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T'h Li\ ~DIAN Bl fHEIJAW ~DIAN Bl 1~HELAW ANADIA~ ~

NESS A r r ~ _ JU IHI DIIIO\ SIX SEVENTH EDITION Ci

WCANADIAN ~

DOROTHY DuPLESSIS

SHANNON O'BYRNE

PHILIP KING

LORRIE ADAMS

STEVEN ENMAN

BUSINESS AND THE LAW ~ANADIANBU ~DTHEI~AW 1IANBUSINF

I Ju.JD THE LAW • l\T" nl" A \J Bll'

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Contents

Preface

The Legal Envir onment o f Bu siness

Chap t er 1: Kn owledge of Law as a Bu siness Asset

Chap t er 2 : Th e Can adian Legal Syst e m ............ .

Chap t er 3 : Managi ng Legal Risks

Chap t er 4: Disp ut e Resolu ti on

Con tracts

Chap t er 5 : An I n t rod ucti on t o Contract s

..... 120

..... 121

Chap ter 6 : For min g Con tractu al Rel ati o nshi p s ........................................... 1 33

Chap ter 7 : The Terms of a Con tract .................................................... 164

Chap t er 8 : Non -Enforce m ent of Contract s . . . . . . . . . . . . . . . . . . .... 190

Chap t er 9 : Ter minat ion and Enforce men t of Con tracts ...... 2 16

Business Torts ....................................................................... 24 5

Chap t er 10 : I ntrodu ction t o Tort Law ................................................... 24 6

Chap t er 11: The Tort of Negli gence ..... 266

Chap t er 12 : Oth er Torts ..... 29 1

St ructurin g Business Acti vi ty .......................................................... 3 19

Chap t er 13 : The Agency Rel ati onshi p .................................................. 320

Chap t er 14: Business Forms and Arrange men t s . . . . . . . . . . . . . .... 34 6

Chap t er 15 : The Corporat e For m : Or gan izati onal Matters ...... 379

Chap t er 16 : The Corporat e Form : Operati onal Matters ................................... 405

Property

Chapter 17: Introduction to Property Law

Chapter 18 : Intell ectu al Prop er ty . . . . . . .. . .. .... .

. . .. .. ... .. . . .. . .. .. .. ... . 440

. . 4 41

. . 469

Chap ter 19 : Real Property . .. . . .. .. .. . .. . .. . .. .. . . .. .. .. . .. .. . . .. .. .. . .. .... .. .. . . .. .. 509

Empl oy ment an d Pro fession al Rel a ti onsh ips . . . . . . . . . . ... ... ... . .. .... ... .. . . 536

Chap ter 2 0: The Employm en t Relation ship

Chapter 2 1: Ter mi n ati ng th e Employ men t Rela tion shi p .. .

Chap ter 22: Profession al Servi ces . .

. .. ..... 537

. . 574

. . 602

The Sale o f Goods, Consu mer Protect ion an d Compe tition Law . . .. . .. .. .. . .. . .. . .. . .. . .. .. 626

Chapter 1: Th e Sale o f Goods ........................................................ .

Chap ter 2 : Consumer Protection and Competi tion Law 18

Fin ancing th e Bu si ness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Chap t er 3 : Bu siness and Ban king

Chap ter 4: Th e Legal Aspects o f Cr edit

Chapter 5 : Bankruptcy and In solven cy ................................................. 97

Tran sference of Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......................... 1 20

Chapter 6 : In suran ce ................................................................. 121

Glossary ............................................................................ 147

How to Read a Ci ta ti on .. 160

Case I aw Reporters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......................... 1 61

I nd ex .. 162

PREFACE In Canadian Business and the Law, Seventh Edition, legal knowledge is regard ed as a business asset that builds competitive advantage for the in ruvid ual and the orga- ruzation allke. This text demonstrates how the law can protect persons and their property as well as resolve disputes. The text also shows that the law fac ilitates personal and commercial interactions. In short, the law provides both opportu- n ities to be capitalized on and r isks to be managed.

Canadian Business and the Law is written from the perspective that the law plays an integral role in all business de cisions. Furthermore, it systematically advocates a r isk management approach as the optimum way of dealing with legal considerations in the business world. A risk management model is introd uced in Part One and apphed in every subsequent part o f the book. Topical coverage is o rgamze d as follows:

Part One establishes the rationale for students' study of business law. It accounts for what the law is, where it comes from, and how the law regulates business. It also establishes risk management as the recurring theme of the book and the study of business law.

Parts Two and T hree recognize that the legal issues a businessperson is most llkely to fa ce are in the a reas of contract law and tort law. Part Two, Contracts, and Part Three, Business Torts, provid e a practical and contextualized analysis o f these important areas. Here stud ents acquire not only an essential legal grounding in contract and tort p rinciples, but also the basic background for the specialized topics ruscussed later in the book. These two essential parts of the book are carefully written so that contracts and torts can be read and taught in whichever sequence is preferable to the user.

The fu ndamentals of contract law are examined in d epth in Part Two to allow fo r application in context in later parts, which deal with topics such as agency, partnership, employment, and insurance. By applying the law to particular relationships, students gain insight into d1e kinds of contracts that will figure prominently in their professional lives.

In our experience, students best understand the law when it is related to core subject areas in the business curriculum, including finance, human resources, sales, and marketing. For this reason, the remairung parts of the book look at the functional areas of business and consider legal issues in relation to those activities.

Part Four concerns the selection and use of the form of business.

Part Five examines the creation, acquisition, use, and protection o f property.

Part Six analyzes the acquisition and use of human resources.

Part Seven focuses on the selling and marketing of good s and ser vices.

Part Eight addresses financing the business activity.

Part Nine explores the transference of r isk through the use of insurance.

Our work in Canadian Business and the Law focuses on meeting a number of objectives:

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Our most important aim is to explain the basic legal principles and concepts in a business context that is engaging and relevant for all readers.

The second objective is to reinforce that all aspects of the legal environment necessitate active management. We o ffer a model for identifying, evaluating, and managing legal risk in Chapter 3. Exam- ples of the mod el's application to business enterprises and a risk management orientation are reflected in the treatment o f legal subjects throughout the text.

The third objective is to convey legal information in contexts geared to the practical application of knowled ge. A Business Law in Practice scenario opens each chapter with a business situation containing both legal and managerial implications. Questions posed by the opening scenario give stud ents rurection and purpose and encourage critical thinking as they read the chapter. As a means of testing the stud ents' comprehension and analytical skills, the scenario is revisited later in the chapter with suggested responses to the opening questions.

The practical application o f legal knowledge is reinforced through boxes provided throughout the text en titled Business Application of the Law. These provide examples of the impact of the law on business enterprises. By illustrating how legal issues a rise in the business environment and how these issues are managed, this feature helps students d evelop a concrete understanrung of why the law matters in a business context.

The fourth goal of the text is to recognize the importance of legal considerations inherent in the emergence of new technologies, internationalization and globalization of the economy, as well as ethical and environmental concerns, all of which cut across traditional legal subjects. Based on our contextualized approach to teach ing and learning, these topics or unifying themes are integrated throughout the body of the text and through features entitled Technology and the Law, Interna tional Perspective, Ethic.al Considerations, Business and Legislation, and Environmental Perspective.

The fifth goal is to provid e a ped agogically effective framework for the presentation of jurucial decisions. Our special Case format begins with a d escription of the business context surrounrung the legal dispute in q uestion, followed by a concise statement of the relevant fac ts that led to the legal conflict. Next, a statement of the legal issues is p rovided as a summary of how the court resolved the conflict. The feature conclud es with several questions that stud ents are asked to consider in order to deepen their understanding of the case under stud y. This feature focuses on context and relevance. Jurucial rulings are summarized and supplemented with brief excerpts of judicial language.

The Landmark Case and Business and Legislation features provide an a ccount of pivotal case law and historical legislative initia tives, which can be essential to grasping contemporary law.

Finally, an Ethical Considerations feature assists the student in assessing the sometimes uncomfortable compromises that the law forges between competing interests. As d emonstrated in the chart on the inside front cover, the textbook organizes coverage of the international, environmental, ethics, and technology themes because of their importance to the mod ern business world . We have increased both the d epth and the bread th of these four themes according to strands, or markers, to illustrate the range of topics tllat tlle text covers. The

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comprehensive chart is also designed to assist instructors in creating their lectures. At a glance, instructors can access the textbook's many themed boxes and locate material according to the subject they wish to address, such as ethics in consumer relations o r ethics in relation to employees.

What's New in This Edition In this edition, we continue to build on the strengths of the textbook. The con- tent is Canadian, current, business oriented, and focused on risk management. In addit ion to enhancing t11e thematic approach as noted above, we present students with new, real-world examples of the application of the law as well as the latest Canadian cases and legislation.

This new edition introduces aboriginal law as a sustained topic as well as, in Chapter 2, aspects of Indigenous laws. There are many reasons for these additions, including the Final Report of the Truth and Reconciliation Commission of Canada (201 5); the impor tance of reconciliation through inclusivity and curr iculum reform; the relevance of Indigenous and aboriginal legal matters to education in business schools at large; and the significance of Indigenous laws and aboriginal law to business on a variety of fronts.

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Some of the other key additions and changes to this edition are:

New ca ses. Many new cases have been added . Examples include: Churchill Falls (Labrador) Corporation Ltd v Hydro-Quebec, 201 6QCCA 1229, leave to appeal to the SCC granted, 201 7 Can LU 21420 (SCC) (Chapter 5); Rosas v Toca, 2018 BCCA 191 (Chapter6); Downerv Pitcher, 2017 NLCA 13 (Chapter 8); Deloitte & Touche v Livent Inc (Receiver of), 2017 SCC 63 (Chapters 11 and 22); Tondat v Hudson's Bay Company, 2017 ONSC 3236, aff'd 2018 ONCA 302 (Chapter 12); Fairview Donut Inc v TDL Group Corp, 2012 ONSC 1252, (2012] OJ No 834, aff'd 2012 ONCA 867, (2012] OJ No 5775 leave to appeal refused, (2013] 2 SCR viii (note) (2013] SCCA No 47 (Chapter 14); Finkelstein v Ontario (Securities Commission), (201 8) ONCA 61, (201 8] OJ No 489 (Chapter 1 5); Midwest Properties Ltdv Thordarson , 2015 ONCA 819, 128 OR (3d) 81 , leave to appeal dismissed 2016 CanLII 30455 (SCC) (Chapter 16); Me nni/lo v Intramodal inc, 2016 SCC 51, (201 6] 2 SCR 428 (Chapter 16); Tsilhqot'in Nation v British Columbia, 2014 SCC 44, (2014] 2 SCR 257 (Chapter 1 7); Diageo Canada Inc v Heaven Hill Distilleries et al, 201 7 FC 571, (2017] FCJ No 598 (Chapter 18); Keenan (cob Keenan Cabinetry) v Canac Kitchens, 201 6 ONCA 79, (2016] OJ No 455 (Chapter 20); Howard v Benson Group Inc, 2016 ONCA 256, 129 OR (3d) 677, leave to appeal refused, (2016] SCCA No 240 (Chapter 21); Canada (Commissioner of Competition) v Thane Canada Inc (201 8), CT-2018-001 (Chapter 24); Re Redwater Energy Corporation, 2016 ABQB 278 (CanLI!) (Chapter 27); and Ledcor Construction Limited v Northbridge Indemnity Insurance Company, 2016 SCC 37, (2016] 2 SCR 23 (Chapter 28).

New legislation. We have highlighted new, amended, and proposed legislation relevant to business, including the regulation of dron es (Chapter 1); the regulation of r ide-sharing and ride-booking enterprises such as Uber (Chapter 1); the regulation of the sale and marketing of vaping products (Chapter 2); the proposed introd uction of regulations mandating plain and standardized packaging for tobacco products (Chapter 2); franchises in British Columbia (Chapter 1 4); crowdfunding

regulations (Chapter 15); national securities regulation (Chapter 16); the t ransition of accountants in Canad a to the new chartered professional accountant (CPA) d esignation (Chapter 22); reducing email spam (Chapter 2 4), and new and revised legislation governing payd ay loans (Chapter 26) .

New real-world examples. This new edition discusses, for example, how a local craft brewery resolved a trad emark ruspute with one of the largest craft breweries in the United States (Chapter 1); Volkswagen's diesel emissions scand al (Chapter 3); third party funding of litigation (Chapter 4); the effect on business by Canad a's Anti-Spam Legislation (Chapter 6); how a Telus customer responded after r eceiving a $ 24 000 cell phone bill (Chapter 7); how a business was ad versely affected by online defamation (Chapter 12); an agent's authority to enter an agreement to share a prize (Chapter 13); responsibility for a partner's d ebts (Chapter 14); Bombardier and d ual-class shares (Chapter 15); a hospital's claim of ownersh ip over its patient's excised tissue (Chapter 1 7); ownership and regulation of water r ights (Chapter 1 7); cybercrime and cyber insurance (Chapter 1 8); offensive names in sports (Chapter 1 8); the global reach of Canadian injunctions (Chapter 18); director, corporate, and taxpayer liability for environmentally contaminated land (Chapter 1 9); T im Hortons and Ontario's minimum wage (Chapter 20); sexual harassment in the workplace (Chapter 20); bad behaviour outside o f the workplace (Chapter 21); social media and just cause for dismissal (Chapter 21); aggravated and punitive d amages in the employment context (Chapter 21); the liability of aurutors to m isled creditors (Chapter 22); convictions for price fi xing and other anti-competitive behaviour (Cha pter 2 4); and the abandonment of contaminated oil wells in Western Canad a (Chapter 27).

Updated and revised real-world examples from previous editions. Examples include the liability fac ed by business for privacy violations (Chapter 1); d ata breaches at Yahoo, Ashley Madison, and Equifax (Chapter 3); legal rufficulties encountered by Cana.man mining companies (Chapter 3); class action lawsuits in the area of privacy, inclurung Facebook and Ashley Madison (Chapter 4); securities class actions (Chapter 15); death in the workplace and criminal sentencing (Chapter 16); corporate social responsibility (Chapter 16); class actions for unpaid overtime (Chapter 20); cryptocurrency such as Bitcoin and other new methods of electronic payment (Chapter 25); genetic testing and insurance legislation (Chapter 28); and pollution exclusion in commercial general liability policies (Chapter 28).

