to this discussion is the question of whether spam can actually be regulated. Although there may be very comprehensive regulations in place in Canada, much spam originates from places outside Canada and, accordingly, may be very difficult to actually regulate. Page 611 Photo caption: What is the purpose of the information on this container? The information is meant to comply with legal requirements for labels and warnings. Those legal requirements are intended to enable consumers to make informed decisions about the suitability and use of the product. Does this label constitute effective communication? Page 612 Business and Legislation: Federal Consumer Product Safety Legislation Critical Analysis: How effective can the law be in dealing with dangerous and unsafe products? How does the growth of global trade make the problem more challenging? This feature is meant to address the broad issue of the role of law in dealing with complex social and economic problems. There is no dispute about the need to promote and ensure the safety of consumer products. In many cases, it is not realistic to expect consumers to protect their own interests. However, society tends to exaggerate the ability of the law to deal with an issue, such as product safety. Often our reflex reaction when a problem emerges is to pass a new law—problem solved. However, the law must be framed in terms that are realistic and enforceable. We must also be prepared to devote adequate resources to enforcing the law. Of course, globalization exacerbates the challenges because we have little or no control over imported products and limited leverage over the exporters in other countries. In terms of government legislative policy, laws are only passed if political will exists and the particular problems are given high priority by the government of the day. In recent years, we have seen the impact of minority governments, frequent elections, and prorogation of Parliament on the complex and lengthy legislative process. Whether governments will be motivated, or able, to pass legislation designed to promote product safety will depend on a number of important factors. Page 613 Photo caption: What legal challenges are presented by the design of this product? Manufacturers, such as playground equipment makers, must be aware of their duties arising through contracts and torts, as well as the need to comply with regulatory and industry standards. Industry codes and guidelines are especially important. Playground equipment should be attractive to children but also designed in recognition of the risk of injury. Where are children most likely to fall? What will happen when they do fall? Can a small child get her head stuck anywhere in the equipment? Page 617 Ethical Considerations: Environmental Claims in Advertising Critical Analysis: Will business use these guidelines to improve the quality of environmental advertising? Are consumers likely to receive the information they need to make environmentally sensitive buying choices? Presumably, businesses want to promote the environmental friendliness of their products while avoiding the risk of being accused of misleading consumers. These guidelines should assist businesses in reaching an appropriate balance. The key message is to be truthful in advertising by avoiding claims that cannot be reasonably supported. Consumers who are aware of the guidelines may have greater confidence in the truth and reliability of the information they receive from advertisers and, of course, they can consult the guidelines themselves for examples of best practices. Page 619 Photo caption: What are the legal issues raised in connection with telemarketing? Telemarketing is not illegal, but deceptive telemarketing is a criminal offence. In addition, the Do Not Call List administered by the CRTC prohibits the calling of numbers on the list. Like the problem of spam, unsolicited telephone calls have become an annoyance for consumers and businesses alike. As a result, regulations have been introduced to deal with telemarketing. The text provides several examples of companies who have been prosecuted for deceptive telemarketing. Page 620 Case: Canada (Commissioner of Competition) v Sears Canada Inc (2005), 37 CPR (4th) 65 (Competition Tribunal) Critical Analysis: In other cases, prominent retailers agreed to pay substantial penalties, some in excess of $1 million. Have these high-profile cases altered the behaviour of retailers? Do consumers have greater confidence in advertised bargain prices? It is hoped that retailers will take note of the significant penalties and notoriety and alter their behaviour accordingly. However, consumers play a role in deterrence as well, by demonstrating their interest in and awareness of the rules regarding sale prices. Consumers lack the information to judge the volume and time tests. They can only be vigilant and file complaints for investigation. Competitors may also monitor pricing claims and file complaints if justified. Page 621 Business Application of the Law: Scanner Price Accuracy Voluntary Code Critical Analysis: Do voluntary codes, such as this one, provide helpful strength to the provisions of the Competition Act? Can voluntary codes replace regulation and enforcement? Are you aware of this code? This code appears to be widely publicized and consumer friendly, and to have an accessible complaint mechanism. Consumers might be more inclined to use this process than to file a complaint with the Competition Bureau. If consumers do not receive satisfactory resolution of complaints, they can still complain to the bureau. Industry associations are accountable to the extent that their failure to deal effectively with consumer complaints will affect their standing in the industry and may cause the bureau to tighten the rules and their enforcement. Regarding the effectiveness of this code, the last question can be useful. If students as consumers are either not aware of this code or unlikely to use it, then its value is limited. Page 622 Business Application of the Law: Unjustified Performance Claims Critical Analysis: Why are sellers tempted to make claims that they cannot support? The simple answer is because it works: people buy the products. In addition, claims may be based on studies, often done in-house. A company will argue that such claims are supported by studies and test results. Consumers are in no position to evaluate the claims and may not bother to file a complaint. On the DVD that supports this Instructor’s Manual, see the segment from The National: “Lasik MD.” Page 625 CASE: How Sweet It … Isn’t Critical Analysis: Will results like this simply force unscrupulous sellers to be more secretive in their dealings with competitors? Is it ever appropriate for competitors to agree on the prices they intend to charge? Conspiracy