This Document Contains Chapters 9 to 12 Chapter 9 The End of the Contractual Relationship Answers to Questions l. Describe the various ways in which a contractual relationship can come to an end. The contractual relationship can come to an end by performance, by breach or failure to perform an agreement, and by frustration. Under what circumstances would a breaching party who had partially performed the terms of the contract be entitled to receive part payment? The breaching party can receive part payment if, according to the contract, the part payment was due and payable before the breach. Describe the differences between a condition and a warranty. What is the distinction significant? condition is an important term of a contract. A warranty is a minor or peripheral term of a contract. If a condition is breached it allows the victim of the breach to discharge the contract. If a warranty is breached the victim must continue to perform but can sue for damages. When might the victim of a breach of a condition lose the right to treat the contract as discharged? The victim of the breach of a condition can lose the right to rescind by affirming the contract after becoming aware of the breach. It takes two people to breach a contract and if the victim of the breach chooses not to treat the contract as discharged, a breach of condition is treated like a breach of warranty. What constitutes adequate tender of performance? Proper tender of performance takes place where goods, services or money are delivered to the other party at a reasonable time and place. When money is involved, payment must be in legal tender. What recourse is available to one party to a contract when performance is made impossible by the other party’s conduct? When the impossibility of performance is caused by one of the parties, it is simply an example of breach of contract and all the remedies that are normally available for breach may be used. If performance is made impossible before actual performance is due, this is another example of anticipatory breach or repudiation and the victim has the choice of either suing immediately or waiting for performance and if there is no performance, suing then. What options are available to the victim of an anticipatory breach? Explain the advantages, disadvantages and risks associated with these options. Anticipatory breach takes place where one party refuses to perform before performance is actually due. When this happens the victim of the anticipatory breach has a choice of either ignoring the repudiation or insisting on performance at the appropriate date or treating the contract as discharged and suing immediately. If the victim of the breach sues immediately, damages can be kept to a minimum by making other arrangements. However, victims of an anticipatory breach might be in a better financial position by continuing to perform their obligations and waiting for the day of performance which may simply be payment by the other party. The disadvantage is that some other unanticipated, interfering event may take place in the interim which may frustrate the contract and cause a loss of the claim for damages. What is an exemption clause? When might an exemption clause be unenforceable? An exemption clause is designed to limit the liability of one of the parties in the event there is a breach of contract. The courts are generally reluctant to give effect to exemption clauses and, therefore, interpret them very strictly. The meaning set out in an exemption clause must be extremely clear for the court to give it effect. Any ambiguity will be interpreted in favour of the person disadvantaged by the exemption clause. What is meant by fundamental breach? What remedy is available to the victim of a fundamental breach of contract? The principle of fundamental breach means that there are some obligations in a contract which cannot be contracted out of by an exculpatory clause. There must be some basic, fundamental obligation that must be performed. The exemption clauses then will not apply to such a fundamental clause unless it is clear that the exemption clause was intended to cover the specific thing that happened. If the exemption does not apply, the victim of a fundamental breach will be relieved of obligations to perform and may also recover damages. Assume the defendant claims that the contract was discharged or modified by agreement; the plaintiff challenges this conclusion and seeks to enforce the original contract. What will the defendant need to prove to avoid having the initial contract enforced? The discharge or modification must be enforceable in law through a modified consensus and the exchange of fresh consideration. Explain what happens when a creditor agrees to take less than is owed to settle a debt. When a person pays less in full satisfaction of a debt, with nothing given in addition, there is no consideration to support the reduction and the full amount is still owing. Statutes in various provinces have modified this so that now when a person actually pays less in full satisfaction of a debt with the consent of the other party, that reduction in the debt will be binding on both parties. How do conditions precedent differ from conditions subsequent? Both conditions precedent and conditions subsequent determine whether a contractual obligation exists. A condition precedent is a condition that must be met before a contract comes into operation. For example, I will sell you my car if I can purchase car X from Jones. A condition subsequent is a condition which causes an ongoing contractual relationship to come to an end. For example, I will pay you $50 a month until you graduate. Define frustration. List three ways that frustration can take place. Frustration allows for a contract to be treated as discharged when some outside, unforeseen event, beyond the control of either party, makes it impossible to perform a contract or causes the contractual relationship to become something essentially different in its nature than the parties anticipated. Such frustration can take place when performance becomes impossible because (1) the subject matter of the agreement has been destroyed (2) the event that forms the basis of the contract fails to take place or (3) acts of the government affect performance. What is the significance of a court’s determination that a contract was frustrated through the fault of one of the parties? Self-induced frustration is simply breach of contract. Explain how the Fibrosa case and subsequent statute law have modified the previously accepted common law rule on the obligations of the parties in the face of a frustrating event. Before Fibrosa, when frustration took place it was thought that the loss would lay where it had fallen. This case established the principle that when there has been a complete failure of consideration and a deposit has been paid (meaning that the person paying the deposit has received absolutely nothing from the other party) that deposit would be repaid. This also caused some unfair results and, therefore, has been modified by statute so that the courts are now permitted in most jurisdictions to apportion the prepayment to provide some compensation for both parties for the costs they have incurred. Distinguish between a deposit and a down payment. What is the significance of this distinction? deposit is a prepayment designed to secure performance. If persons making the prepayment fail to perform their obligations that prepayment will be lost. Therefore, the prepaid deposit is a form of liquidated damages. A down payment, on the other hand, is merely the first payment of several under the contractual obligations and there is no intention that the down payment be forfeited upon breach. The significance of the difference, therefore, is that one will be forfeited and the other will not in the event of failure to perform. What must be shown for the court to conclude that money paid ought to be categorized as a deposit? It must be show that the parties intended that the prepayment is to be forfeited in the event