New content concerning Indigenous laws and aboriginal law. Examples include an account of Indigenous peoples and constitutional law (Chapter 2); the Crown's duty to consult and accommod ate aboriginal peoples (Chapter 4); an explanation of aboriginal title and important d evelopments with respect to the use of lands that are subject to unresolved land claims (Chapter 17); and an examination of section 89 of the Indian Act (Chapter 26).

New material on negotiable instruments. The ruscussion of negotiable instruments has been significa ntly enhanced and expanded, especially on the topics of bills o f exchange, pro1nissory notes, and defences.

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New and updated d1apter openers (Business Law in Practice) for Chapters 4, 11, 1 7, 20, 21, 23, and 24.

New and revised end-of-chapter material. We have added or replaced questions in the Questions for Review, Questions for Critical Thinking, and Situations for Discussion features.

Canadian Business and the Law, Seventh Edition, is offered as a modern resource for learning the fundam entals of business law from a business and risk manage- ment perspective. Rather than simply providing a summary of the law, it presents traditional business law topics in a manner that resonates with commercial reality. If you have any suggestions for improvements, additions, or clarifications, please let us know:

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Dorothy Du Plessis

Shannon O'Byrne

Philip King

Lorrie Adams

[email protected]

Chapter Objectives outline the learning goals of each chapte\

The real-world application of legal knowledge is reinforced through the Business Application of the Law feature. which provides examples that illustrate how the law aftects a business en terprise-such as the issues to consider when determining w hether to pursue a legal conflict.

New technolog ies. globalization. and the environment all have implications for many aspects of business law. Learn how in the Technology and the Law. International Perspective. and Environmental Perspective features.

INTEGRATED PEDAGOGICAL SYSTEM Basic legal principles and concepts are explained and reinforced through extensive pedagogy designed to help students proceed and learn the material.

·1 KNOWLEDGE or LAW AS A BUSINESS ASSH

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ETHICAL CONSIDERATIONS

The special Case format follows a standard analysis for every featured case and landmark case. beg1m1ng with an exp ta nauon of the BUSINESS CONTEXT th at is at issue. Readers are then given the FACTUAL BACKGROUND of th e case and presented w ith the LEGAL QUESTIONS before they read the court's actu al RESOLlfTION . Each case en ds w ith questions for CRI flCAL ANALYSIS. Each of these sections 1s clearly labelled for easy reference.

The Landmark Case and Business and Legislation features provide accounts ot pivotal case law and historical legislative initiatives.

The Ethical Considerations feature assists the student 1n assessarq the sorret1mes uncomfortable compromises

MAPU LODG£ fARNS. COMVICTIO N

MarJ.' I~· f.~ .. ..,~ <'-t-oi rht- brgt"tt rlr~ produ: cn b Cao~::~. wu sc:i: occO br a::i o m i 11.>! a1.. n. i..w .. w1w1.the ~1."'1.f AH; .. .rJ.c "''' ;, '.br\· IJx\:• l'-.r1r~"ih,...f in .. nr~1V"ly1.,.11~ po i te-d chlcket~ 1.1.\d tnaff!' .:!it d. tr o.: \ ~.o~t\l.r-t t~ w .J .,., . .,11l:.l:'t. A..c.t.•1<li.t1t, Lu J,,.. ...... 1.1~ l i.u J d....l~u:; lt.> ~Of"'eof th e d~ath~:

- -- that the law forges between compcung interests.

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CHAPTER STUDY

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End-of-chapter materials in clude Key Terms and Concepts w ith page references. Que.stions fo r Review. Questions for C r it ical Thi nking. and Sit uations fo r Discussio n. Q uest ion s fo r Review will help students to check their und erstanding o f ch apter topics. Questions for Cr itical Thinking and Situations for Discu ssion w ill let them apply the concepts th ey have learned to oth er business situations .

Instructor Resources The Nelson Ed ucation Teaching Advantage (NETA) program d elivers research- based instructor resources that promote student engagement and higher-ord er thinking to enable the success of Canadian stud ents and ed ucators. Visit Nelson Ed ucation's Inspired Instruction website at nelson.com/inspired/ to find out more about NETA.

The following instructor resources have been created fo r Canadian Business and the Law, Seventh Edition. Access these ultimate tools for customizing lectures and presentations at nelson.com/ instructor.

NETA Test Bank This resource was written by Lorrie Adams, M acEwan University. It includ es more than 1,200 multiple-choice questions written a ccording to NETA guide- lines for effective construction and development of hi gher-order questions. Also included are an average of 20 true/ false questions and 10 short answer questions in each chapter.

The NETA Test Bank is avaHable in a new, cloud -based platfor m. Nelson Testing Powered by Cognero® is a secure online testing system that allows instructors to author, edit, and manage test bank content from anywhere Internet access is available. No special installa tions or d ownloads a re needed, and the desktop-inspired interfac e- with its d rop-d own menus and fa miliar, intuitive tools- allows instructors to create and manage tests with ease. Multiple test versions can be created in an instant, and content can be imported into or exported from other systems. Tests can be d elivered from a learning management system, the classroom, or where ver an instructor chooses. Testing Powered by Cognero for Canadian Business and the Law, Seventh Edition, can be accessed through nelson.com/instructor.

NETA PowerPoint Microsoft• PowerPoint• lecture slid es present an average of 30 slides per chapter, many fea turing key figures, tables, and photographs from Canadian Business and the Law. Extensive additional content- such as teaching suggestions, discussion questions, activities, and references- is provided in the "Notes" section o f slid es to help instructors encourage stud ent engagement. (Versions of these PPTs with the notes removed are available for stud ents.) NETA prin ciples of clear d esign and engaging content have been incorporated throughout, making it simple for instructors to customize the deck for their courses.

Image Library This resource consists of digital copies of figures, short tables, and photographs used in the book. Instructors may use these jpegs to customize the NETA Power- Point or create their own PowerPoint presentations.

Videos Instructors can enhance the classroom experience with the exciting and relevant vid eos provided online. These vid eos have been selected to a ccompany Canadian Business and the Law. Also incorporated into MindTap, they include video ques- tions for students.

NEL 8

NETA Instructor Guide This resource was written by the authors of the text. It is organized according to the textbook chapters and addresses key educational concerns, such as typical stumbling blocks students face and how to address them. Other features in dude videos, teaching objectives, teaching strategies, student activities, and detailed explanations of features in the text (such as boxes and photos).

M indTap Offering personalized paths of dynamic assignments and applications, MindTap is a digital learning solution that turns cookie-cutter into cutting-edge, apathy into engagement, and memorizers into h igher-level thinkers. MindTap enables stud ents to analyze and apply chapter concepts within relevant assignments and quizzes written by George Allen, Red River College, and allows instructors to measure skills and promote better outcomes with ease. A fully online learning solution, MindTap combines all student learning tools- readings, multimedia, activities, and assessments- into a single Learning Path that guides students through the curriculum. Instructors personalize the experience by customizing the presentation of these learning tools to their students, even seamlessly intro- ducing their own content into the Learning Path.

Student Ancillaries M indTap Stay organized and effici ent with MindTap- a single d estination with all the course material and study aids you need to succeed. Built-in apps leverage social media and the latest learning technology. For example:

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Visit nelson.com/student to start using MindTap. Enter the Online Access Cod e from the card included with your text. !fa code card is not provided, you can purchase instant access at NELSONbrain.com.

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CHAPTER Knowledge of Law as a Business Asset

CHAPTER The Canadian Legal System

CHAPrER Managing Legal Risks

CHAPTER Dispute Resolution

THIS TEXT DEALS with the importance of the law to business and, in Parts Two to Nine, it presents funda- mental legal principles in their relevant business con- texts. The text contends that those engaged in business need to manage the legal environment as much as any other aspect of their business. Part One provides the basis for that management by introducing the founda- tions of business law and the concept of legal risk man- agement. It emphasizes the importance of knowing the law, complying with the law, avoiding unexpected le gal problems, and regarding law not as an obstacle but as a means of fa cilitating commercial activity and competi- tive advantage.

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OBJECTIVES After studying this chapter. you should have an under- standing of

• the role of law in guiding conduct

• the importance of legal knowledge in the business environment

• the challenges posed by business ethics and their relation ship to leg al requirements

BUSINESS LAW IN PRACTICE

Lionel Garfield, who grew up on a large farm in Ontario, decided to go into the chicken processing business for himself. When a local Ontario poultry producer announced his retirement, Lionel jumped at the opportunity to purchase the business- including buildings and equipment. Lionel looked forward to a prosperous future.

First on his list of things to do was to rebrand the operation with the hope of increasing sales over what the vendor had managed to achieve. The previous owner had been winding his business down over the last number of years and barely had a presence in the indus- try anymore. Lionel thought it best to start fresh with a new name. Having an unusual sense of humour and wishing to come up w ith something unique, Lionel decided to carry on business under the name of "Chelsea Chickens." Because he was most emphatically not a fan of the English football tean1 called Chelsea, Lionel thought that calling his business the "Chelsea Chickens" was therefore clever and funny, and gave him a distinctive business name to boot. Lionel then began to advertise in the industry under the name "Chelsea Chickens" and erected a large s ign outside his poultry farm with big, bold letters stating "Home of the Famous Chelsea Chickens." He also built a website featuring this business name as well as ordered letter- head and related office supplies with the name "Chelsea Chickens" being prominently displayed throughout.

The success of Lionel's business was slow but sure. He received an increasing number of orders for broiler (male meat) chickens because of his growing reputation for quality and reliability. And then, sud- denly, everything seemed to go downhill:

a lawyer for a chicken processing corporation in northern Canada, Chelsee Eggs and Poultry Ltd, has demanded that Lionel stop doing business under the name of "Chelsea Chickens" because it is misleading customers into thinking that Chelsea Chickens is somehow associated with Chelsee Eggs and Poultry Ltd. This includes re-doing his website as well as removing his large and expensive "Home of the Famous Chelsea Chickens" sign. Lionel is aghast since he had no intention of confusing anyone. He simply wanted a catchy business name that had a humorous story belllnd it.

a client of Lionel's business is angry because Lionel, uncharacteristically, has failed to deliver an order of processed chicken. Though this was a breach of contract, Lionel has

NEL 11

concluded that the d eficiency was not his fault. He had done everything possible to d eliver but an unavoidable mechanical breakdown in his prod uction facility meant that a few orders could not be processed on time.

a potential customer was touring Lionel's production facili ty when she slipped and fell on the freshly mopped floor in the holding barn. The customer suffered a serious concussion and will be off work for at least half a year.

about 1 00 chickens froze to d eath when Lionel transported them on a flatbed trailer from the holding barn to a farm customer about two hours away in ver y cold conditions. Lionel has been charged under the Health of Animals Act' for causing undue suffering to birds.

Given these mounting problems, Lionel does not know which way to turn.

1. How d oes the law affect Llonel's business?

2. What are the purposes of the laws that affect Lionel's business?

3. What has gone wrong with Lionel's business and why?

Law in the Business Environment The law impacts virtually every aspect of society, in duding the business environ- ment. It affects most business d ecisions- from development of the basic business idea through to its implementation, and all the attendant matters in between, including financing, hiring, production, marketing, and sales. As Lionel starts his business, for example, he will be involved in a number of transactions and events with significant legal implications. For instance, to advance hi s chicken processing business, Lionel has to d ecide whether to form a corporation, operate as a sole proprietor, or find partners. He also has financ ing d ecisions to make: should he borrow money, use his own funds, or perhaps sell shares in his venture? While his operation is starting out small, he may ultimately have to hire many employees. Lionel also has to market his business in order to build and maintain a customer base. All of these d ecisions have legal aspects, whether Lionel recog- nizes that or not.

By understanding the role of law in the multitude of business decisions that people like Lionel must make, an entrepreneur can maximize the protection that the law extends while avoiding its pitfalls. Put another way, knowledge of the law is a business asset that can assist owners and managers in reaching their goals and objectives. This is because business law:

defines general rules of commerce.

protects business ideas and more tangible forms of property.

provid es mechanisms that permit businesspeople to select their desired degree of participation and exposure to risk in busine.ss ventures.

seeks to ensure that losses are borne by those who are responsible for them.

facilitates planning by ensuring compliance with commitments.

Of course, a businessperson can function w ith little or no understanding of tl1e law. This lack of knowled ge, however, may result in failure to maximize

1 SC 1990, c 21 . ro1 mo1e disOJssiOn abOtJ l tegis\.)tiOo, sat'.! (:tl<lpt~r 2

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Business law A sd o• establ1sl1ed rules governing commercial relationships. including ~he enforcement of ngl1lS

Trademark

A word symbol. design. or any comb1na:1on of these used to d1st1ngu1sh a person's products or services from those of others

opportunities or j n losing out on them altogether. For example, a business that neglects to protect its intellectual property may have its ideas taken with impunity by a competitor; a business that ignores employment and human rights laws may be force d to reverse human resource decisions or pay compensation to wronged employees; and a business that fails to explore djfferent modes of carrying out busjness may suffer unnecessary losses. Perhaps even more seriously, legal igno- rance or intentional d efiance of the law may result in the business or its owner being subjected to regulatory and judicial sanctions, including being fined, forced to pay penalties, or closed down altogether.

INTERNATIONAL PERSPECTIVE

CANADIAN CRAFT BREWERY CHANGES NAME IN LIGHT OF POSSIBLE TRADEMARK INFRINGEMENT In July of 201 6, a New Brunswick corporation opened a craft brewery in Fredericton called Gray Stone Brewing. Wes Ward is a director of that cor- poration. About a week after the opening, Ward received a phone call from Greg Koch, CEO of Stone Brewing Co. wrud1 is based in San Diego and ranked as one of the largest craft breweries in the United States. Korn advised Ward that the name and logo of Gray Stone Brewery infringed on Stone

The Gmy Stone Brewery in Fredericton, NB

Brewing Co's trademark. A trademark, as dis- cussed further in Chapter 18, is a word, symbol, design, or any combination of these used to distin· guish a person's products or services from those of others. When someone infringes another's trad e- mark, an important concern is that members of the public will be confused into thinking that there is an association between the two businesses when there is none. As the Supreme Court of Canada has stated, trad emarks assure consumers "that they are buying from the source from whom they think they are buying and receiving the quality wruch they associate with that particular trade-mark."2

According to Ward and as reported in the Daily Gleaner: "We had a conversation. He [Korn] was very nice. He said, 'I know this is coming out o f left fiel d. Hopefully, we can come to a solu- tion. I have a couple o f ideas.'" One solution Koch suggested was for Gray Stone Brewing to change its name to Graystone Brewing. Despite the costs for the New Brunswick corporation to alter its signage, logos {including on beer cans), legal documents, and social media presence as well as T-shirts and other merchandise asso- ciated with the business, Ward still favoure d d oing so. In part , trus was because he wanted

~ to avoid the consjd erable costs associated with ~ taking the djspute through the legal system. As 0 Ward stated to the media: "The fact that [Stone ~ 15 Brewing] has offered us the chance to put the two ~ words together was qujte nice" and noted that ~ some people "would have just sent us a lawyer's

letter and we'd have to d eal with it."