is extremely difficult to prove because it requires evidence that the parties agreed to do something illegal. Typically, sophisticated parties engaged in illegal activity tried to conceal such evidence. However, there have been some notable and high profile investigations and convictions for price-fixing, so it is possible to successfully prosecute such crimes. The larger the companies involved, and the more people who know about the illegal activity, the more likely it is that someone will be willing to step forward and cooperate with the authorities. There may be situations where it is appropriate for competitors to agree on the prices they will charge. For example, when an agreement to control price is sanctioned by an international trade treaty (e.g., NAFTA), or is prescribed by government regulation (e.g., utility rates), then the agreement will be legal. Chapter 25 Business and Banking Instructor’s Manual–Answers by Philip King and Steven Enman I. TEACHING OBJECTIVES After studying this chapter, students should have an understanding of • the relationship between a business and its bank • the legal issues involved in electronic banking • the costs and benefits of various methods of payment • the legal framework of negotiable instruments • the rights and obligations of those connected with negotiable instruments The major objective of this chapter is to examine the various aspects of financing a business by looking at the relationship between banks and business in the broad sense. The chapter is meant to provide a context for the traditional rules governing negotiable instruments and the comparative lack of regulation over electronic banking. The chapter highlights the aspects of banking of which a business should be aware and emphasizes the risk in relying on a bank to manage the financial affairs of a business. There is emphasis on the benefits and risks of the various options for accepting payments from customers. II. TEACHING STRATEGIES The traditional or core business law topic in this chapter is negotiable instruments. For instructors who want to focus on that topic, pages 645–651, along with Question for Critical Thinking 5, and Situations for Discussion 1, 3, 4, 7, and 8 are relevant. For instructors who want to use the chapter in its entirety, the following suggestions may be helpful: • The Business Law in Practice in this chapter continues through Chapters 26 and 27 to illustrate the various legal issues in financing a business. It can be used here to introduce the relationship between a business and its bank. How does a business evaluate its banking arrangements? The bank is essentially a service provider, so a business must somehow determine the variety and level of banking services it requires and proceed to purchase those services from the provider that can deliver the best value for money. There is a range of options and associated risks that a business such as Hometown should consider. • Question for Critical Thinking 4 can be used as a basis for discussion of the expansion of banks into the other three financial pillars: insurance, investing, and trust activities. Pose the question why, given the animosity that much of the public has for banks, we are allowing them to provide more services. It could be argued that our financial system is now more vulnerable to collapse because the sectors are no longer separated. The events of 2008 and beyond revealed the risky interconnectedness in the system. • Question for Critical Thinking 1 and Situation for Discussion 6 support discussion of the banking agreement between the bank and the customer. The first questions the dominance of the banks in essentially drafting the terms of the agreement to minimize their risk. The second serves as an example that even conditions inserted for the convenience of the customers entail significant risks. • Use Business Application of the Law: Client Information and Money Laundering (textbook page 640) as a prime example of legislative intervention in the duties arising from the bank–customer relationship. This reinforces the message in Question for Critical Thinking 1 and Situation for Discussion 2 that customers are normally on their own in looking out for their interests. • Use Questions for Critical Thinking 3, 5, and 6 and Situation for Discussion 5 to explore the legally challenging territory of electronic banking. Business and Legislation: Identity Theft (textbook page 642) highlights a major risk arising from technology. Technology and the Law: Developments in Electronic Payment Systems (textbook page 643) provides a flavour of the speed of technological development and innovation that is producing a revolution in payment systems. • Figures 25.1 and 25.2 show the basic features of a cheque, who is involved, and the normal path that a cheque follows through the banking system. • Figure 25.3 and Situation for Discussion 4 are useful to demonstrate the rights created by writing a cheque compared with other payment options. Figure 25.4 and Situation for Discussion 3 demonstrate the corresponding risks in accepting various forms of payment. • SNS Industrial Products Limited v Bank of Montreal and Situations for Discussion 1, 7, and 8 enable the exploration of the liability resulting from forgeries. • Questions for Critical Thinking 5 and 6 provide a convenient way to wrap up discussion of negotiable instruments and electronic banking. They invite students to consider the payments systems in the broad sense. People trade convenience for the occasional unfair result. The video segment on the DVD that supports this Instructor’s Manual that is relevant to this discussion is Marketplace: “Busting the Banks.” III. STUDENT ACTIVITIES Task 1: Ask students about their perception of banks and their relationship with customers. Ask them about their personal experiences with banks. Then have them locate and examine their agreements relating to their bank accounts, debit cards, and credit cards. Do they understand what the agreements contain? Have students identify and explain their rights and obligations. This assignment may be done in groups because of the complexity of the language in the documents. Task 2: Articles in the media dealing with various aspects of electronic banking (such as debit card fraud and payments by cellphone) are common. Have students find and summarize an article from a newspaper, magazine, or website. Task 3: As a group activity, encourage students to contact a business with which they are familiar and find out about the payment methods used for customer purchases. How well do they work? Does the business see any risks arising from these methods? What are the associated costs? IV. EXPLANATION OF SELECTED FEATURES Page 637 Photo caption: When operating a business, what financial decisions with legal consequences