of the breach or failure to perform by the prepaying party. In light of the decision in Hadley v. Baxendale, how is the recovery of damages limited? Generally, the principle developed in this case is that a breaching party is only responsible for those damages that could have been reasonably within contemplation at the time the parties entered into the contract (reasonably foreseeable damages). Therefore, when unusual damages are suffered from circumstances that the breaching party was unaware of, there will be no responsibility for those damages. Describe what is meant by mitigation. Explain how the obligation to mitigate damages limits the ability of the victim of a breach to obtain damages. Mitigation is the obligation on the victim of the breach to keep damages as low as possible. Failure to do this means that the victim will only receive damages in the amount that would have been due had losses been properly mitigated. Distinguish between specific performance and injunction. Explain the restrictions on their availability. Specific performance is an equitable remedy by which an order of the court requires the breaching party to perform the contract. A negative injunction is an order to the breaching party to stop doing something that is in breach of the contract. These are equitable remedies and are only available when damages would be inappropriate, when there hasn’t been undue delay or fault on the part of one of the parties and, in the case of specific performance, when personal services are not involved. Similarly, when the awarding of an equitable remedy would work a hardship on some person or be otherwise inappropriate, it will not be granted. Solutions to Cases Betker v. Williams, [1991] B.C.J. No. 3724 (C.A.); 1991 CanLII 1160. There can be no frustration when the parties The defendants could have argued that the subject representation regarding the land was verbal and accordingly was not binding due to the Statute of Frauds. The court agreed with the plaintiff and held that since this exemption clause was not brought to the attention of the Betkers they were not bound by it. Therefore the negligent misrepresentation on the part of the realtors was actionable. Rescission is the appropriate remedy, but because of the delay, rescission was not granted and damages were awarded. Teleflex Inc. v. I.M.P. Group Ltd., (1996), 149 N.S.R. (2d) 355 (NS CA); 1996 CanLII 5603. There can be no frustration when the parties have anticipated the possibility of events in advance, and made provision for them in the contract. The contract specifically made provision for termination of the purchase order, which would then trigger payment to Teleflex for both completed and uncompleted work at that point. It is only unforeseen events that are covered under frustration. Meunier v. Cloutier, 1984 CanLII 1929 (ON SC) The Court would consider if Meunier’s business was negatively affected by Cloutier. It would look at the activities of Cloutier to determine if he purposely tried to take clients away from Meunier or make dealings that would be described as unfair competition. A noncompetition clause is unenforceable when it is unreasonable and restricts one party from earning a fair living. If there is unfair competition, such as taking clients away, and that can be proven, the non-competition clause can be enforceable. 652013 B.C. Ltd. v. Kim, [2006] O.J. No. 423 (Ont. S.C.J.); 2006 CanLII 2892. It would be helpful to know if the lack of illumination was the fault of the equipment supplied or the power supplier. The court rejected Kim’s argument that the failure of the signs to operate properly was fundamental breach of the lease agreement. Moreover, Kim had not properly terminated the lease agreement and as a result he was responsible for payment of the accelerated amount claimed. Although the contractual interest was high, it was not unconscionable. Chapter 10 Agency and Partnership Answers to Questions What is the agent’s function? Why is it important to understand the law of agency in business? An agent enters into new legal relationships (usually contracts) on behalf of a principal with a third party. In business activities the vast majority of contracts are entered into through the services of an agent. Explain what effect an agent’s limited capacity will have on the contractual obligations created between a principal and a third party. What effect would the incapacity of the principal have on this relationship? The reference to capacity in this question is to be differentiated from authority of the agent. The incapacity of an agent generally will not affect the validity of the contract between the principal and third party unless the agent was not capable of understanding what was happening. An under aged principal, however, will not be bound by contracts for non-necessities. Distinguish between an agent’s actual, implied, and apparent authority. Explain why this distinction can be important from the agent’s point of view. An agent is given actual authority to act on behalf of a principal. This actual authority can be expressly given in the form of verbal or written instructions or can be implied by circumstances. So long as the agent acts within actual authority there will be no liability for losses incurred. Apparent authority is assumed when a principal has done something to lead a third party to believe that the agent has authority that in fact the agent does not have authority. When the agent acts beyond the actual authority, either expressed or implied, but within apparent authority, the contract with the third party is binding on the principal, but the principal can then sue the agent for breach of the agency agreement. It is only when the agent violates both actual and apparent authority that the third party can sue the agent directly for breach of warranty of authority. Explain the role estoppel plays in agency law. Promissory estoppel is a defence available when consideration is brought into question. It can only be used as a defence and not as a cause of action. When one person makes a promise about future conduct and the other person relies on that promise, incurring expense, the beneficiary of the promise can use the promise as a defence if sued by the person making the promise. Ordinary estoppel deals with statements of fact. When one person makes a statement of fact that another relies on, the first person cannot deny that fact. In agency law if a principal leads a third party to believe that an agent has authority, it is a fact. If the third party relies on that statement and enters into a contract with the agent on behalf of the principal, the principal will not later be permitted to deny the existence of the authority. Explain what is meant by “ratification” and describe the limitations on a principal’s right to ratify the actions of his or her agent. How can the principle of ratification be as dangerous to the principal as it is to the third party? When an agent acts beyond both actual and apparent authority, the third party is not contractually bound to the principal. The principal, however, has the option of ratifying the agreement. That is to give the agent retroactive authority to enter into the contract, making the third party bound by the contract. The third party then faces the possibility of the principal ratifying after the fact, while the principal has the option of making the contract binding or not. However, the principal can inadvertently ratify by accepting some benefit under the contract, thereby binding themselves to the contract. What effect does it have on the relationship between principal and third party when an agent writes on an agreement “subject to ratification?” This is a qualification which indicates that no agreement has yet been made between the parties. It is a condition precedent that the principal must approve of or ratify the terms of the agreement before it is effective. Agents owe a fiduciary duty to their principals. What are the requirements of that duty? A fiduciary duty requires an agent to act in the best