2 M•11ellncv 3894207Canadalnc. 2006 SCC 22 al pora 2L 12006! l SCR 772.

13 NEL

Ward also learned a lesson in the importance of managing legal risks proactively. He noted, with disappointment, his assumption that con- d ucting a name search would automatically includ e a trademark search.3 And Ward expressed relief that Koch of Stone Brewing was willing to pursue a cooperative approach to the problem- a hallmark, Ward observed, o f the "special bond" between brewers internationally.

actions of a small brewery in New Brunswick may well infringe on the rights of a very much larger American corporation thousands of kilo- metres away. How would knowledge of the law by Ward have avoided the conflict between Grey Stone Brewing and Stone Brewing Co.? How did knowledge of the law by both parties help resolve this conflict?

Critical Analysis: 1h e globalization and inter- nationalization o f business means that the

So urcE:: Adam Bowe. ·~w Brev;eiy 1n rrE!dencton F"orcCd 10 Tw oek N am<!. Lo go, Due 10 Tra.iemark. lnlrir\Qi'!imnr. The OMy CJea-1& (S Au g us l 2016 J A3 .

Rules and Principles Broadly d efi ned, the law is a set of rules and principles intend ed to guide conduct in society, primarily by protecting persons a nd their property, fa cilitating personal and commercial interactions, and providing mechani sms for dispute resolution.

Protecting Persons and Their Property Probably the most familiar purpose of the law is to provid e protection. Those who violate the Criminal Code of Canada- such as by breaking into another person's house, assaulting someone, or committing a commercial frau d- are subject to criminal sanctions, such as fines or imprisonment.

As another example of a legal obligation, businesses are required to adequately protect their customers' personal information d ue to the regime established by Canada's Personal Information Protection and Electronic Documents Act (PIPEDA).4

PIPEDA is legislation passed by the fed eral government. One of its goals is to regulate how the private business sector collects, uses, and discloses personal information acquired from its customers- a particularly important matter in a technological era.' Personal information has been defined by the courts as infor- mation that is "uniquely and directly connected to one person."6 According to the Privacy Commissioner, such information includ es "age, name, ID numbers, income, etlmic origin, or blood type" as well as credit reports and medical reports, to name several examples.7 In short, PIPEDA imposes national privacy standards

3 1"01 rrr..'>1E! dlSCussonon 11¥! steps invoh<a1 1n r(\(.lhOn to 11\\':01poral!ng s<:eCMp1er 15 4 SC 2000, c S !PJPE'OA}. No te that PIPfOA has oe€<~ afr1~nded by l l'M'.! 0.'gital P11vacy Ac! SC ~15 c 32 wnich,.

v1ne n i n fo1ce. requires l'ltlsiness to o!scbse d~tt) 01eaches 10 t~ Prr,,acy CommiSsioner or lace signi f'k:a~t tines. See sec1on 10 lllJ, wh1Ch ameMs PIPfDA to inct u<lt"! the idlov11 1'v~r "An or9an1.ZatiOl'l shal report l o 1he Comml!isoner any brcocn or secunly safeguards involvu)Q personal m tormaton unde1 •lS con1rot 1l 1L iS reasoMI*? ii\ lhe Ci1cumsla!'\C~S to OOliev e 1M 1 t~t.'! breach crE!<"itesa rE!at riSkot signi tican t M1m to an ioo1vdua!: This ru4e, amo119 ot~rs, \Y ll lak<.'? ettecl on November !, 2018 Sc?e Government o t Canada, PC 2fil8· 369. 12018) C Go z II. 810

5 See stact iOn 3 ot PJPfDA. :b.d. 6 See Loon's f u1nltu1e Lift'IJted v Alb&ra (Jnfatlr'lt#10:'t i'N'ld Pt Nacy CCY'fJmssJorte1J. 20U ABCA 94 a t para 47, {2011J

45 Alla LR 15th) L 1 Office of 100 Prw~ CommissiOner o f CanOOa, 'P1Vacy Tootkll ror ~sioossas·, onli!'\E! <rttos/,\v .. >1w.prw.9c.ca/en/

orw<Y..y• top cs/ orNOCy-t.;,v1s ·in-(;() ra°"'/t r-e · ~ n.on.'.'b ,nfo1maton-tnotecto n-and·et:ct ronic.Cocu l'rY.! rt s-a\':t · o '(>OOa/ p·~da·cornp(iance• t-etplgu :de_o19f>

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Law

Th ese( of rules and pnnc1pl es gu1d1ng conduct 1n society

on businesses that apply in most Canadia n provinces" and includes an "overriding

obligation", in the words of the Privacy Commissioner, that the collection, use,

and disclosure of personal information be limited to what "a reasonable person

would consider are appropriate in the circumstances ...

Those who believe that their privacy has been breached under PIP EDA may

make a complaint to the Pr ivacy Commissioner. The Privacy Commissioner is

independent from government and is mandated to try to resolve such complaints.

A person can also apply to court for a remedy, including damages. This is discussed

in the box below.

BUSINESS AND LEGISLATION

BREACH OF PRIVACY

Breaches of privacy under PIPEDA encompass a

broad range of activity. Some breaches can be

trifling and largely inoffensive. f.or example, in

one case, an individual (Mr. Randall) complained

because the gym to which he belonged divulged

to his employer how often he used his gym membership-a benefit partially paid for by the

employer. 10 The Privacy Commissioner determined

that the complaint was well founded because the

gym had disclosed Randall's personal informa-

tion (in the form of his fitness centre usage)

without his consent." It recommended specific

improvements to the gym's privacy procedures

and documentation.12 RandalJ then took the step

of suing the gym for the aclmowledged breach of

privacy, seeking $85 000 in damages. However,

the court refused to award any damages at alJ

because the disclosure did not cause any injury

or loss to Mr. Randall, was itself minimal, and

was not the result of bad faith but a simple misunderstanding.'-'

By way of contrast, some breaches of privacy are

more offensive and cause distress, anxiety, or

embarrassment in their victims. For example, a

woman who had recently given birth at a

Scarborough, Ontario, hospital file d a complaint

with the Privacy Commissioner because a company

selling registered education savin~ plans (RESPs)

had contacted her as a potential customer. This is

not problematic in itself; the issue arose because

the woman's maternity patient u1formation (name,

contact information, and dates of hospital visits)

were stolen by a hospital employee and handed over to an employee of the RESP company in exchange

for money. Maternity patient information was

being acquired and used by the employee to obtain

sales leads. The Privacy Commissioner determined

that the complaint was welJ founded because

personal information had been divulged and

recommended changes to the RESP company

procedures, including how it could better ensure

respect for privacy. '4 Additionally, a $400 million

class action is being pursued against the hospital on

8 NOie l'lal W'~M: P'CW""IC::(:s ~ Cf'WICIQia l"IC! f ow••\ Wqd:)' CO'T'IOa•.aol:e PJP!DA 'fq nows Al~ta ~''°"""

Jnfa~.ion Pao:::~ Act SA 2001 c P--651. S• I S."'t Cm."1t>.a l.P£1$C)fi.a# J.n/onnMxJr. Prorect.on: Act sac

2003, c 631, <l"'° O.~oe<: (A.r; kt llcsp:-ctortg Ute Praloct.on OI Pason31. frt!otm1!ot ift rhe PtNdte SN:ror RSC c P·3:tJJ '" M >n tob.l prvocy teq \t."'lt.on h.lS l'Elen assc•nt<?<I lo bo.Jt ~not y<?t "t.ora. See Person3J Jnformbr100 Pro:ect,'<Yl t1nd ktct1111y Theft PrCW>n11onAcr. CCSM c P337

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100:c:slp1 ..oc:y .. .rws· l\<:an.>ja/1fV!o IX'f ~!\al nfOf rmtol\·PIOIOCl¢f\-a'°K1-eJa::11on @OJ!'rlC!.,LS-a::l ·P pcoa/ l>lX'!da•COl'fli:illl'C-~ t:>fguO:>_o<gf>

10 R.arid/J/l v~ f1lnfZ>.M Centtes 2010rc 681at oaoa 6 U bd at o.Ya 2l a"'CJ 28 lJ ibid at o.Ya 29 13 Jmd ., 57 and 5a 14 OlficE! ol the! P1rvocy Commiss1otlCr of (J.)l\!'XI~ ·Qobal Rt SP (.01po1at on Accountll~ fo1 AcliOf\.\ ol

~\es Rep1~c>nl.ll·~ fo1 t!o\e l.J$cof Pbl·Q!'llS. PerSO!lal ll')lo1rri.1to:\Ptirct\MCO r1om• Rouge Vatk'!y hO!t.P•ldt

£."OOl~ PIP(Q4 I«: pert ol r na "Qi •201S-0161190clObe! 2015). Onll'K' <ntlp.i l/W\v\vpr v.gcc:./M/ OOC·acta ' 1"Wj-OOC$C1"1Sf "1'n?s19~ ~flf'l'Wst gato~ 1 Ovs"'C?sses/20l.Sfp0t ta 2lJ15..0l61>

15 N!l

behalf of over 8000 maternity patients. As discussed in Chapter 4 in more detail, a class action is a lawsuit launched by someone who represents a class of persons having similar claims against the same defend ant. Megan Ware, who gave birth to her son James in 2010 at the hospital in question, reports tl1at her privacy was breached by the hospital. She joined the class action suit and said this to the Toronto Star: "You're vulnerable. The vulnerability that you feel when you don't really know where your information- myinformation, as well as my child's information- has ended up."15

Another maternitypatient whose records were also stolen, Tanya Taylor (pictured in this box with one of her children), admitted to the press that she was feeling "paranoid" as she prepared to give birth to her next child due to worry that she was at risk of another privacy breach. However, Taylor also stated her belief that the hospital had "taken steps to ensure I don't have to go through that again. Hopefully it works." 16 In 201 6, two employees involved in privacy breach (a former maternity ward nurse and an RESP broker) pleaded guilty to criminal charges. As reported by the Toronto Star,

Tan)'l Taykir, pit:tt1red with her daughter, IM1S the victim of a privacy breach while a maternity patient.

they were sentenced to "three monilis' house arrest, part of six-month conditional sentences, as well as two years' probation and 340 hours of community service:·n

Critical Analysis: [n what way d oes PIPEDA protect tl1e public? Do you iliink iliat PIPEDA encourages people to be too sensitive about their personal information? Why or why not?

The law offers protection in two related ways: (1) it sets rules to safeguard interests, and (2) it sets penalties and oilier consequences for breacl1 of iliose rules to ensure accountability and encourage future compliance. For example, contract law permits Lionel to enter into a binding agreementwitha supplier, thereby protecting his interests in having a prod uct when he needs it. If a supplier fails to d eliver a product in breach of contract, Lionel can sue that supplier for d amages, iliereby ensuring that the party who has committed the breach is held financiaHy accountable. Likewise, the law safeguards those who d eal with Lionel's business. Lionel must perform his contracts on time. He must not discriminate in hiring practices. He must not disregard health and safety regulations or animal welfa re legislation governing his operation. He must pay his creditors. In sum, Lionel, and those with whom he d eals, are obliged to abide by ilie law on a variety of fronts, since failure to comply can have severe consequences, including financial penalties and legal prosecution.

15 Joet CastvlOOd. "Rou9~ V<A.@; Faces $400M (l()SS•ActiOn. La-. ... Sutt Ovt!1 P1<vacy Bfe~t·( To100:0 Star !25 June 2014), onune <hnps .//,vww.tnes1.a11:.om/rv;iv1S,/gtaf2014/06/25/rO!Jge_v~ey _l.Y.:es_ 400m_c:'-lssocton _\a\..-su t_over_pr<vocy_br<:a:':l\ hltri>

16 Sa1at'h.loyce B<itt~rs!)y. ·Hosp tat lnformato n: Schemers Ssnlenc:Od to House Anesl·, Toron:o Slaf 12 June 2016), o nune < hnps . / /\vww. the s\t)r .co ml r¥;?v1s /g1a/2016/06/0 2 fhOs O;lat .. i nf 01 m.') 10 n-schem~: s· sentenced •lO•t'lOu~·.ai1res t.hll'li>.