must the owners make? Financing is a major part of the business plan that the owners use to establish and operate the business. Debt financing is the subject of the next chapter. In terms of business and banking, the owners must choose a bank and the appropriate types of accounts for the needs of the business. The owners must also decide who has access to the accounts and decide what methods of paying bills and accepting payments will be used. Page 640 Business Application of the Law: Client Information and Money Laundering Critical Analysis: To what extent should the confidentiality of individual client accounts be compromised to combat money laundering by a minority of clients? How is the effectiveness of this regime measured? Is the regulatory burden justified? This feature explores the ramifications of legislative intervention in private business arrangements to address criminal activity. To what extent do the innocent suffer to find the guilty? The banks are reasonably well placed to comply with the current legislation because they were heavily affected by the previous money laundering rules. Other institutions are affected for the first time. The confidentiality question is not meant to have a definite answer. There must be a balance of competing interests. Students may come down strongly on one side or the other and need to be reminded of the necessary balance. The rules apply to institutions other than banks (including insurance companies and professionals, such as accountants). The law imposes significant duties on these private entities to report information that may indicate criminal activity. It could be interpreted as a download of enforcement responsibilities by government. Customers may lose confidence in their banks’ ability to protect their private information. Banks are caught in the middle. They don’t want to alienate customers by disclosing more than necessary to the authorities, but they don’t want to be in conflict with those authorities for failing to meet the disclosure requirements. With the increased threat of global terrorism, and the funding of terrorism, money-laundering and similar criminal activities have taken on a greater degree of importance for governments and the police. The effectiveness of this regime is difficult to measure. Obviously, money laundering still occurs. In addition, it does not stop the smurfing process, whereby money is deposited in amounts below the reportable amount. However, the simple implementation of the Act has likely lessened the occurrence of money laundering in Canada. The regulatory burden is justified; however, the question is how far the intrusion should go. There are competing interests of trying to stop money laundering yet at the same time the civil liberties of individuals must not be violated. For further information, see the FINTRAC website at http://www.fintrac.gc.ca/intro-eng.asp. Page 642 Photo caption: What rules govern ATM transactions? The rules of negotiable instruments do not apply to these paperless transactions. They are governed mainly by standard form contracts and international agreements. Page 643 Technology and the Law: Developments in Electronic Payments Systems Critical Analysis: The range of electronic payment mechanisms is continually expanding. Are the risks associated with these methods outweighed by the low cost, convenience, and customer demand? Can the developers of such methods and the lawmakers stay ahead of those who seek to breach security? The most common risk is fraud. With the growing use of electronic transactions, there is an increased potential of identity theft. In addition, there have been glaring examples of financial institutions’ and large retailers’ lack of security for sensitive data and the loss of such data through carelessness or theft. Another problem relates to the absence of a paper trail that can be used to sort out any difficulties among the parties involved. It remains to be seen whether the absence of regulation is a problem. The efficiency, convenience, and low cost of electronic transactions will justify a certain level of fraud and identity theft. The goal is to develop security measures which are more advanced than the techniques used by those who seek to breach security. There is fraud with cheques and other traditional forms of payment. One can even make the argument that electronic cash and payment systems are safer than traditional methods. Financial institutions are altering their arrangements with customers to instill and maintain confidence in their systems by absorbing losses that they might in the past have imposed on customers. Page 644 Photo caption: Do the same rules apply to various payment choices? The same rules do not apply. Cheques, debit cards, and credit cards all operate differently. Cellphones and other electronic devices are rapidly expanding the range of options for banking and making payments. Since all the payment methods operate through financial institutions, the rules come mainly from the agreement between the customer and the financial institution and from common law principles. Negotiable instruments are governed by the Bills of Exchange Act. Page 649 Case: SNS Industrial Products Limited v Bank of Montreal, 2010 ONCA 500 Critical Analysis: Does the specific reference to forgery in the 2006 contract support the court’s conclusion regarding the 1994 clause? The trial judge found that the forger did a good job on Sanfillippo’s signature and that Sanfillippo did not have adequate controls in place. Are these findings relevant to the interpretation of the legislation and the agreement? In its interpretation of the Act and the two agreements, the court is affirming the bank’s basic legislative responsibility for detecting forgeries or accepting the consequences. The bank is able to transfer the risk to its customers through verification agreements, but only if the language is clear and there is evidence of intention to transfer the risk. Verification agreements are strictly construed against the bank. The more specific language in the 2006 agreement is a good indication of the relative vagueness of the 1994 language. The bank’s advantage over the customer regarding the drafting and acceptance of such agreements is also recognized. The second question addresses the practicalities of detecting forgeries and the customer’s duty to engage in practices that reduce the risk of forgeries. These case-specific circumstances are relevant only if there is an implied duty by customers to take care of their banking in a way that reasonably minimizes risk. The court in this case recognized no such duty outside the language of the agreement. Instructor Manual for Canadian Business and the Law Philip King, Dorothy Duplessis, Shannon O'byrne 9780176570323, 9780176509651, 9780176501624, 9780176795085