interests of the principal. Any information that would benefit the principal that comes to the agent while acting as agent must be communicated to the principal. Agents must not take advantage of personal opportunities that come to them because of their position. Agents cannot take commissions from both the principal and the third party unless that fact is disclosed to both. An agent who owns property cannot sell it to the principal without disclosure of the interest in the property. What options are open to a third party who has been dealing with an undisclosed principal if the contract is breached? If the agent made it clear they were acting as agent only the principal can be sued. If the agent acted as if they were principal only the agent can be sued. Where the circumstances are ambiguous as to whether the agent was acting as principal or agent the third party can choose to sue either but is bound by that choice. An undisclosed principal cannot ratify the acts of an agent, since the agent must be claiming to represent a specific principal in the dealings with the third party. Explain how the doctrine of vicarious liability applies in a principal-agent relationship. If the agent happens to be the employee as well, then vicarious liability will be present so long as the act complained of happens within the scope of the employment. When the agent is independent, vicarious liability will only apply if the agent has fraudulently or negligently misrepresented something on behalf of the principal while actually acting as agent. Distinguish among a sole proprietorship, a partnership, and a corporation. A sole proprietorship is an individual doing business on their own, while a partnership is two or more people carrying on business together. A corporation is a legal entity created pursuant to a statute that carries on business in its own right. What advantages and disadvantages are associated with carrying on business as a sole proprietorship? As a partnership? The advantages of sole proprietorship include being in control by themselves and not having to split the profits with anyone. The major disadvantage is bearing the risks of business alone. Many of those risks can be managed with insurance. The advantages of partnership include the protection of minority interests because of the requirement of unanimous consent and involvement of partners in management. This factor also presents the primary disadvantage of partnership since unanimous agreement must be obtained before any changes that affect the partnership can be made. Partners have a right to inspect records. There are few formal requirements that must be met to carry on business and few government regulations that must be complied with and the operation of a partnership is generally less costly than incorporation. Distinguish between sharing profits and sharing revenues. Sharing of revenues means the division of the gross receipts from some sort of business activity before deducting costs. Sharing of profits on the other hand means that all expenses and costs will be met before the split of funds takes place. It is only the latter that will be evidence that a partnership exists. If two people enter into a business together with the object of making money but lose it instead, can the business still be a partnership? Yes, it is only necessary that the object be to make profit. It makes no difference that a loss has been incurred instead. Why must a person understand the law of agency in order to understand the law of partnership? All partners are agents of each other. The liability and responsibility of each partner for each of the other partners is based on the concepts of agency. What danger exists when a third party is led to believe that two people are partners, when in fact, they are not? What legal principle is applied in this situation? Leading someone to believe that you are a partner will make you liable for that partner’s actions as if the partnership does in fact exist. This is an application of the principle of estoppel. What is the significance of the existence of a partnership agreement for outsiders dealing with the partnership? What is the advantage of entering into a formal agreement? A partnership agreement will not affect the rights of an outsider to obtain a remedy against each individual partner. The Partnership Act regulates such liability. The advantage of the partnership agreement is to govern the relationship among the individual partners and to establish their responsibilities to each other in a custom fashion that may differ from the framework of the Partnership Act. As with any written contract, it has the advantage of later being strong evidence in the event of a dispute. Explain the different ways in which a person can become responsible for the acts of his or her partner and describe the limitations on this responsibility. Describe the liability of retiring and new partners. One partner can be responsible for any contracts entered into by other partners based on the concepts of agency. Similarly, one partner can be liable for the wrongful conduct of another partner based on the concepts of vicarious liability (tort liability). One partner can be responsible for any breach of trust on the part of another partner. But these liabilities will only fall on the partner where the wrongful actions are committed within the scope of the partnership business. A retiring partner will be responsible for any conduct taking place while he was a partner of the firm. A partnership agreement may modify this, but a retired partner will not be held responsible for conduct taking place after retirement unless outsiders were not properly notified of the retirement. A new partner will not be responsible for any conduct before becoming a partner in the firm unless such liability was assumed in a partnership agreement. Partners have fiduciary obligations to each other. Explain what this means and give examples. A partner has an obligation to act in the best interests of the partnership business and the other partners. There is a corresponding obligation to act in the utmost good faith. This means that a partner must not compete with the partnership by carrying on a similar business, must not accept personal benefit without the consent of the partners and must convey any private information that comes because of his associations with the partnership. An example would be that an accountant acting in partnership with another accountant cannot compete with the partnership business by preparing financial statements privately without disclosing the profits generated and paying them to the partnership. What events may bring about the end of a partnership prematurely? Under what circumstances might it be necessary to get a court order to end a partnership? A partnership can be dissolved upon notice of one of the partners or the death, bankruptcy or insolvency of any partner. If the business carried on by the partnership becomes illegal the partnership is automatically dissolved. Generally, a court can dissolve a partnership where it feels it appropriate to do so--where the business continually operates at a loss, when one of the partners becomes mentally incompetent or is unwilling to perform the partnership responsibilities, or when the conduct of one of the parties is prejudicial to the partnership relationship. What will the normal effect be on a partnership when a partner dies or becomes insolvent? How is the law of British Columbia significantly different? Upon death, insolvency or bankruptcy, the partnership will usually be dissolved. In B. C. when there are more than two partners involved, the partnership will only be dissolved in relationship to that one partner. When a partnership is being dissolved, and does not have sufficient assets to pay its debts, how is the responsibility for these debts distributed? How are the excess assets distributed? The assets are distributed first to pay off the debts of the partnership and, if there are not enough assets, creditors will turn to the personal assets