17 lb,'(/

Nfl

Breach of contract

"aiture ,o comply w1;h a contrac:ual promise

ETHICAL CONSIDERATIONS

MAPLE LODGE FARMS' CONVICTION

Maple Lodge Farms, one of the largest crucken prod ucers in Canad a, was sentenced by an Ontario court for violating the Health of Animals Act."' Maple Lodge Farms had inhumanely trans- ported chjckens and many died from exposure to cold weather. According to the court in relation to some of the deaths:

Al though Maple Lodge Farms took some steps to protect t he birds from the elements by tarp - ing w hich was standard at the time. they failed to take reasonable steps to l eave some o uter crates empty (of birds! to defray t he frigid air intake venting into the trailer. They also failed to adequately monitor the trailer in t he hol ding barns. w hile the birds were still on the trailer. to ensure they did not suffer unduly pending their processing o n the (slaughter! line.19

In relation to other chjcken deaths, the court summarized the matter as follows: "Regrettably, Maple Lodge Farms ... decided that commercial imperatives trumped animal welfare .... "20 And byway of general comment, the court relied on a quote frequently attributed to Gand ru: "The greatness of a nation and its moral progress can be judged by the way its animals are treated."21

In sentencing the corporation, the court observed that for those offences to which Maple Lodge Farms admjtted guilt or on which it was found guilty, "twenty-five thousand four hundred and fifty chickens (25 450) died inhumanely by undue exposure to weather or inadequate ventila- tion during transport."22 The court went on to fine Maple Lodge Farms $80 000 and placed the corp er ration on probation for three years. A condition of

18 Supra no1e L

What are the rep!ltational costs to Maple Lodge Farms for its recent convictions and how can those be managed?

the probation requires the company to spend at least $1 million to make substantial improvements to its vehicles and facilities. The court's stated goal was that Maple Lodge Farms would set the model for the industry via anticipated innovations in how birds would be transported in the future.23

Online, Maple Lodge Farms has expressed concern: "We acknowledge the seriousness of these charges [under the Health of Animals Act] and the moral obligation we have to better the conditions for the chickens we process."24

Two animal rights groups- the Canadian Coalition for Farm Animals (CCFA) and Animal Allian ce of Canada (AAC) - have spoken out against Maple Lodge Farms, noting as follows: "Economics over animal welfare was a dear theme wh ich emerged from the trial. Maple Lodge Farms failed to ensure proper animal wel- fare for the birds, ind uding not properly training its drivers, and not following Canada's voluntary Codes of Practice or the company's Standard Operating Procedures for bird welfare."25

19 R v Maple Lodge Farm~ 2013 ONCJ S35 al para 456 20 Jbtd a1 pa1a 468. 21 Jmd at pa1a l 22 R v 1"'1ple LOdge Fatm.< 2014 ONCJ 212 al para 13. 23 Ibid al Mras 54-57. 24 Ma~ LO.ige rarrru;, "Our Journey to lmprov~d B11d V/etl~re· (unda!Gd), On!1ne <http//\"l\'l'WJ'Tl~lp4et0dgela11ns

.corn/v1p·oonti'!nl/uptOOOs/20l6/04/0u1-.k>u mey.-to·lmp1oved·Bi1d~WeUare..Jutyl22016.pdt> 25 See CCrA•AAC. ·£cooomies0v(?f Animat V/dlar~ Preducliol\ T1a1'SPort. t)nd St2rughter ofChic:~ns ;nCa~a

!2014r l21Ma•ch2014). 001100· <'n ttp//w..v,,y.t.Jmaoolood.<:a/pdl%2011!\k.s/Map6a%20LOOge,...20rarmX20 report pdf>

NEL 17

Maple Lodge continued to have diffi culty complying with animal welfare laws, however. While still on probation for the events described above, the company held thousands of hens in an unheated barn over a 1 2-hour period on a cold day in January. According to the Federal Court of Appeal, the hens "experienced pro- longed, und ue suffering d ue to Maple Lodge Farms' omissions.'"6 Additionally, an animal r ights group released a video taken by hidden camera allegedly showing horrifying animal mis- treatment at Maple Lodge Farms. In response, an d as reported by CBC, CEO Michael Burrows

posted a video on Maple Lodge Farms' website stating: "The activities shown are really disturb- ing to us as I'm sure they are to you", he said . "We have a zero tolerance policy for any viola- tion of animal welfare polici es. We hold our- selves and everyone we work with to these high standards of care ."27

Critical Analysis: What is the role of businesses to ensure the humane and ethical treatment of animals in their care? What is the role of gov- ernment to ensure the humane and ethical treat- ment of animals by businesses?

The law is also important for responding to new and emerging hazards, as the following box illustrates.

BUSINESS AND LEGISLATION

REGULATING RECREATIONAL DRONES

Drones (sometimes called "unmanned aerial vehicles") were once associated only with the mil- itary but now are widely available to anyone who wants to fly them for enjoyment.18 Recreational drones are posing increasing concerns, however, on both privacy and safety fronts. For example, a Vancouver resident reports encountering a d rone outside the win dow of h is 36th floor condo, with its camera pointing directly at him. U nl1appy with this invasion of privacy, tl1e resi- dent called the police."' (In Virginia, a 65-year- old woman watdled a d rone hovering over her property and claims she used her shotgun to blast the d rone out of the sky.)30

What kinds of dtmgers are posed by drones?

26 See M~~ Lodge fa1ms Udv CMadfan Food fnspe:11on Agency 2017 rCA at para 79 27 CBC ~ws, "MtJ~e Lodg" Fa1ms P1obes .ti.UagOO MtSlrea1 '1"!1nl or ChlCk.<.'!ns- t30 March 2015J, onlioo

<hlt p I fwvmc.0<:c.a/~wsfca!'OOa/lo1onto/map(e-t009e·fa1ms·protes·a!~ed mi straatment·ol-chk:kens· l.3014864:- Rep•Ojuced tty pe1m:ss10:\of CBC Lieeru;·ng

See a!soG!ob<lt f\k!v1s. "Mapk'! Looge ra1msC£O Rosp.:'>!lds 10 HlddenCamoraSh0\>11~ Al~ed AbtJse at rocl1ly· f30 Ma1cn: 2015), 0"1 1oe <http l/9101::>.ll~S.C.'.ll/vloeo/1911763/ m()~·bdge·larms-c~o· resoor'lds•hidde!l*-carn.~ra·video-snowing -~e~d·atxae-at ·facifity>.

28 Rya'\ Browne, ·oroocs· Ha.-1 OiSruotive Ara Tooy aOO ¥/Ml Is Being Ck>ne lo Regu~1e Thl:>m?", C NBC.14 .}Jly 2017J, on1111e <hllP //\V..V>N.cntx. com/2017/07 /04/drones•OON<liSruot ive.ere·t hey'•.and~wnat·iS·be 1ng•done 10-rogutatt?· them.htrnt>

29 CBC ~ws, ·01oneCaughl Peepirlg ln10Var.couve1 Aparlmenr U8 . .0.Ugust 2014) on1 1ne <hllp//\'"'''"·c.b<:..ca/ nev1slc.anada/br1tiSh·oCOUmba/dro~·cau.gl\L·peeping•into-'Vancouver·a~rt!'l"lent•l27'4020S>

30 Jute ~:ey el at ·v1rg1ni.l V!/oman. Stlys She SMl Oa, ... n Orooo", 4 vvash;ngtof) l26 August 2016J, on4:1ne <htlP /.'w11~w ntx.v1ash1 n-;1ton eom/oows/bcatN,191na •V/ornao•Sl'tools·OOv(!l· Oro!le Net'li1 ·AC.IOr·RObert ·DuvtJIS•Horne·391423411 .htm1>

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At airports, drones are a particularly dangerous risk. Most seriously, a SkyJet plane travelling to Quebec City's Jean Lesage International airport was struck by a drone in October of 2017.3 ' Transport Minister Marc Garneau, himself a former astronaut, said his fear that a drone would hit a plane and result in a catastrophic accident "is the kind o f nightmare scenario that keeps me awake at night."32 In response to safety and privacy concerns, the federal government has put in place some stricter interim rules pending formal regulations. 33 According to Garneau: "The government certainly doesn't want to restrict drones so much that we hinder innovation because it's so important to our economy and stand ard of living. But like any new technology, drones must be used with care. And we cannot wait until something bad happens before we act."34

New federal rules, for example, govern rec- reational drones weighing over 250 g and under 35 kg. The rules, as summarized by the federal government, includ e the following:

Fly your drone:

• below 90 m above the ground

at least 30 m away from vehicles, vessels and the public (if your drone weighs over 250 g and up to 1 kg) at least 76 m away from vehicl es. vessels and the public (if your drone weighs over 1 kg and up to 35 kg) at least 5.6 km away from aerodromes (any airport. seaplane base or area w here aircraf t take off and land) at least 1.9 km away from heliports or aerodromes used by helicopters only outside o f controlled o r restricted airspace at least 9 km away from a natural hazard or di saster area away from areas w here its use could interfere with police o r fi rst responders during the day and not in clouds within your sight at all times within 500 m o f yoursel f o nly i f c learly marked w ith your name. address and telepho ne number"

Individuals face fin es of up to $3000 for violation.

Critical Analysis: Should drones be regulated? What are tl1e pros and cons of doing so?

Facilitating Interactions The law facili tates personal interactions by providing rules concerning marriage, adoption, and the disposal of property upon the owner's death, to name a few examples. The law also facilitates commercial activity by providing rules governing the marketplace. TI1e law of contract, for example, provid es a way for parties to enter into binding agreements, tl1ereby creating a measure of security and

31 Misha Ca,ev1Sk.1. ·01one Sln~s Comrnerc;a1 AHCfalt in Quebec Ca roe.at.( crv Nevis us October 20171 on1:100 CTVNews.c:a <hnps //w<11<11 c1 vntN1s.c.a/c.aMdafarooo..s1rik:es·comm{?1Ci:j-airciah·in·<::iuebec -garlle.OO· l .3633035>. Beyo!\d lhis, lhe mOOia 1e;Y.)1LS 1hat 100 ~mbe1 o f if\Sl()~S ll\C'.aMdaol drones llying 100 dose 10 pLln~ Ms tq:XEXI since 2014 See CP, "M1nis1er £ntt:::1s New Ru\es fo1 Orones-.£dmonton Jou1n;,1 117 Maren 2017), NP4.

32 il'>d. 33 Transport CaM:ia, 'lnter:m 01da No.<) Respacl !nc) ~ Use ol Moo~ Airer air 131May201SJ, C.aM:ia Gazetl(',,

Pail l Votume 152, Num!X!r 24, ontine <http//w,..-v1.9ai:e ni!.gc calrp·pr/pl /2018/2018·06·16/hll'l'l1/notice -Av<s·eng i"ll fri# 006>. ror fu1lher diScussiO~ of 1ci9utati0n of tile 1ec1001ion.11 d1000 .sec101 mo1e9enerat-;, seQ Anne Ma11e Ma::Oonatd. "Nev,. RQgulalOos 11')Cafl<)ja lor toe U$E;?' of Drones· funaa1edontu"-'! postJ CBC Cklc Zone -= nnp J /v1.t1w ~ oc.caf doc20n.atlea1u1e ~d rone-'<Y"IS -ca l\OC!a>.

34 Rotx'!fl fife, ·0113\.Ya To~J9nens Rutes fo1 Oper.ltiog RecrQ<HiO:\alt 01o")es-.C1ot.-eand M>N 116 March 2017J, 0!11100 <hi tps/ Joe la tnegb be.l nd ma I.co ml r.ews/ pd itcs/ouav .. a· toughens· rule s~ro 1·opa 'at 1 "Q· re: real ioMI -drones/articie 34318007/?rer-n1 tp //\'A'l\Y. tM9boeano!Ticli1.com&>. Rep10duced b'y pe1 miSs+on of The Globe and Mal

35 Tna Gove1nrmn1 ot ('.al)Ad:l R(;le•ence ITranspcrt CaM.ia), "flying Your Drooo ~lety a!'Y.l l egauy· ldate mo.11~ 23 .l.lty 2018), online <nups·f/w.t1'11 tc.9c.ca/en/s~1V.C~sfavQt on/drone..st)fery/flying -oro~saf~·~g~y.ht l\'11> See atso Sean Tind<'ie., ·M~pp1ng the Sh1 fli!\g Regutatory La:'ldsc.a~ or Dione Usl<'! in C.an<>C<f. and The Lav..ye1's ();)!¥CS J..."loua1y 2018), part or leitiS~xtS Caooaa onlioo <tttos // www 1ne~wyersoaity.ca/artc5es/S497/mapp1ng·lhe·sh lting~re9ui.i101~a!ldscape-of-dro~·use•in<anOO~>

19 NEL

certainty in their bufilness operations. Contract law allows business enterprises to plan for the future and to enforce their expectations.

Although the law addresses failed relations- as when one party d oes not meet its contractual obligations or gives negligent legal ad vice- it is not primarily about conflict. Rather, the law functions to prevent disputes and to fa cilit ate relation- shlps. It provides certainty for Lionel's commercial agreements and enables hlm to engage in transactions that nlight otherwise be unstructured and unpredictable.

Nor is the law primarily about rules that constrain commerce. Though the law d oes forbid certain activities- such as false advertising and operating without a business licence- its more filgnificant role is fa cilitative. Legal rules provide defiru- tion and context to doing business. For example, assume that Lionel wants to enter into a long-term relationship with a particularly reliable local supplier. Contract law allows him to accomplish this end by providing a mechanism through which Lionel and the supplier can d escribe- and enforce- their commitments to each other. Th erefore, Lionel can agree in advance with hls supplier on what kind o f prod uct is to be provided, how mud1, at what price, over what period of time, and when.

TI1e creation of certainty in bufilness relationshlps is one of the most important contributions that law can make to the commercial a rena. While the necessity of creating certainty means that some anticipated contracts founder when it comes to formal izing their content, the law has not necessarily failed. It more likely means that the businesspeople involved were not as dose to being in agreement as they had in itially assumed . Further discussions, perhaps through lawyers, have simply identified problems that, although hidden, were always there.

No contract can recite and provide for all contingencies; the.re will be some issues left unstated, but often the parties themselves find ways of overcoming these onlissions. Generally, they will be guided by the need to achieve the original intent behind the contractual relationshlp, with the objective of d ealing fai rly with the unexpected orunaddressed event that has just occurred. In this way, the bufil- ness relationshlp "fills in the blanks" in the contractual arrangement. If one or both of the parties involve the legal system, a judge will apply established rules governing contracts to resolve the issue. TI1e influence of the law on the business environment does not have to be exacting and literal. In fact, parties to a bufilness contract d o not always observe their agreement to the letter, preferring to main- t ain their relationshlp rather than sue for breach of contract. For example, assume that Lionel has a five-year contract with a reputa ble supplier of chlcken feed. Owing to poor planning, the supplier will be unable to make its delivery on time and has advised Lionel of a three-d ay delay. Although he may be annoyed at the d efault, Lionel stands to lose more than he would gain from suing, particularly if the supplier is otherwise reliable and the two have a solid working relationship. TI1ere is no good reason to risk this relationshlp and devote resources to litigation, that is, the process involved in suing someone. In thi s way, the contract between Lionel an d the supplier provid es the legal backdrop to their relationshlp- by d efining rights and obligations- but it is the business relationshlp that deter- m ines whether strict legal rights will be insisted upon. This is an important reality that affects how the law actually operates in the bufilness environment.

Providing Mechanisms for Dispute Resolution Whether a conflict can or even should be resolved outside the formal legal system depends on the circumstances. If Lionel hires an on-filte manager who proves to be incompetent, it is in the interests of hls enterprise to term inate the person's

Nfl

Contract law

Rules ha. make agreements bind 1ng and then°fore. iac1ht3te planning and the enforcement of expectations

Litigation

The process involved when one person sues another

Mediation

A process ~hrough which ~he pa mes to a d1spui:e endeavour to reach a resolution with the assistance of a neutral person

Arbitration

A process •hrough wh1 ch a neutral party makes a dec1 s1on (usually b1nd1ng) that resolves a dispute.