of the individual partners. Excess assets will pay expenses of partners, then loans advanced by the partners, then capital investments. Any assets left will be distributed according to the normal distribution of the partnership. What must a person do in order to qualify as a limited partner? What happens when a limited partner violates one of these qualifications? The limited partnership must be registered. Failure to comply with these regulations causes the limited partner to become a general partner, exposing personal assets to satisfy the debts and responsibilities of the partnership. What is the main advantage of limited liability partnerships? In light of this, what does the law require, in an attempt to protect those who suffer losses through the actions of a partner or an employee of a limited liability partnership? The limited liability partnership (LLP) is available in some jurisdictions to professionals so that only the negligent or fraudulent partner has personal assets at risk, along with the assets of the partnership itself. Explain the nature of a joint venture, how it can be formed, and how normal partnership law applies to such a creation. When two or more individuals or corporations wish to cooperate in developing a project together, they can form a joint venture. The joint venture can be formed in two ways. A new company can be formed where the parties of the venture hold an agreed amount of shares in the company. Normal company law will apply to that new company. They can also be created through partnership. If the parties try to form a joint venture by way of a contract, partnership law will apply even if the parties have stated the Partnership Act will not apply. Solutions to Cases B.P.Y.A. Holdings v. The Innovators Insurance, 2001 BCSC 836 (CanLII) Morgex could argue that Mr. Trimble and Innovations Insurance had no apparent or actual authority to bind them as principal. The plaintiff could argue the opposite - that in fact there was apparent or actual authority. A finding of fact would have to be made by the court. The court held that, “(t)he evidence in this case establishes that Innovators Insurance had a contract to provide Kootenay Honda with a policy of hole-in-one insurance for the sum of $35,000. It failed to do so and is in breach of that contract. The evidence also establishes that Innovators Insurance was negligent in the representation it made to Kootenay Honda that hole-in-one insurance was in place, a representation upon which Kootenay Honda relied to its detriment. Thus, on both of these bases, Innovators Insurance is liable to Kootenay Honda for damages both for breach of contract and for negligent misrepresentation.” Ocean City Realty Ltd. v. A & M Holdings Ltd., 1987 CanLII 2872, 36 DLR (4th) 94 (BCCA). The owner of the property A & M Holdings Ltd. could argue breach of fiduciary obligation on the part of Forbes, the real estate agent. The purchaser could do the same. It may have also been pleaded that in turn Ocean City Realty Ltd. is vicariously responsible for the actions of Forbes. Forbes and Ocean City Realty Ltd. would just simply argue breach of contract to pay the commission and try to present facts that the other parties had agreed to the dual agency of Forbes. 3464920 Canada Inc. v. Strother, 2005 BCCA 384 (CanLII). The complaint was breach of fiduciary obligation through conflict of interest. The Supreme Court of Canada has since considered this case: [2007] 2 S.C.R. 177, 2007 SCC 24. The Court allowed the appeal in part, holding, “(b)y acquiring a substantial and direct financial interest in one client (Sentinel) seeking to enter a very restricted market related to film production services in which another client (Monarch) previously had a major presence, Strother put his personal financial interest into conflict with his duty to Monarch. … It gave Strother a reason to keep the principals of Monarch “in the dark”, in breach of his duty to provide candid advice on his changing views of the potential for film production services tax shelters. … The firm cannot be held to have breached a fiduciary duty on the basis of facts of which its partners were ignorant.” 3. Tremblett v. Tremblett, 2012 CanLII 67443 (NL SCTD); appeal, 2013 NLCA 34 (CanLII) Doug would have claim for an equal share over all assets of the business if the business operated as a partnership. The courts could ascertain if the brothers shared the profits and held responsibility for debts equally. It appears they both owned the fishing boat and if they shared profits and responsibility for debts, they acted like a partnership. It’s difficult for each party in a partnership to equally do the same amount of work. If Bill did more than Doug, that should not change the treatment of the business as a partnership. If Doug was successful in the trial, he would be entitled to half of the value of the license or $400,000. Chapter 11 Corporations Answers to Questions What is meant by a corporation’s having a separate legal identity? The separate legal identity means that, in law at least, the corporation is a separate legal person from its shareholders and also separate from the management. Principles such as limited liability and the longevity of corporations are based on this concept. Explain how the liability of a shareholder is limited. In corporations where a shareholder invests a certain sum, the most that the shareholder can lose is the amount of the investment. Creditors cannot go beyond the assets of the corporation and sue the shareholders to seek a return on the debt. The shareholder thus has limited liability. Explain under what circumstances a court will “lift the corporate veil.” It is appropriate to “lift the corporate veil” if principals participate in fraudulent or criminal conduct or the avoidance of obligations that out to be honoured. Why are the principles of agency law relevant to corporations? Since the corporate entity is a legal fiction, all of its activities must be carried out through the services of real people acting as agents. The principles of agency law set out in Chapter 11 are, therefore, extremely important when dealing with corporations. Directors and employees, from officers right down to clerks, may have actual or apparent authority to bind the corporation, depending on the nature of their jobs. Explain how a personal guarantee reduces the limited liability of the principals of a closely held corporation. A personal guarantee, if granted to a creditor of the corporation by one of the principals of the corporation, makes the principal directly liable for the debts of the corporation. This protects the creditors of the corporation but overrides the limited liability the principals might otherwise enjoy. Explain the advantages of free transferability of shares and how and why this right is often modified by shareholder agreement. The main purpose for the creation of a corporate identity in the first place is to facilitate capital investment from as large a pool of investors as possible. Through a share purchase, investors are able to invest significant funds and are also free to withdraw from the operation by selling those shares without disrupting the operation of the company. In smaller corporations, however, such free transferability of shares can be a disadvantage. When there are few shareholders the personality of the shareholders becomes important since they are often involved in the running of the company and so restrictions are placed on the transferability of shares in closely held corporations. Set out and explain some of the disadvantages associated with the corporate method of carrying on business. Unlike partnership it is difficult to make major changes in the corporation since incorporating documents have to be altered. The position of a minority shareholder is one of relative weakness in a corporation, whereas a single partner has considerable amount of power and can veto major decisions. The running of the corporation is usually more expensive. Distinguish among companies and corporations that have been created by special acts of parliament, by royal charter, by registration, by letters patent and by filing articles of incorporation. Historically, one of a kind businesses were created by royal charter (e.g. The Hudson Bay Company). Now this is done by special act of parliament (CBC, CNR, etc.). For general purposes several different methods of incorporation have been developed. Some provinces use the registration system that requires the registration of certain documents with the appropriate government agency. Letters patent jurisdictions, developing their systems from the royal charter power, create corporations by the governing authority granting letters patent. In more recent times jurisdictions such as the federal government and most provinces have turned to a method which involves the filing of articles of incorporation to obtain a certificate. Explain the significance of the memorandum of association in a registration jurisdiction. Contrast it with the role of articles of incorporation and articles of association. The memorandum of association in a registration jurisdiction is the document that accomplishes the creation of the corporate body. It is analogous to a constitution in that it sets out important matters such as the name of the company, the authorized share capital and the objects of incorporated entity. The articles of association are more like the bylaws of the incorporated entity used in other jurisdictions. These bylaws deal with the day-to-day operation of the incorporated entity including how the shares are issued and cancelled, requirements for meetings of the board of directors and shareholders, voting procedures, etc. The articles of incorporation used in such jurisdictions as Ontario and the federal government are quite different from the articles of association in that they are analogous to the memoranda of association in a registration jurisdiction and comparable to a constitution. In those jurisdictions there are separate bylaws dealing with the day-to-day operation of the corporation. What is a “society” and how does it compare to a corporation. society is also a body corporate, but its objects specifically are not to make a profit. What is the capacity of most corporations? What is the exception to this rule? Modern corporations have all the powers and capacity of a natural person unless the articles of association or memorandum place restrictions on those powers. Explain why the concept of a par-value share is misleading and why the use of such shares has declined. With a par-value share a specific value is attached to the share certificate at the point of issue. Such a value has no significance except at the point of issue. A par value share may be issued at $1.00, but once on the market the value of that share is determined by the marketplace and may vary from $.50 to $5.00. It may also be discounted at the point of issue and the par value price may bear no relationship to its trading price. What is meant by a “preferred” share? Contrast this with the “common” share. Explain why the term preferred shares is misleading. It is possible to create different classes of shares and while many different characteristics can be given to these shares, usually they are divided into common and preferred shares. Preferred shares give the shareholder preference in relation to dividends. That is, a set amount of dividend is payable to the shareholder. That dividend must be paid before any dividends are paid to common shareholders. Preferred shares do not usually carry with them a right to vote unless the dividend payments are in default. Common shares carry a right to vote and a right to dividends if they are declared. In other words the majority common shareholder controls the company. Does a shareholder, whether preferred or common, have a right to a dividend? Explain. No shareholder has a right to demand a dividend. Whether a dividend is paid or not is determined by the board of directors. Even when a preferred share is involved, which sets out that the preferred shareholder is entitled to a yearly dividend, that is not a debt and the corporation is not obligated to pay it. Shareholders cannot sue to force payment of a dividend unless the dividend has been declared and has not been passed on to the shareholders. What is the significant difference between a bondholder and a preferred shareholder, both of whom are entitled to a specified payment each year? The preferred shareholder is an investor in the corporation and has no right to demand a dividend and cannot sue upon failure to receive one. A bondholder is a creditor of the corporation who can sue or enforce payment through realizing any security involved if the corporation fails to pay. Distinguish between a closely held and a broadly held corporation and explain the differences in terms of the provisions in place in your jurisdiction. The answer to this question will vary with the circumstances and the jurisdiction, but essentially the shares of a broadly held corporation are either traded on the stock exchange or the corporation is so large that it has been designated as such by the appropriate government agency. A closely held corporation is usually smaller, often a family organization, with just a few shareholders and some restrictions on the free selling of those shares. A broadly held corporation is subject to more control than a closely held corporation. In some jurisdictions closely held corporations are referred to as private corporations and in others as non-reporting corporations. A closely held corporation is typically owned by a small number of shareholders, often with restrictions on share transfers, while a broadly held corporation has many shareholders with freely transferable shares. In our jurisdiction, closely held corporations have fewer regulatory requirements and more flexible governance structures compared to broadly held corporations, which are subject to stricter disclosure and governance standards. Set out the nature of the duties owed by a director of a corporation. To whom are these duties owed? Who else in the corporate organization owes similar duties? The director has an obligation to be careful in dealings on behalf of the corporation and can be sued for negligence if that duty is violated. The director also has the duty of a fiduciary which is to act in the best interests of the corporation, be loyal, avoid conflicts and otherwise to act in the utmost good faith towards the corporation. The director cannot take advantage of opportunities that come because of the position as director, must disclose any situations of conflict of interest and cannot start any business in competition with the corporation. The duty is owed to the corporation and not the shareholders. A similar duty is owed by the officers. Explain why it is becoming increasingly difficult to get prominent individuals to serve as directors of Canadian corporations. Not only has the standard of care required of a director increased (now to the level of a reasonably prudent business person) but directors also face a number of situations where they can be held personally liable for the corporations actions. In addition to unpaid taxes and wages, the directors can be personally liable for violations of environmental legislation and even in some jurisdictions, violations of consumer protection legislation. This risk can be managed through an appropriate indemnity of the director from the corporation, backed up back directors’ and officers’ liability insurance. Who is usually responsible for running the affairs of the corporation? Although directors are legally responsible for management, in a large corporation they usually appoint a managing director or chief executive officer (CEO), who is given overall responsibility, along with a managing committee of the directors, to run the affairs of the corporation. The day-to-day operation of the corporation is assigned to others who report to the CEO. These officers may include an executive vicepresident, treasurer, secretary, and other senior