Ho wean parties n? sol.ve a business disp!ite wit.ho!lt g:J i ng to mu.rt?

employment. While Lionel may have a case to fire the employee outright, he m ight also conside r offering a small severance package to reduce the possibility of being sued for wrongful clisnlissal.36 This is a jud gment call, but the t ime and money saved in avoicling a court battle may more than offset the cost of the severance package. Conversely, it may be that the employee has had his hand in the till and has stolen from the business. Lionel is in a different situation now. He not only must ensure that the employee leaves the company immecliately but also will prob- ably want to involve tl1e police and try to recover what tl1e employee has taken. In these kinds of circumstances, a full-blown legal conflict is much more likely and appropriate.

When one party fails to keep a contractual commitment, suing that person may seem to be the best and only response. This is particularly trne when someone feels badly treated and believes that an essential principle is at stake in tl1e conflict . However, the d esire to stand up for this principle at all costs is a short-term way of thinking that should be resisted . Maintaining a good business relationship with the party in breach- or at least m inimizing the financial costs of the dispute- is often much more important than proving yourself to be right in a court of law. Questions to ask includ e:

are legal proceedings absolutely necessary, at least right now?

• is there a way to resolve the problem from a larger, relationship-preserving perspective, rather than from a strictly legal yjewpoint?

Solutions to a legal dispute exist at various levels o f formality. The first logjcal step is forthe parties to try to come to a resolution between themselves and pro- d uce, if necessary, a formalized settlement agreement. If thi s solution does not work, the legal system offers mediation and arbitration as ways of avoiding

NEL 21

litigation.37 Thus, the law provides a number of mechanisms for settling disputes short of a courtroom battle.

Sometimes, however, one business will commence legal action against another and take the matter to court . Perhaps there had been no previous agreement between the parties to refer disputes to arbitration and they have no desire to d o so now; perhaps one of the parties refuses to accept mediation; perhaps one of the parties is tremendously unfair and cannot be reasoned w ith; or perhaps the dispute has reached the point at which a court ruling i s the only way to end the matter once and for all. It is essential to a workable business environment that the last-resort solution provid ed by the litigation process be available to the clisputants. In this way, the liability of one business to another can be established .

How and Why the Law Works There are any number of ways to resolve a clispute, inclucling trial by ordeal (as in the notorious Salem witch trials of seventeenth century America); pistol duel (prevalent in France and England until the nineteenth century); and even modern- day drive-by shootings. What these methods lack, however, is accordance with modern ideas of what is just, fair, and reasonable.

Canada's legal system stands in opposition to such inequitable, arbitrary, and violent alternatives. While our legal system is far from perfect, it possesses essential improvements over its pred ecessors because it determines liability in accordance with certain principles and processes that are regarded as just. This is because the Canadian legal system demands that both the process for determining liability and the rules or laws that are applied in that process are impartial, fair, and free from bias. 1hese goals are ambitious, however, and impossible to fully achieve. For example, a judge can never be fully impartial because she arrives in court with her own personal background which, in turn, forms and impacts upon her perspectives. As an appeal court judge recently stated in another context: ''.Judges are no clifferent than butchers, bakers, and candlestick makers. All are human bejngs with djfferent backgrounds and life experiences, clifferent views of the world, and clifferent philosophies."38 And, in fact, these differences can be very helpful in advancing the d evelopment of law in a healthy way.39

To understand how the Canaclian legal system operates, consider an exan1ple in which Lionel is sued by his customer for breach of contract because he failed to d eliver product on time and the matter has now come before a judge. Lionel's customer, as the party who has initiated the complaint of breach of contract, is obligated to prove his case. 1he jud ge, in turn, is obligated to be as objective as possible in d etermining whether the customer has proven his case. Part of the judge's job is to determine what the agreement between the parties actually was, as well as the law governing the matter. The judge must then apply this law as impartially as possible to the situation. In order that the outcome of the customer's dispute with Lionel be seen as just, the law that the judge ultimately relies on must

37 ro1 fu!lher<hSCtJSSiO!lOI the-se CO')Cept s, .see Chapter 4 38 RvCashikarryi, 2017 ABCA 194 at Ml~ 12. Tht!: state'T'lenlt)rOSe in l heCO:'\L&I Ol lhe ~dqe advocating 101 l he

raOOom ass•;;Jnmenl ol appcUa1e µdgas 10 case-s. 39 lb:d at par() 15.