executives, such as vice presidents and managers, as deemed appropriate for the organization. How can a promoter avoid personal liability for pre-incorporation contracts? Some jurisdictions allow corporations, once they or formed, to ratify a preincorporation contract. If such is possible it will reduce the risk to the promoters. Where ratification is not possible, promoters should include a provision in the contract exempting themselves from any resulting liability. Explain any duties shareholders assume. Summarize the rights of the shareholders in relationship to other shareholders, the management and directors of the corporation. The shareholder has no duty to the corporation unless he or she qualifies as an insider or has some position within the corporation. The shareholder has significant rights to certain information and can have access to records. The shareholder has a right to receive a copy of the annual report and financial statements. The shareholder has a right to vote on shareholder resolutions (where such power has been given) and to vote for the board of directors. The shareholder has the right to have that vote made by proxy. In some jurisdictions shareholders have pre-emptive rights, relief from oppression and in other cases the special rights given to preferred shareholders. Explain what is meant by a ‘proxy’ and why proxies can be so important at a corporation’s annual general meeting. shareholder may not be able to attend the annual general meeting where votes are cast and directors are chosen. Shareholder has the right to authorize someone else to vote in their place. This is called a vote by proxy and if a faction can gain enough proxies they can gain control of a corporation by controlling those elected to the board of directors. Distinguish among a derivative action, dissent and oppression. Explain when it would be appropriate to use each of them. derivative action allows the shareholders to sue the directors in the name of the corporation for their wrongdoing. A dissent action arises when fundamental changes to the corporation have adversely affected a minority shareholder, but are in the interest of the corporation. It allows the shareholder to be bought out at fair market value. An oppression action arises when someone (shareholder, director, officer, creditor) is unfairly prejudiced by the actions of the company. The court may make any order it sees fit, up to and including dissolving the corporation. Explain the purpose of a shareholders’ agreement and why it is important. shareholders’ agreement is put in place, usually in small, closely held corporations, to cover various contingencies which may arise in the future in order to avoid conflict. It often includes pre-emptive rights, restrictions on the sale of shares, and termination provisions if one of the shareholders wishes to leave the company. It is often called a unanimous shareholders’ agreement or a USA. How can a corporation be terminated? corporation is usually terminated by dissolution provisions which are included in incorporation legislation. There may be separate winding up legislation. However, in some areas failure to file annual reports will eventually cause the corporation to be removed from the lists. Where assets are involved the corporation should be dissolved in line with the legislation. This can be either a voluntary or involuntary process. Solutions to Cases Dynasty Kitchen Cabinets v. Soheili, 2011 BCPC 414 (CanLII). Yes, the corporate veil should be lifted. Soheil is personally benefitting from the transaction between Dynasty Kitchen and the corporation. The only reason why the corporation cannot pay its debt is because Soheil is not paying the debt owed to the corporation. This is similar to wrongdoing and fraud. Both the corporation and Soheil personally should be held liable for the obligation and liability to Dynasty. BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, 2008 SCC 69. Directors owe their duty to the corporation and must do what is in the best interests of the corporation. If there is an irreconcilable conflict between the best interests of the corporation and of a stakeholder, the directors should choose in favour of the corporation. Different stakeholders have different remedies, including oppression, pre-emptive rights, dissent, a derivative action, and what may have been provided in a unanimous shareholders agreement. In the case before the Supreme Court of Canada, the directors were obliged to consider the position of the debentureholders and the evidence confirmed that they did so. This fulfilled the directors’ duty and the proposed buyout did not amount to an unfair disregard for the interests of the debentureholders. The arrangement did not fundamentally alter the debentureholders’ rights, as the investment and return they contracted for remained intact. Accordingly, the Supreme Court allowed the appeal and approved the buyout. Kaur v. Canada, 2013 TCC 227 (CanLII). Kaur could avoid liability for the upaid GST. It is appropriate for Kaur to rely on expertise of those running the operations of the business. Kaur exercised due diligence as the director of the company and should not be held liable for the negligence of the general manager. Black Fluid Inc. v. Opulence Clothing Inc., 2014 ABQB 138 (CanLII) Zoul’s request would be denied because adding Taleb and his corporation as defendants in a derivative filed by Taleb does nothing to benefit the corporation. Salesco Limited v. Lee Paige (2007), 61 C.C.E.L. (3d) 279, (2007), 36 B.L.R. (4th) 229 (Ont. S.C.), 2007 CanLII 37463 (ON SC), Capobianco v. Paige, 2009 CanLII 29899 (ON SC). The Court stated that P owed a duty to all of Salesco’s shareholders. As an officer of Old Spray-Park he owed a duty to its shareholders, including Salesco. As a director of Old Spray-Park, M owed a duty to its shareholders. The court then concluded that “the shareholders of Old Spray-Pak, including Salesco, could reasonably expect that its directors and officers would further its financial interests in good faith, fairly and accurately present its financial position to its bankers and not denude the Company of its assets for their personal benefit. They could reasonably expect to be notified of material developments such as the calling of a Bank loan. The court stated, “(i)n total disregard of those reasonable expectations, P and M preferred their own interests and acted to denude Old Spray-Pak of its value and to defeat the interests of its shareholders including Salesco. In rendering Old Spray-Pak a “shell,” they acted contrary to its best interests and the interests of its shareholders. Transferring its employees, assets and business to New Spray-Pak was contrary to Old Spray-Pak’s and Salesco’s interests and the interests of their shareholders.” Mundy (E.C.) Ltd. v. Canada Safeway Ltd., 2004 MBCA 143 (CanLII) The court should allow Mundy’s claim. Mundy should have all rights and privileges and be liable for obligations that it should have had if it had not been dissolved. The invoices would show proof of transactions that Safeway owed Mundy. These transactions occurred before the dissolution of Mundy. There is no evidence showing that Safeway denied owing Mundy for the transactions that occurred between them. Chapter 12 Employment Answers to Questions Distinguish among an employee, an independent contractor and an agent. An employee can be told not only what to do but how to do it by an employer. An independent contractor has agreed to do particular work. An agent is a person who enters into contractual relationships on behalf of a principal. Both the independent contractor and the employee can function as agents in different circumstances. Explain how a court will determine whether a person is an employee rather than an independent contractor. The traditional approach was to determine the degree of control exercised by an employer over an employee. Today the courts have also turned to the organization test to determine how involved the employee is in the organization. If the worker is an integral part of the employer’s organization and subject to group control, the person in that circumstance would be considered an employee. Summarize the obligations of an employer to its employees and those of employees to the employer under common law. An employer must provide a safe working place and conditions as well as work and direction. In addition to the agreed upon wage, an employer must compensate the employee for reasonable expenses incurred. The employee must possess the skills claimed and exercise them in a reasonably competent and careful manner, follow reasonable orders, be honest and courteous, be loyal and not insubordinate, be punctual and not excessively absent. Explain what is meant by a restrictive covenant and what factors determine whether it is enforceable. restrictive covenant is a term in an employment contract which prohibits the employee, upon leaving, from working for a competitor employer, in a particular area. To be enforceable such restrictive covenants must be reasonable in duration and geographic area. What is the proper way to terminate an employment contract that is for an indefinite period of time? reasonable amount of notice must be given by either party to terminate a contract. This amount varies with the length of time employed and the nature of the job (e.g. an executive will require more notice or pay in lieu of notice than a labourer). How is the appropriate notice period to terminate an employment relationship determined? The appropriate notice is determined by the reasonable person test and taking into consideration such factors as length of service, nature of job, qualifications and nature of the job market. Under what circumstances can an employee be dismissed without notice? When can an employee leave employment without giving notice? When an employee is terminated without notice, it is referred to as termination for just cause. The employee can be dismissed without notice when there is serious absenteeism, consistent tardiness, open disobedience, habitual negligence, incompetence or immoral conduct. The employee can leave without notice when asked to do something that is immoral or dangerous and not part of the job. What risk does an employer face who ignores an employee’s incompetence over a period of time? If bonuses or wage increases are paid to an employee it indicates that an employer is pleased with the services being rendered or that any incompetence was not important to the job. The employer will not then be able to raise this incompetence as grounds for dismissing or disciplining the employee. What is “constructive dismissal”? Be sure to explain it using a contractual perspective. Constructive dismissal can occur when an employer unilaterally changes an employee’s job. This is tantamount to a modification of the employment contract without the employee’s consent. In such circumstances the employee can treat the modification as a termination of the employment contract and sue for wrongful dismissal, claiming pay in lien of reasonable notice. What factors will a court take into consideration when determining compensation in a wrongful dismissal action? Indicate the various types of remedies that may be available to the plaintiff. Usually the damages that are awarded to the victim are the difference between the amount the employee was paid upon termination and what would have been earned had pay in place of reasonable notice been given. An employee who successful in the action will usually be entitled to costs as well. Damages may include claims for lost employment benefits and pension rights. If in the process of being dismissed damage was done to the person’s reputation, damages may be awarded for defamation, as well. Very rarely will a court order an employee to be reinstated. Explain what is meant by “vicarious liability”. Describe the limitations on its application. Vicarious liability is a principle whereby one person is responsible for the wrongful acts of another person. For example, an employer is liable for the tortious acts of an employee done in the course of the employment. When the employer is held vicariously liable, this does not relieve the employee from responsibility for tortious conduct both to the wronged party and the employer. Describe how the Employment Standards legislation protects basic workers’ rights. Minimum wage, minimum termination notice, maternity leave, child labour, and other such areas are controlled in this legislation. Explain how human rights legislation applies to areas of employment? When employees are harassed or discriminated against because of age, gender, ethnic origin, religion, disability etc, by employers, managers or their fellow employees it can have a devastating effect on them and their career. The statutes provide recourse for such employees with remedies in the form of compensation and even in some circumstances, reinstatement. Explain what is meant by a “duty to accommodate” in the field of human rights and how that can affect employers. Employers have a duty to accommodate the religious practices and disabilities of their employees. This may mean rescheduling shifts to accommodate a day free for religious observance or simply moving the desks to provide for wheelchair access. But it may also require significant modification of job requirements to accommodate a disabled person, up to the point of undue hardship on the employer. Explain the object and purpose of workers’ compensation legislation and how those objectives are accomplished. If a worker is injured on the job and is not covered by workers’ compensation, what course of action need she take to secure a remedy? The object of workers’ compensation legislation is to provide compensation in case of on-thejob injury without any need to establish who was at fault. The employee loses the ability to sue the employer for the injury. Employers and sometimes employees pay into an insurance fund made available to compensate injured workers. The premiums vary with the risks inherent with the employment. For employees not covered by workers’ compensation, through the common law an employee hurt on the job would have to prove on the balance of probabilities that the employer was negligent or deliberately caused the injury. The employee may also be found contributorily negligent, thereby lessening the damage award. What is the significance of the National Labour Relations Act (Wagner Act) in Canada? The Wagner Act controlled the certification process (organization) which was the main point of conflict between employers and employees. A government body was established to determine when certification was accomplished thus eliminating the need for the employer to take part in the process. Similar legislation was adopted by Canada during the Second World War and subsequently adopted by most of the provinces. Compare and contrast recognition disputes, jurisdiction disputes, interest disputes, and rights disputes. recognition dispute is a dispute between the trade union and the employer over whether or not the trade union has the right to represent the employees in the collective bargaining process. This is now covered by legislation dealing with certification. An interest dispute is a conflict between the trade union and the employer as to what terms ought to be included in a collective agreement. A rights dispute is a disagreement between the union and the employer as to the interpretation of rights agreed on in the collective agreement. This takes place only where a collective agreement is already in force. A jurisdictional dispute involves a conflict between two unions as to the kinds of workers to be represented by each union. Once a collective agreement is in place, what effect will it have on the individual rights of employees? How will it affect the employer? collective agreement embodies the terms of the contract of employment between the employer and employees. There is no right to bargain separately with individual employees. Explain the difference between mediation/conciliation and arbitration. Describe