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Liability

Legal responsibility for the event or loss that has occurred

also be fai r and reasonable. For example, it is a rule of law that a party who suffers a breach of contract is entitled to be put in the position that he or she would have been in had the contract been fu lfilled . If the customer can prove that, as a result of Lionel's bread1, he lost business, for example, a court may well award d amages for loss of profi t. The rationale behi nd the rule is simple: Lionel has broken his contractual promise, albei t unintentionally. Lionel must therefore assume responsibility for any direct and foreseeable fin ancial consequences that his customer experiences as a result.

~~~·~~~~~~~~ ..... . 8 As noted earlier, the law is sig nificant because

it offers a mechanism for achieving the goals of protection, faci litation, and dispute resolution in a va r iety o f contexts. For example, bankruptcy law is the veh icle for ensuring that all those

This man said that he had been locked in a car trunk over a debt oi.l!d to his attackers. He was freed by firefighters. H01<1 is this method of disput.e resolr1tion inconsistent lllith dte mlues informing the Canadian jttsti<.e syst.em?

Legal risk management plan

A comprehensive action pl an for dealing w1 th the lega l risks invol ved in operating a business

affected by a failed business are treated fai rly, reasonably, and according to a set of agreed-upon

rules. Anti-discrimination law confronts bigotry by providing remedies to those who are treated unjustly and p rejudicially. Tort law ensures that those who wrongfully cause injury to another are held finan cially accountable. And the legal system at large provides a vast machi nery for resolving conflict.

Knowledge of the Law as a Business Asset Entrepreneurs like Lionel can use the law to protect and advance their business interests. Conversely, they can cause themselves much anxiety, grief, and financial loss by ignoring the law.

For example, the law of occupiers' liability holds Lionel responsible for the head injuries suffered and income lost by his potential customer who slipped on a wet floor on his premises.4 0 Likewise, the law forbids Lionel from using a business name similar to that of the northern Canadian company ("Chelsee Eggs and Poultry") if that misleads the public into thi nking that the two businesses are somel10w related. Though Lionel did not intend to mislead the public, this is no d efence to any action launched by Chelsee Eggs and Poultry.41

Lionel's negative experience with the law- while perhaps a Ii ttle bit extreme- illustrates the point that knowledge of the law is a business asset. Had Lionel taken more time to inform himself about the laws governing his operations, as well as about the consequences for fai ling to abide by them, his business experi- ence presumably would have been much more positive and profitable.

An effective way to avoid Lionel's mistakes is to implement a legal risk management plan. This means identifying the legal r isks associated with a business and implementing concrete measures for managing those r isks. The objective is to identify and plan for risks before they occur.41

40 ro1 dtScussiOI\ 0 1 occup:-e1f C;ab1 ty, soe Ch.lpt~' 12. 41 ro1 discussion or passing oft, sae CMp1e1 12. 42 Set:! Chapter 3 for a riSk. !'NM9eme1u modet.

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Law and Business Ethics From the perspective of reputation and profitability, it is not enough fo r a com- mercial enterprise simply to comply Mth the law. Business ethics also provid e an increasingly important over lay. Business ethics concern moral p ri nci pies and val- ues that seek to determine right and wrong in the business world. On this basis, while it is ethical for a business to comply wjth the law, ethics may dema nd even more. Business ethics require entrepreneurs to conform to principles of commer- cial morality, fairness, and honesty. Entire books have been written about the ethical problems or d ilemmas that a business m ight fa ce.43 However, from an introductor y perspective, it is useful to consider how ethics impacts on business d ecisions from a number of vantage points:44

Business to Consumer: How fa r should a company go in extolling the virtues of its product? When d oes sales talk become deception?

Business to Society: To what lengths should a company go to enhance shareholder return? To reduce costs, should a business employ chlld labour in those countries where it is legal to do so? What if the child's income is essential to the family 's survival?

Business to Employee: Should a business monitor employee emails and Internet use on company computers?

Business to Business: Short oflying or frau d, is it ethical to bluff d uring business negotiations? When d oes bluffing become a form of corruption?

Indeed, skirting ethical norms can lead to lost revenue, bad publicity, public d emonstrations, and condemnation.

ETHICAL CONSIDERATIONS

Business ethics Moral principles and values tha: seek to de:ermi n•2 ngllt and wrong 1n the business world

UBER Uber, headquartered in San Francisco, is interna- tionally known for its ride-booking and r ide- sharing application (or app) for smartphones. Uber forms part of what is called the disruptive, sharing economy because it perm its people to "bypass traditional businesses" - in this case, the taxi cab ind ustry- and "to rent or buy from one another instead ."45

Canad a's taxi ind ustry regulations, gener- ally set by municipalities across the country, are strict and costly to ful fi ll. The commend- able goal of these regulations is to protect the public interest and, as part of that mand ate, regulators enact rules which impose insurance req uirements (so as to protect the customer and others should the cab be in an accident) as well as taxi price levels, vehi cle safety stan- dards, and m inimum service requirements. 4 6

43 See, lor gx.arnoCe, Rober! Se,ay CJnadltln Busmess i>rrd Soc.el)' Cth1cs Mid Respa"ts~li:y, 3d ed lWh11by, ON McGr.Yw•Hlt Ryerson. 2013), Rober! La1me1 £rh1<:s in the WorkpJace. Se1ected Rmdtngs :n B:Jsmes.s £:h;cs, 2d ed {Betmoni. CA· \l\/OOS\ .. 'Crtn T"'°mson Le~ining, 2002).

44 Tne~ va'lt::ige 001n1.S a1e d<Hwed lrom t~ \...Ork ot la1m<:H, 1bd 45 Sunl Johal b Noah Zo!'\, f.>oJ1o..-y /vlaking la rhe ShbfNlg £c01ontt !Toronto; Monat Centre, 2015) at b, on tine

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There are also limits on the number of cabs permitted on the road through taxi licences (also known as plates or medallions)47 wh ich a cab must have to legally operate. While prices have dropped recently, plates at their peak in Toronto coul d run up to $360 000. 48

Uber's business model is constructed on Uber's claim that taxi regulations do not apply to it because it is not a cab company but a transpor- tation service company which simply connects passengers to drivers.49 This helps to drive down costs since, for example, Uber operators do not incur the significant costs of a taxi plate. 50 And lower costs have, of course, contributed to Uber's

A protest by taxi driwrs against Uber

47 JbJd al 2 481b/d

phenomenal popularity- the company claims 40 million active users a month worldwide.51

When Uber began operating in Toronto, tl1e City pushed back against Uber's position that it was not bound by rules governing the cab indus- try. Tracey Cook, executive clirector of Municipal Licensing and Standards for Toronto, stated at a 201 4 press conference that Uber was operating "without lawful authority" and that its unregu- lated status potentially endangered the public. 51

In this regard, she referenced allegations of lack of driver training, inadequate insurance, and price gouging due to its unregulated fare structure.53

Uber's approach to the Toronto market was seemingly brash: enter the market and then openly operate "outside the law" while hoping to force a regulatory change. 54 This is called regula- tory arbitrage and is described by law professor Brishen Rogers in this way:

You follow some rules and try to skirt around some others and you break some others. And you know, Uber's calculation. and I have to sort o f admire their chutzpah in some ways. is simply that their product i s good enough that some- times if they break the rules they'll be able to change the rules. because the consumers will want them to be in the city so badly. And that has happened.55

49 Ct.-'01ge Siedel ·Business SchOot Learf\illQ Goots· TM L\?g.¥. and Reg1J!t)IOfY Conleitl c t 01gan;z~10~ to a Gb~1 £conomy', {20!7J 34 Journ/IJ Of Legal Srud1e! fduc<ntan 325 al 335- 336.

50 CBC Nevis. "Ube1 Is H<!re to Sla'y' M<ry'Or· C\ect Ma-yor John Tory Says· U9 November 2014), Onl:iOO -:. nup// w .. vw.cbC.~/news/cal\OO.l/t1.)1onto/uber·is·M1e· tO·S~· I010~lo-~01·e\ec l•jOhn· tOry· s.'Jjy!i· 12840295>

51 Kla Kolrattcneva, "Uber Nev.' Has 4 0 MUon t-bnth(y R"iaers V/orth..,dt( fortune fTedlJ 119 Oct 2016), On tine <http//fo1tuf')(!.COm/2016/10/20/uoe1·app· ri0ers/,

52 James Armstiong, "Toronto Att~mpling to St\ul Cbv1n Uber VV1tllin City lim its ·. ClOb;)I_ Meo-is ll B NCM!mbef 2014), Onl:1ne <hllp://g!obalOO\.YSc.a/news/l 67S342/c!ly· to-al\noUnc:e-.devek>p!'r'enlS •r<.':~10 in.g·uoe1·se1vce-!n· to1onlo/>

53 Jt>d. 54 Ower Moore. "(oogam~ Approoch1ng for Ut:ier Operating ·outside the Lavi in Toronto·, Gabe and MaJI

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55 JbJd.

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It would appear that Uber's gambit is produc- ing results. 1his is because the City of Toronto has rolled out Uber-friendly regulations. Accord- ing to Su nil Johal,

UberX drivers will now be required to file docu- mentatio n. such as criminal record checks a nd insurance certificates. directly with the c ity rathe r than with Uber as had been the case pre- viously. and o btain a city licence. But Uber dri v- ers won't be required to have cameras in the ir car, undertake training courses o r have rates regulated by the city (other than a small change to the base fare).56

There are also new rules that have relaxed somewhat the regulation of taxis. 57

Though other cities will likely fo llow s uit a nd permit Uber to operate according to a restructured set o f rules, Ube r's problems are not behin d it. According to Chris Mills, "Despite a $60 billion valuation, Uber has yet to turn a cent of profi t , it's lacking any senior leadersMp, [and] cash is being burned through at a n alarming rate . .. ."58

As well, Uber has been accused o f fo stering a tox ic work environment, including sexual harassment and discrimination,59 homophobia, as well as threa ts o f violence a nd sexual assault in the workplace.60 In June o f 20 17, Uber released the results o f an internal investigation

into such allegations led by former U.S. Attorney General Eric Holder. The report was critical o f Ube r 's corporate culture and included a recom- mend ation that Uber "reformulate its written cultur al values because it is v ital that they reflect more positive and inclusive behaviours."61

Und er this r ecommend at ion, the r eport included a statement that Uber "elim inate those values wMch have ... been used to justify poor behavior" including values represented by the fo llowing slogans: "Let Build e rs Build, Always Be H ustlin', Me ritocrac y and Toe-Stepping, and Pr in cipled Confrontation . . . . "61 On a related front, a European commentator has observed upon Uber's failure to present itself "in a stable and socially responsible way."63 [n light o f these and otl1er serious matters, Uber's fo under and CEO, Travis Kalan ick, was replaced in August of 2017.

Critical Analysis: Uber 's business mod el o f refusing to follow rules governing the taxi indus- try has been described as either "disruptive or illegal, d epending whom you ask."64 Which view do you hold and why? [s i tan acceptable business p ractice to b reak the law? What are the ethical considerations of d oing so and how might this impact on or reflect corporate culture?

56 Noreen Ahmed•Ulah. "New Re9uk-1lO"!> Moon Business as Usual 101 Uoer, Says U cf T £x.perr. U of T Nr.."'Ws !9 tv\)'y 2016),orti~: <hllps //W1muto10010.CA/news/nev1·r~glA<lli0ns·~n--business~sua4: '(Jber·~S·u•t•etpe1 l> U~d by oermissiOn ol Sunl Johat

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59 Selena Larson. ·uoar P$eads 'N1Lh Those Ot'!h~1tog 1ne Apo ¥le ie Hur11ng·, CNN Tech t23 reoruary 201n, o nl:tOO < hup ff mo!le)' c. nnc.o m/2017 /CY212 3/technob9y/ d~et e-u be r• ~ xuat- ha!aSS r'ne nl/inclex . hll'li >

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61 Anila B<takftshMn b Deirdre Bosa "Uber CE:O T1av1s Kabnick to Take f,fre Av.-ay Fl'Om lhe Compar"ry· CNBC 113 .lJ ne 2017J, Online -:l'lup l/111wwc.~bc.com/2011/06/13/urter · tdde• 0 1epo1L ·1ecomrnt'!OOa1i0ns.i'111'1i>

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BUSINESS LAW IN PRACTICE REVISITED

1. How does the law affect Lionel's business?

As Lionel starts his business, he will be involved in a number of transactions and events with significant legal implications, including the following:

Business form. Does Lionel want to operate his business alone as a sole proprietor, would he prefer to work w ith partners, or is he interested in incorporating? Each business vehicle has its own set of rules, which Lionel must find out about. For instance, the incorporation process is strictly dictated by federal and provincial law.""

Business name. Lionel must be sure to choose a nan1e that is not confusingly similar to the name of another business. Even if he chooses such a name inadvertently, he will be subject to legal consequences, including be.ing sued for damages by the individual or company that has built up goodwill in the name in question.ti6

Financing considerations. lf Lionel d ecides to borrow his operating capital from the bank, he must enter into a specialized form of contract known as a promissory note. In this contract, he prom ises to repay the loan, with interest, according to a schedule.67 If Lionel d ecides that he wants to raise money by selling shares, he will defin itely have to incorporate a company. As well, should Lionel's company end up selling shares to the public, it will have disclosure obligations under securities legislation.68

Property. If Lionel decides to expand, he must d eterminewhetherto buy, build, or lease additional prem ises for his business operation. Each option involves a unique set of laws.69 Furthermore, many aspects of tl1e property used in Lionel's business are regulated through health legislation and fire regulations, to nan1e two exan1ples. Additionally, if customers are injured on his premises, Lionel may be held liable and be required to pay damages.70

Services. Lionel may ultimately hire staff to run his business. He must become aware of the laws concerning unjust dismissal and employment equity, as well as human rights legislation that prohibits discrimination.71

Marketing. In promoting his business to the public, Lionel must be sure to abide by laws prohibiting false and misleading advertising,72 as well as trad emark and copyright law, to nan1e two examples.

Selling. Lionel must be sure to provide a reasonable level of service to his customers.

Just as Lionel must d evote resources to monitoring any staff that he might have, attending to proper bookkeeping, and keeping his loans in good stand- ing, he also must spend time managing the legal elements of hi s business

65 ror a discussion or the ioco1p0raton cnocess, see Ct)t)Oter 15 601b/d 67 Fo1 a dtScussiOI\ 01 cr0011,, see Chapter 26 68 ror a discussion of secun11es tav1, ~e Chaplen 15. 69 ror a dlSOJssiO!l or real estal(! t.-w1, set:! Ch.clotar 19 70 rcr diSOJssion cf occopier's t1aOl1ty ~"'· see Chapter 12. 71 ror a discussion 01 emp40yment l<)v;, ~e Chaplors 20 aOO 21. 12 ror a dlSOJssiO!l of m.:int.eling tarw, ~e Chc':lplers 23 and 24

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environm ent. Sin ce the law affects Lionel's business from a variety o f perspec- tives, he is much better off accepting this responsibility from the outset, rather than fighting a rear-guard action. Once he und erstand s the law, Lionel can take simple, proactive steps to ensure that he complies with it; just as importantly, he can plan for the futu re. A properly d evised risk management plan is an invaluable tool to achieving this end.

2. What are the purposes of the laws that affect Lionel's business?

One of the most important functions of law in the business environment is to fac ilitate planning, particularly- though not exclusively- through contract law. Business law also has a protective fun ction in that it seeks to ensure that those who cause a loss are held financially responsible and otherwise accountable for thei r actions, including through the crimi nal justice system. Finally, the law pro- vid es a series of mechanisms and rules for dispute resolution, thereby making an essential contribution to certainty in the marketplace.

3. What has gone wrong with Lionel's business and why?

The Business Law in Practice scenario provides a lengthy illustration of the kinds o f penalties and liabilities Lionel fac es for neglecting the legal rules that govern hi s enterprise and fai ling to manage against their violation.

CHAPTER SUMMARY Law is involved in all aspects o f business, whether the entrepreneur is aware of it or not. The law protects persons and their property, fa cilitates commercial inter- actions, particularly through contract law, and provides mechanisms for dispute resolution.

Though not perfect , the Canadian legal system has much to recommend it. The system strives for just outcomes by demanding that both the process for d etermining liability an d the rules or laws that are applied in that process are fair, objective, and free from bias. No justice system, o f course, can consistently a ccomplish all these goals.

Indeed, there are serious limitations to what the law can realistically achieve when a legal problem arises; thus, it is imperative that a business adopt a proac- tive approach in managing the legal aspects of its environment through a legal r isk management plan. TI1is chapter has emphasized the idea that knowledge o f the law is a n essential business asset. Informed owners and managers can pro- tect their businesses by ensuring compliance with legal requirements. They can capitalize on the planning function of law to ensure the future of their business by entering into contracts. They also can seek enforcement of legal rules against those who d o business or have other interactions with the enterprise. In thi s way, the property, contractual expectations, and profitability o f the business a re made more secure. Business ethics- while sometimes but not always coextensive with legal requirements- are also increasingly important to running a success- f ul business.

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CHAPTER STUDY