how these tools are used in Canadian labour disputes. Conciliation or mediation involves a third party stepping into an interest dispute to act as a go-between or intermediary between the parties. An arbitrator is a third party appointed by the parties to the dispute or the government to rule on the dispute. The recommendation of a mediator or conciliator is merely persuasive, but the decisions of an arbitrator are binding on the parties. Arbitration is the appropriate method of settling rights disputes and provisions for such arbitration must be provided in the agreement. Distinguish among a union shop, a closed shop, and an agency shop. union shop clause requires new employees to join the union within a specified period of time. A closed shop clause requires that the employee be a member of the union before getting the job. An agency shop clause gives employees the option of joining the union but requires that they pay union dues in any event. Distinguish between a strike and a lockout. What kind of disputes are strikes and lockouts limited to? How are the other types of disputes between union and employer dealt with? strike involves a withdrawal of services by employees which may constitute a refusal to come to work, but also may be merely a slowdown or refusal to do certain types of work. A lockout is an action undertaken by the employer whereby the employer refuses to let the employees work. A strike or lockout can only take place in an interest dispute during the negotiation process for a collective agreement. Once such a collective agreement is in place any disputes have to be handled by arbitration (rights disputes). Recognition disputes are handled by the governmentimposed organizational process whereby a union becomes certified. Explain what steps must take place before a strike or lockout is legal. strike or lockout can only take place in an interest dispute and even then it must be shown that the parties have attempted to bargain in good faith. Once that is clear, a certain amount of notice must be given to the other party before the strike or lockout can take place. Some jurisdictions such as Alberta have mandatory mediation before strike notice may be given. Explain what is meant by “picketing”, when it can take place, and the limitations that have been placed on picketing in different jurisdictions. Picketing involves strikers standing near or marching around a place of business trying to persuade people to refrain from doing business there. Only information can be conveyed. Intimidation or physical violence are prohibited under the legislation and if they may result in criminal charges in addition to sanctions applied under the relevant labour legislation. Picketing must be peaceful and not in violation of private property. Courts or boards may limit the number of picketers where the crowd becomes intimidating. What is the legal position of a person who wishes to cross a picket line? In most jurisdictions, people have a perfect right to cross a picket line if they wish. A picket line is merely a method of persuading people to support the union’s cause. How is collective bargaining for public sector and essential service employees different from that for people employed in private industry? Most provinces permit collective bargaining to some extent for employees in the public sector or that provide essential services. However, only a few allow such employees to participate in strikes and picketing. Usually there is some form of compulsory arbitration to resolve disputes. Of course, in all labour disputes, including private ones, the government has the right, either by existing statute, or by the passage of a specific bill, to end a work stoppage and impose a settlement, or an alternative method of resolving the dispute, such as compulsory arbitration. Solutions to Cases Lyons v. Multari, 2000 CanLII 16851 (ON CA), leave to appeal to SCC refused, [2000] S.C.C.A. No. 567. The courts are increasingly finding a non-competition restrictive covenant to be against public policy and void when the protected party’s economic interests would be sufficiently protected by a non-solicitation restrictive covenant. The courts consider the length of time and geographic area of a restrictive covenant in the context of the particular industry, determining if they are unreasonable and void for public policy reasons. Evans v. Teamsters Local Union No. 31, 2008 SCC 20 (CanLII). The Supreme Court made it clear that an employee should not always be required to return to work for the dismissing employer. This should only occur where there are no barriers to re-employment. “…[T]he employer bears the onus of demonstrating both that an employee has failed to make reasonable efforts to find work and that work could have been found. Where the employer offers the employee a chance to mitigate damages by returning to work for him or her, the central issue is whether a reasonable person would accept such an opportunity…. [A] reasonable person should be expected to do so “[w]here the salary offered is the same, where the working conditions are not substantially different or the work demeaning, and where the personal relationships involved are not acrimonious” [T]he British Columbia Court of Appeal held that other relevant factors include the history and nature of the employment, whether or not the employee has commenced litigation, and whether the offer of re-employment was made while the employee was still working for the employer or only after he or she had already left. The critical element is that an employee “not [be] obliged to mitigate by working in an atmosphere of hostility, embarrassment or humiliation”. Brazeau v. International Brotherhood of Electrical Workers, 2004 BCCA 645 (CanLII). Harassment consists of unwelcome conduct based upon a person’s protected status. While there was harassment by Mr. Brazeau, which the trial judge concluded fell into a medium category, there was no clear warning given to him that if he continued to harass Ms. Pynaker, he would suffer disciplinary consequences, such as dismissal. As such, his dismissal was wrongful. The trial judge must take into account the full context of the harassment, in order to make these kinds of decisions. The harassment initially consisted of unwelcome romantic advances, but there was no physical contact of a sexual nature. The parties continued to work together successfully for some years, and it was not until two or three years later that it began to affect their working relationship. Since the trial judge took all of this into account in her judgment, the appeal was dismissed. Emerald Foods Ltd. (c.o.b. Bird’s Hill Garden Market IGA) v. United Food and Commercial Workers’ Union, Local 832, 2003 MBCA 83 (CanLII). Upon review of the contents of the President’s letter, the Board concluded that it was delivered with the purpose of influencing the outcome of the vote. This constitutes an unfair labour practice. The letter itself spoke of wage negotiations which were taking place through a focus group without union involvement, and carried the implicit warning that improved wages and benefits might not take place should the union be certified. While employers are able to distribute information, they cannot threaten or attempt to influence the outcome of certification votes. The intentions of the employer are relevant in making this kind of determination. The labour statute in this case protected employees against an employer exercising too much power. Goudie v. Ottawa (City), 2003 SCC 14 (CanLII). Their claim would succeed. The dispute did not arise from the collective agreement between CUPE and the City. The employees were employed by the Ottawa Policy Force at that time of their claim that a pre-employment agreement existed. It would not be right to have the matter treated as a collective agreement dealing and arbitrated. Solution Manual for Business Law in Canada Richard A. Yates, Teresa Bereznicki-Korol, Trevor Clarke 9780133847130, 9780132164412
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