Key Terms and Concepts ubitration (p. 12)

breach of contract (p. 7)

business ethics (p. 15)

business law (p. 3)

contract law ( p. 11)

law (p. 5)

legal risk manage ment plan (p. 14)

liability (p.13)

litig ation (p. 11)

mediation (p. 12)

trademark (p. 4)

Questions for Review 1. What is the function of law?

2. How does the law offer protection?

3. How does the law facilitate business activity?

4. In what ways does the law facilitate certainty in the marketplace?

5. Does the nature of the business relationship affect the enforcement of legal rights?

6. How does the law resolve disputes?

7. Does dispute resolution always involve going to court?

8. In what way is knowledge of the law a business asset?

9. How might a lack of knowledge of the law negatively impact a business?

10. How does contract law facilitate interactions?

11. Why should a business put a legal risk manage- ment plan in place?

12. Why is it important that certain activities, such as the recreational use of drones, be regulated?

13. What is the role of business ethics?

14. Why are business ethics important?

Questions for Critical Thinking 1. The law is sometimes made subject to the crit-

icism that it does not necessarily forbid uneth- ical behaviour and is therefore too narrow in scope. What is the relationship between ethics and law? Are ethical responsibilities the same as legal responsibilities?

2. When is a lawsuit the best response to a legal dispute? What is at r isk?

3. Knowledge of the law is a business asset. How can you acquire this asset short of becoming a lawyer? How is ignorance of the law a liability?

4. Courthouses throughout the world, including in Canada, sometimes feature a statue of a woman who represents or symbolizes justice. In cer- tain examples, she is blindfold ed and carrying

both a sword and scales of justice. According to sources, the blindfold is a symbol of impartial- ity; the sword is a symbol of "power, authority, protection"; and the scales "imply a just bal- ance", among other explanations.73 Describe and give examples of how these qualities are present in the Canadian justice system and how they are not.

Because tanning beds are a cause of melanoma or skin cancer, the vast majority of Canadian provinces have legislation regulating their use. One common model that the legislation follows is to require warning signs on the tanning salon premises and prohibit those who are under the age of majority (i.e., the age at which someone becomes an adult for legal purposes) from using tanning beds altogether. This ranges from 18 to 1 9 years of age, depending on the province. Another possible model would not outright ban underage tanning. Instead, written parental con- sent would be required. Should the government try to protect young people from the dangers of

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tanning or should the matter be left unregulated and up to the individual consumer? [f you think the matter should be regulated, which model described above do you prefer and why?

6. Was it a good idea for Maple Lodge Farms {dis- cussed in the Ethical Perspectives Box in this chapter) to fight charges under the Health of Animals Act for failing to prevent undue suf- fering by exposing chickens to the cold during transport? What are the risks of doing so? What are the risks of admitting guilt?

Situations for Discussion 1. Joe has recently opened a bar and adjoining

restaurant, specializing in seafood . It is named "The Finny Friends" after a restaurant that Joe had visited in Toronto several years ago. ln accordance with the law, Joe has a liquor licence from the provincial liquor-licensing authority tllat limits tlle seating capacity in the bar to 30. As Joe's bar becomes increas ingly popular, he begins to regularly allow over 60 patrons in at one time. Eventually he is caught, and-having already received two warnings-his operation is closed down for 30 days. Joe is flabbergaste d at ilie severity of the penalty. Soon thereafter, Joe is contacted by a lawyer for The Finny Friends Restaurant in Toronto. The lawyer says that Joe has 48 hours to take down h is restaurant awning, modify his social media presence, and destroy anytlling else with the name "The Finny Friends" on it {including menus, invoices, place- mats, and napkins) or he will bring an appli- cation for a court order to that effect. To make matters worse, a health inspector is on Joe's doorstep saying that there have been several recent reports of food poisoning originating from Joe's restaurant. What has gone wrong in Joe's business and why?

2. Sam owns a small gas station in Alberta. He is very angry that a customer has failed to pay her outstanding account with his business, despite nwnerous reminders from him and promises from her that she would to do so. His idea is

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to print up a poster and tape it to the main entrance of the gas station. Th e poster would contain a photograph of the derelict customer and her name, as well as stating "PAY YOUR

OVERDUE ACCOUNT" in bold, upper case font. "It's ilie only way [have to get through to my no-good customer. Plus it's the truth. She does owe me money. Quite a bit in fact", Sam told a friend. Does this plan involve Sam disclosing per- sonal information? Should he go allead with the plan? ,. Explain.

3. Peter is a fudge maker of some renown and obviously requires a reliable supplier of sugar. His current sugar supplier has been very dependable but recently, is delivering late- sometimes days at a time. Peter is concerned iliat the supplier has entered into too many supply contracts wiili a variety of businesses and cannot fill his orders on a timely basis. Peter knows the sugar suppUer is in breach of his con- tract for delivering late but wants to avoid a full - blown legal battle. What alternative approaches might address Peter's problem more effectively?

4. Several provinces across Canada, including Ontario, Marutoba, and Saskatchewan, have proposed or passed legislation that prevents child ren from buying or renting video games that are expressly vfolent or sexual, as deter- mined by a ratings board. Businesses found sellingiliese games to minors face penalties iliat range from fine.s to having their business licences revoked.75 How effective do you th ink government regulation is in limiting children's access to violent video games? Are there better ways of achieving these types of goals? ls it the role of government to provide legal conse- quences for ilie underage renting or purchase of violent video games?

5. Olivia owns a convertlence store and has invested a lot of money in gambUng machines for the store. Recently, ilie government passed a law banning the machines from tlle store immediately, aliliough pubs are allowed to continue operating iliese machines. l s this law fair? Does it violate any of the common values

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associated with the law? Would it make a differ- ence if the law applied only to new businesses? Would it make a difference if the government provided compensation to the convenience stores affected, or phased in the law to allow for a period of adjustment?

6. A businessman who worked in the dry-cleaning business for almost three decad es received a jail sentence for repeatedly breaching environ- mental protection laws related to the improper storage of a cancer-causing agent called perchlo- roethylene used in the dry-deaning process. His operation did not follow rules requiring the

chemical, as well as its waste water and residue, to be stored in a closed container. The business- man's lawyer said that his client was embar· rassed by the infraction but simply got too busy to supervise this aspect of operations. Do you agree with a law that can send an individual to jail even though there is no proof that anyone fell ill from the infraction and no proof that the individual intentionally disregard ed the law?76

76 Tony Btais, ·ory Oeaner Geis House A1r~sr, (dmon:ott Jou1nat

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BUSINESS LAW IN PRACTICE James McCrae owns a small convenjence store jn Nova Scotia whkh sells a varjety of items, inclucling cigarettes and other tobacco prod - ucts. On what he regards to be a point of principle, McCrae refuses to comply with regulations passed under Nova Scotia's Tobacco Access Act. 1 These regulations prohj bit the display of tobacco or tobacco products in retail outlets and specify how such products are to be stored. The law requires that tobacco not be visible to the public except at the moment of sale at the till.

McCrae is also aware that the tobacco industry pays retailers to display therr goods and thls is part of hls income stream. Retailers subject to display bans lose preferred shelf space revenue whlch ranges from $3000 to $6000 per store.' Legislation like that of Nova Scotia is found in jurisclictions across the country.3 The idea behlnd such enactments is that the retail display of tobacco products (called power walls) normalizes the consumption of tobacco and encourages smoking. As noted on the government of Nova Scotia's website:

Power walls, or point-of-sale advertising, are large, visually appealing ilisplays, located in most gas stations and local stores. Research has indicated these displays are particularly appealing to children and young adults. The legislation will force otore owners to conceal cigarettes, and any other tobacco product. The removal of power walls will further restrict the advertising reach of tobacco companies.•

l Tc.'>OOccoAcces.s Act.. SNS 1993 c 14. 2 Randy Ray i"Ct..rs Tof.:laeco ~por1 Bbed.ed ~I UnbOv..ed· '!'CM !Your Corr....en.ienc(!

MaoageiJ fvlAghZine {2006) u 1 Jan/~<i?b 3B at 39, onune <tutpl/dig11.llmedQ.ycmonlll')e'!.Ca! YCM/YCM2006Jall!;a1y/1!\dex.htm!#0-39:io

3 Atl p1ov+nces afK! lern101ies hcl;(! bal\S Oil tne dis~ of tot-a~o prOOuclS at pOint o f s<ie as of 1 Janua1y 2010. See Jl Re.id & 0 Hammond, Tobacco Use .on CtltliJdh' Ptnt&-rls attd 7iends. SuppJemcnt Tobacco Cont10J Pobaes H'f CantKJa 2017 Cd lWatertoo, ON Propet Cen11e for PoputatiOn He~th Impact,, Unrversr1yof Wat~rk:IO) at Sl· 24,online <hll~// uv1at\.'!l'kio.ca/toc.-'"JCco•use<.aMjafs11es/Cl'J.tooocco-t1s~-<:aooda/ftes/uO{Oads/lk!s/ tobaccoust'.!1ncaooda_201? _pd,cystJOp1,cment.pdl>.

4 SeeGovi'!rnment ol Nova Scotia, N;'!ws n~~ase, ·covo1nm~n1 Puls lhe F"u>J onTot:>a:::co PovRr V/atts· f31 ()Clober 2006), on(,ne <~Uo //vNNl/'JOv.ns.ca/oo-.Ys/der.at.s .asp»d-20061031002>.

Ackn0v.ied9e1mnl'. Tile autlv.>rs gra1elut1 ackoovk>dgt'.! t~ very hdoltJI comrmnts on an eartier d1af1 oy the fotov1ino;) scldars• Dr. La11yChar11a'ld,AcademC Oi1ec101 ol the Native Lav.' Centre {Unrversity of $.)sleatc')ev .. an) aoo Profesf.Or onteave horn the F"aetJtly or Lavi at the Unrv<:l$1ty ol ()1tav1a, and As.c;oc01e P1otesso1 01 Sari Graben ol the T€!d Rogers SctY.>ot ol Business f.;1anagement.. Rye!'SO!l Uni\.e1S1ty.

The Right Honourable Riduud Wagner, Chief Justice of dte Supreme Cou rt of Cal?llda

Nfl

OBJECTIVES After studying this chapter. you should have an under- standing of

• the impac t o f the Canadian legal system on business

• the role of constitutional law in protecting commercial rights and freedoms

the government"s law- making powers under sections 91 and 92 of the Constitution Act, 1867

• the executive's formal and political tuncti ons in regulating business

• the judiciary"s role in assessing the constitutionality of legislation

• the classifications of law

• how administrative law atrec ts business

• the importance of Indigenous legal traditions as well as aboriginal and treaty rights

Government poUey The central ideas or pnn c1 pies tha: guide government 1n llS work, including the kinds of laws 1" passes

Constitutional law 7he supreme law of Canada 1ha• constrains and controls how the branches of g overnmem exercise power

Liberalism A pol1:1cal ph 1losopl1y that emphasizes ind 1v1dua l freedom as its key organ1z1ng value.

Canadian legal system The machinery tha· comprises and governs the legislative. executive and 1ud1cial brancl1es of government

There is also evidence that anti-power wall legislation has helped reduce the number of young people who smoke or take up smoking. As the Guardian notes for example, "Those countries that have removed displays of tobacco have expe- rienced falls in smoking prevalence among young people. In Iceland, there was a fall of 7.5% among people aged 15-1 6, while Canada saw a fall of 1 0% over five years among those aged 15- 19."' From McCrae's perspective, Nova Scotia's legis- lation interferes w ith free dom of expression, as protected unde r section 2(b) of the Canadian Charter of Rights and Freedoms, which states:

2. Everyone has the following fundamental freedoms ...

(b) freedom of thought , belief, opinion and expression, including freedom of t he press and other rnedia of communication;(i

McCrae's view is that displaying tobacco products is a protected form of expression.

McCrae is eventually charged under the Tobacco Access Act for displaying tobacco products out in the open. He wants his lawyer to have the charges thrown out on the basis that the Tobacco Access Act is unconstitutional, as contrary to section 2 of the Canadian Charter of Rights and Freedoms, quoted above.

1. Is Nova Scotia's Tobacco Access Act constitutional and hence enforceable?

2. Who assesses whether the legislation is permissible?

3. Are there any moral or ethical questions tl1at arise from tlus scenario?

Introduction The Canadian legal system is the machinery that comprises and regulates govern- ment. Government, in turn, is divided into three branches:

the legislative branch crea tes law in the fo rm of sta tutes and regulations.

the executive branch formulates an d implements government policy and law.

the judicial branch adjudicates on disputes.

Constitutional law- which is the supreme law of Canad a- is charged with ascer- t aining and enforcing limits on the exercise of power by the branches of government. It is also charged with upholding "the values of a nation."' These values are tied to the political philosophy known as liberalism. Briefly put, liberalism emphasizes indi- vidual freedom as its key organizing value. A related aspect is that any interference with freedom- including the freedom to display a legal product in one's business premises- must be justified according to the principles of constitutional law.

The Canadian legal system- along w ith tl1e constitutional law that governs it - can be an overwhelming and sometimes very technical area. Even so, some basic knowledge is essential for business owners and managers because:

tl1e legislative branch of government passes laws that impact on business operations. For example, when government enacts a law, fai lure to comply

5 J<'llOCL Athe11o n. "Keev It Hddel The Cul'J(d1an {4 rebruaiy 2l)()g), 0~1ne <http·//vt..ivw.guardlt)n CO.tJk/SOC(;.ly/ joopu~c/2009/feti/04/chidr~l\ -$l'n0k. il'IQ>

6 CMadfatt Cht)(ter of ftgh:s /Ind Freed<xns, S(!CIJO" 2lbJ, Part I Ol l!')e Constifut:on Aa. 19B2, beillg ~Mdt.:6C B 10 the Cani>da ACI !982 il!KJ. 1982. c 11 IChMl<YJ

'l Pe ter Hogg Const1t1 .. tJOrtal LaY1 Of Canada, 2016 Stud~ru Cd1ti01\ tT01onto, ON Carsv..el. 2016) at 1- 1.

NEL 33

Somecusromers are !in happy with display bans, incl!iding Rene LaPoint.e. it's just anot/1'!r law for the government to throw at us~ says La Pointe. "They're treating t/1'! adrdts like dtildren: Do>"" agree with his analysis?•

can result in fi nes and other penalties, including closure of the business. Ignorance of a law also means that business loses out on oppor tunities to influence government policy and to take advantage of fa vourable laws; failure to challenge laws that are unconstitutional means that business is needlessly constrained .

the executive branch implements and generates policy that may be directed at business. For this reason, companies such as General Motors of Canad a Lt d have a corpora te and environmental affairs d epa rtment that is cha rged with monitoring government policy as well as tracking and contributing to debates over public policy that could affect GM operations.• Smaller busi- nesses may work to influence government on a more modest scale by mon- itoring issues in-house, hiring lobbyists, and working through ind ustry associations.

the judicial branch provides rulings that not only resolve existing legal con- flicts but also impact on fu ture disputes. For example, the Supreme Court of Canada's determination of whether commercial expression is protected speech under the Canadian Charter of Rights and Freedoms has an impact on any number of industries, from cigarette prod ucers to toy manufa cturers.

McCrae's challenge to the Tobacco Access Act, mentioned in the chapter opener, involves all three of these branches. The legislative branch passed the law to which McCrae objects. The executive branch formulated a nd ad vanced the government polic y that led to the legislation being enacted. And the judicial branch- by applying constitutional law- will deter mine whether McCrae's objections to the law are valid or not.

8 ·smoKers ru~ Ow1 Tobaeco Display~!'\# The £drn?nton Journ?JJ U June 2008) AS, O"l1 1ne P1essneooer The fdmonton Joutni'IJ <hllps·//vN1v1.p1ess1e.a:der.comtcaMdaf4'!dmon1on-jOurMV20080601/281668250721952>.

9 ln1e1vew ot Ms. Minarn Chust~ MaM;ie1 ol Gov~1ru·nenl Rel.a1ioos, Corpo:a1e a!'Y.I Cnv110nl'l"'(!nt.at Affa irs Ck'>par1men1, General Mo101s of Cana-:ia Ltd 110 r ... 1a1ch: 2000)

Nfl

Constitutional conventions mportant rules tha·

are no' enforceabl e by a court of l aw but that prac,ically determine l1ow a g iven power 1s exercised by govern men~

Legislative branch -he branch of government that crea:es sta:ute l aw

Statute law f or1T1al. \.Yntten laws created or enacted by the l eg1sl at1ve branch of governmenl

The Canadian Constitution The territory forming what is now called Canada used to be a British colony which is why the Canadian Constitution has d eep British roots. Additionally, Indigenous legal systems are important to the Canadian Constitution, 10 a matter to which the text returns in the section "Indigenous Peoples and Constitutional Law." French legal practices must also be acknowledged, u with Quebec's Civil Code being dis- cussed in the section "Classifications of Law."

The Canadian Constitution is not contained in one document. Rather, it is located in a variety of places, both legislative and political, written and unwritten. While this means that the Constitution may sometimes not be specific, it also means that the Constitution can more easily grow to resolve questions or issues related to government.

The written elements of the Constitution include the Constitution Act, 1867 (part of which divides legislative power between the fed eral and provincial gov- ernments) and the Canadian Charter of Rights and Freedoms (which identifi es the rights and freedoms that are guaranteed in Canada). Additionally, relevant d eci- sions by judges concerning constitutional law- discussed later in this chapter- also form part of the Constitution. Though these documents provid e some of the fram ework and values informing Canada's system of government, other important constitutional features (known as constitutional conventions) are not mentioned at all.

Constitutional conventions are a "code of ethics that governs our political processes."11 They are not binding the way that constitutional rules contained in legislation would be; they cannot be enforced in a court oflaw. Rather, they are in place because politicians historically have agreed to abide by them. One example relates to tl1e office of prime minister; nowhere in Canada's written Constitution is this important office even mentioned, yet no one doubts that the fed eral gov- ernment is to be head ed by such an officer. In this way, constitutional conventions come to the fore and provide some of the detail of governance.

The Canadian Constitution also attends to many other matters, including the admission of new provinces and territories to Canada, 13 provisions for amending the Constitution,14 and autonomy from the United Kingdom Parliament.15 Most significantly forourpurposes, however, the Canadian Constitution provides forthe three branches of government: legislative, executive, and judicial, discussed below.

The Legislative Branch of Government The legislative b ranch of government creates a form of law known as statute law or legislation. A familiar example of statute law is the Criminal Code of Canada, which prohibits a variety of offences, such as assault, theft , and fraud. The Tobacco Access Act was also created by tl1e legislative branch, this time at the provincial 1 eve!.

JO PelerC:J.tve1. Pa111ck Ma::k.~.unb Natha1e D~ RosierS. "Chapter 1. ln1rooucti0n· in Pe1erOrver. Pa11'Ck Ma:":kle"t\& Nathalie Des Rosoe1s, oos . TheOxladHttndbookof !he Can<ldiattConstJtu::an (Nev.' York Ox.ford Un.1w1-s1ly P1ess, 201n at 2.

11 Ibid. 12 Bern<Hd rul\S IO!\b £ugeoo ME!E?MI\ Can/JdtiS CO!lS!ttUt!OO.,, Law in ti NutShell,, 4th 00 tT01on10 Carsvii'!I,

20l.3J • t 6. 13 As Ho~ Ob!*?Nes, surxa note 7 at 2~12, s«lion 146 o f Ille Const1:ur1on Acl, 1867 gove1os lh is 1Mtto1 14 See P()rt Vot lhE! Const:tulion Acr, 1982, be11'19 S--:OOdub B to lhE! CatriKJ<J Aa 1982 (UK). 19B2, c U and Hogg.

1btd a t 4-12 and lctbv11ng. 15 ro1 fu11 her dlSOJSSion o l thiS point.. see Hog:;, ib.'d a l 3-1 10 3 ... 15.

NEL 35

In fact, three levels of government- the federal, provincial, and municipal levels- make legislation in Canada. Parliament, the fed eral legislative branch, is composed of tl1e House of Commons and tl1e Senate. For legislation to become law, it must fi rst be passed by the House of Commons and then be approved by the Senate. Because the Senate assesses the work of the House of Commons, it has been called "the chamber of sober second thought."

Each province also has a law-making bod y. In British Columbia, for example, this is called the Legislative Assembly, while in Nova Scotia this is called the House of Assembly. At the provinciallevel, the.re is no Senate, or upper house.

Municipalities, which are created by provincial legislation, have legislative bodies often called city councils. Their powers are delegated to them by the prov- ince in which they are located (see Figure 2.1).

FIGURE 2.1 Law-Maki ng Jurisdiction

Constitution Act, 1.867

Federal Government Parliament

-House of Commons -Senate

• Law- making jurisdiction provided bys. 91 of the Constitution Act. 1867

t Territorial Governments • Limited self-government • Subject to federal control

Provincial Government Legislature

• Law-making j urisd icti on provided bys. 92 of the Constitution Act. 1867

t Municipal Government

• Law-making jurisdiction provided by the provincial legislature

Statute Law and Jurisdiction As already noted, the Constitution- through the Constitution Aa, 1867-dictates whether each level of government can make a given law or not. Expressed in legal language, each level of government has the jurisdiction to pass laws within its proper authority or sphere. Jurisdiction is divided in tins way because Canada is a federal state, which means that governmental power is split between the central, national authority (the federal government), and regional authorities (the provincial governments). Additionally, the federal government empowers territorial govern- ments to engage ina form of limited self-government. The provincial governments, in turn, empower municipal governments to legislate in specifically defined areas.

BUSINESS AND LEGISLATION

Jurisd ict io n

,.he povver ~hat a given level of government has to enact laws

CONSTITUTION ACT, 1867

The fed eral government has the power, or the jurisdiction, to make laws in those areas set out in section 91 of the Constitution Act, 1867 (formerly known as the British North America

Act or the BNA Act). Areas in which the fed- eral government may enact laws include the following:

Nfl

interprovinciaVinternational trad e and commerce

trade as a whole

postal service

navigation and shipping

seacoast and inland fisheries

cu rrency

national defence

criminal law

banking

all legislative areas not given to the prov- inces (Note: This is a residual category in the sense that the federal government has all the law-making power not expressly given to the provinces. For example, it is the residual power that justifies federal legislation that creates federally incorporated companies.)

The provincial governments have jurisdiction to make laws in those areas set out in section 92 of the Constitution Act, 1867, including the following:

hospitals

property and civil rights within the prov- ince (e.g., the regulation o f contracts)

adm inistration of justice (e.g., the court system)

local matters (e.g., highway regula tion)

incorporation of provincial companies

Mu nicipalities have no constitutionally rec- ognized powers. They have only the law-making authority that is delegated to them by the provin- cial governments. The municipal governments have jurisdiction to make laws as perm itted by the relevant provincial government, for example, in these areas:

zoning

subdivision

taxation for the benefit of the municipality

licensing

Critical Analysis: What are the advantages of dividing law-making powers between the fed- eral and provincial governments? What a re the disadvantages?

Exclusive jurisdiction

Junsd1ct1on ,ha· one level of government holds entirely on 1cs own and nm on a shared basis with another level

The Constitution specifies that the federal government has jurisdiction over criminal law, which includ es the power to d efine new crimes, provid e penalties for breaches of the criminal law, and pass laws with the purpose of protecting the public. Because criminal law falls und er federal jurisdiction, there is a Criminal Code of Canada but there are no provincial cr iminal cod es. In fact , if the legislature of Manitoba were to attempt to enact a law known as the Criminal Code of Man i- toba, for example, this law would be unconstitutional because a provincial govern- ment d oes not have the power to pass such a law. No court would enforce the co de because it would be contrary to the Constitution to do so. In short, the federal government has exclusive jurisdiction over criminal law.

Concurrent jurisdiction

Jun sd1ct1on tl1ilt 1s shared between levels of government

Sometimes, the federal and provincial governments have shared or concurre nt jurisdiction. This means that the area being regulated does not fall neatly into the fed eral or provincial jurisdiction but strad dles them both. Public health is one such area, with both federal and provincial governments legislating in the area . The environment is another, as discussed in the follow ing box.

ENVIRONMENTAL PERSPECTIVE

CONCURRENT JURISDICTION OVER THE ENVIRONMENT

From a business perspective, one tremendously significant area o f concurrent jurisdiction relates

to the environment. Both the fed eral and pro- vincial governments share jurisdiction but, per- haps surprisingly, so do municipalities. Tius is

37 NEL

because, as Shawn Denstedt and Daniel Kirby observe, municipalities a re

traditionally responsible for water and sewage systems and noise issues, land) in some cases now restrict or prohb1t the use of pesticides and herb1c1des (even after their use has been apprOYed by the federal or applicable prO'Jinc1al government). requre plbllc d1sclostre regarding the use ot toxic substances and often try to control the impact of development on the envi- ronment through their role as the primary authority for land-use planning."

Federal jurisdiction over the environment cen- tres on (a) protection of oceans and inland water- ways; (b) fisheries protection; (c) the import and export of hazardous products; and (d) the inter- provinciaVinternational transportation o f dan- gerous goods. 17 For example, the fed erally enacted legislation called the Canadian Environmental Pro- tection Act'4 (CEPA) sets out comprehensive rules governing toxic substances as they relate, from a business perspective, to "research and d evelop- ment through to production, marketing, use and disposal."" The goal of the legislation is to pro- tect human health and the environment from the dangers of harmful and toxic substances.20 On a related front, CEPA is important because, as Envi- ronment Canada notes, it "manages environ- mental and human health impacts of products of biotechnology, marine pollution, disposal at sea, vehicle, engine and equipment emissions, fuels, hazardous wastes, environmental emergencies, and other sources of pollution."21

CEPA provides strong penalties for violation, including fines of up to $l million a day for each

day the offence continues, imprisonment for up to three years, or both. Those convicted are also subject to paying clean-up costs, as relevant, or forfeiting any profit earned as a result of failing to comply with the Act.22

The Criminal Code of Canada is another example of federal law concerning the environ- ment.23 Charges can be laid under the Criminal CDde when, for example, an environmental dis - charge causes bodily injury or death. 14

Every province and territory in Canada has extensive environmental protection legislative regimes. In Ontario, for example, the most sig- nificant legislation on point is the Environmental Protection Act.25 For example, section 14(1) of the Act states as follows: "a person shall not dis- charge a contaminant or cause or permit the dis- charge of a contaminant into the natural environ ment, if the discharge causes or may cause an adverse effect."

If a spill occurs, the legislation requires that it be reported pursuant to section 15 and, pursuant to section 1 7, that the person responsible reme- diate the problem (i.e., clean up).

The court can impose fines and even jail time for violation of the Act with penalties varying according to the kind of offence committed as well as whether the violation was a first offence or not."

Directors and officers also face personal lia- bility for non-compliance with environmental protection legislation and are thereby exposed to potentially heavy fines and, in the extreme case, even imprisonment. For further discussion on this point, see Chapter 16.

16 Oa"iitl I< 't>/ b Ric::t\l'C Kifl.1 't'°"' f()!'l~l"1t.lll L.aw rn Ca'\c\<l.a· ., Osle•. Oo.Y"N} Bu.s.<nessn CanMi.a {0ec:et'fi0Ct 2014! 'lt l onl t'IO ~'°' • 051(" & t-4.J<ourt <l'lllos lfwww O!.K?rcol'J'l/u~aae<1rtes/News a"'Wj ResotJiccsl Puotc.1tonVCuelC'i/Oo.nq_9'.!. "ltSS_ "-Ca'lada_ ·_2014/0SIC· 15-("""' -on'Tle'\l.M·l.a.i'i.;"l,<:a....;,a oct>

17 Robert i.'Jd''C'\ Joiin 6'ihtm.)n Lo C.>'O~ Mc:Afk:tc 11.'J..,.~. ·trrv·ion"l"lental P!Ot<ict.o~ Law . .,o.,ta•.o· ISpt nq 200 )j Or'lt "IC V.'c 'fO.JIOS <hllO /lwwwv..'<01 •ta.Id!. col'\"l/f k?s/4130_\','t •FOu!OsX20LLP EO\o 'O'\rncnL)tl.awPt0~<;tonOntoitO pelf,. ~I 3

18 CanJd.•-Nl £n11Nonmmtt1i P1otc•c:11an Act !J"!)') SC c .53 1·CEP/I.. l<J l<:•byb l(,nq suptd no~ 16at 83 20 C;';'.r~nm<-nl (.bf\Jd<l. 'A Cud<: to Unc:l<?t!ol..)~1ng lt'Kl CiNltld:tNt (1'N.'fonman1~ Pr.;,:ecttoo Act

1999 tOoccmbC1 2004. moo:l~d io M<a1cl\ 20171, onl;f"K2 <http /lvNN1«:gc.callcpe-c;?pa/ocltJott ac;p~lang .. (n.t-Jn•l:006~B08 1> at C?

21 Ibid. 22 Jbkt a t 14 23 Ctlm'nal Code RY..; 198;. c C·46 24 Suprtt no1C1 16 a t 85 lS CnvlfortmMtA• P101~1Jon Act llSQ 1:>90. ct: 19 26 Wa1tCr\ su1>1t1note 17 J)I ~

NEL

Regulation and protection of the emriron- ment is complex, in part, because jurisdiction is spread among three levels of government. This makes it particularly important for businesses to know what legislation applies to the situation in q uestion, to d eploy risk m anagement strategies to ensure that such legislation sees compliance,

and to acquire environmental insurance as a back- stop should tl1e organization fa il in its statutory obligations.

Critical Analysis: What are the advantages of concurrent jurisdiction over the environment? What are tl1e disadvantages?

Paramou ntcy

A doc,nne tha: provides that federal l aws prevail when tl1ere are confll ct1ng or 1ncons1stent federa l and prov1nc1al laws.

In a reas of concurrent jurisdiction, what ilie provincial government cannot d o is enact legislation that would create a conflict wiili fed eral legislation . That is, in an area of concurrent jurisdiction- such as healili or the environment- the doc- trine of paramountcy applies. This doctrine makes ilie federal legislation pa ra- mount or supreme and the provincial law inoperative, but only to the extent of ilie conflict. Though a signific ant d octrine, it is also a limited one. The judiciary has held that paramountcy generally applies only if iliere is an express contradic- tion between ilie two laws. If a person could simply obey ilie stricter law- and iliereby comply with botl1 pieces of legislation- ilien paramow1tcy would not apply; boili laws would operate fully.

Governments have a variety of reasons to pass legislation- including to pro- tect public healili and safety in relation to potentially hazardous prod ucts, as ilie following box illustrates.

BUSINESS AND LEGISLATION

VAPING AND THE LAW*

Vaping has been described as a "frontier industry" with a global value estimated to reach $32 billion by 2021.17 Unlike the common, combustible cig- arette which burns tobacco, vaping d oes not involve tobacco at all. Rather, it relies on a vaping liquid of propylene glycol and/ or glycerol which "often" includ es flavour ings and n icotine.'" When the user inhales, the vaping liquid is heated and turned into an aerosol by a vaping d evice • Wit'l 1esea1cn <iissis~-x:t? hem Carty ~ker

(sudl as an e-cigarette) which, in turn, consists of a "battery, a heating element, a t ank o r reser- voir, and a mouthpiece."29

Though some argue iliat the risks have been overstated,30 vaping can pose a threat to health. As the federal govern ment's consultation d ocu- ment on vaping observed:

Despite emitting f ewer harmful substances than c igarettes. vaping products are harmful. For instance. many contain nicotine, which is toxic

21 le-~ey You~. "The T1ulh AbOIJI Vap1ng ai> We Currenl~ K~v1 11 · U6 JafkJ()fy 2017) ra10 (Unwe1s1Ly of A!oortal quoti n-~ smoki!'\g cesS;) ton expert and a!'\ie-StnC?SiO\Ogisl Or. Ba1ry f ii\egan, of'lll ,ne <https/,\•1wwJ0110.ca/ the•tru1h<abOtJt•vap1ng~as .. .,1e•cunentt1· k•l'Jw·1t/>

28 Govo1nm~n1 01 Ca~a. ·proposats fo1 1~ Re9ula1i0n. o f Vap1ng ProouclS· tAugus t 2017J, onune <https // w .. vw.raMja.calen/llGltth·Ct)M::ia/p1og1ams/consul1ati01\ore~tahon-vaoin.g·o10duc1s/p1opcsa!s· 1t'?gu\a1e -vap,ng· Oroduc1s.h1rrl?wb01sab4e-11ue> a t 4

29 Ibid 30 AMre PiCcl1d, 'The He~tl\ HaM:OsofVapiogA1eOve·~wn·, TheG.bbe /lt'id /v!a.V tl.3 Aprl 2017),o"'ioo <https.//

w.v.t1 the9tooeand f'n:) 11.com/op1 n On/l he.'-neat 1h-htl2:ards•Ol ..Yao1 ng-a re -ove1 'CliOwn/ a1 tick! 33 703 363/ >. Pie aid c11es R.e~e O'Le.l1y. Ma1)0rie MacDon~. Tim Sl6Ckv.<el, and Dall R~i sl, Oe.>nttg Ute Air A Sys1ernat1C f.lewev1 on the HtJtms Md Ber1e/1ts of C.CJgt1tenes and V~ur Datte.es ViCtoria. BC · Centre fo1 Addietio~ Rese.a1cn ol BC ~J<>r~aiy 2017), ori1~ <https'//w.t1w.uv,c.cafresea1ch/cen1ies/c:sur/assets/docslr.epo1l·doa11ng.1~ ·a1r 0 1 e\'\ew-exe<:•!AJ m l't"lll ry.pd I >.

NEL 39

Is w.ping harmful?

and addictive; the aerosol they emit may con- tain chemical s w hi ch c ould negatively affect health; and there are demonstrated saf ety con - cerns assoc iated with their use. As well there are concerns about the appeal o f vaping prod - ucts to youth and the detrimental impacts that nicotine exposure during adolescence has on the develo ping brain. The lo ng-term heal th effects are unknown . and there is limi ted research o n the effects o n bystanders."

Another wor ry is the increasing appeal that va ping holds for Canadians aged 1 5- 1 9.32 For example, Dr. Michael Khoury (a resident in pedi- atric cardiology who has co-authored research on teen vaping) n oted tl1at e-cigarette companies seek to appeal to youth wjth vaping liquid fla- vours like "cotton can dy and cola" and raises the alarm that vaping could "re-normalize" smoking altogether. 33 Beyond tlUs, a study published in tl1e Canadian Medical Association Journal shows a

31 Supt;J r'Y.)le 28.

"strong and robust" association between stu- dents who vape and those who subseq uently begin to use tobacco.34

Until recently, only a patchwork of laws governed vapingat the provincial and munic- ipal levels.35 However, in 201 8, the Parlia- ment of Canada passed into law Bill S-5: A n Act to Amend the Tobacco Act and the Non - Smokers' Health Act and to Make Consequential Amendments to Other Acts (short title: Tobacco and Vaping Products Act) in o rder to address tl1e matter nationally. A bill is pro- posed legislation going through the process of becoming law.36 This legislation is wjde- reaching and has a number of goals. These goals, as stated in the legislation, include protect ing young persons (tl10se under 1 8 years of age) from "ind ucements to use vapingproducts", and protecting their health "by restricting access to vaping products." Accordingly, the Act includes a prohibition on the sale of vaping prod ucts to young per- sons and the promotion of flavoured vaping prod ucts that appeal to youth.~ On a related fr ont, section 30.1 of the Act prohibits advertising a vaping product "if there are rea- sonable grounds to believe that the adver- tising could be appealing to young persons."

Critical Analysis: Vaping is generally regarded as less harmful tl1an smoking tobacco. Should government nonetheless restrict the access of young people to vaping prod ucts? Why or why not?

Bill 32 l-!~ait1'Canada, N evlS Re\eaSI.!, ·ci0ve1nrrent of C.aM:ia lntrOduc~ Ne ... Tobacco aM V<:iping Prooucls

Le9islalion: t2 2 N::>vembe1 2016), onune· <hllps l/111ww caM1a.calenlheat1h•caM:'la/!'M'N11/2016lU! govero~n1·caM::la·int1odu<:e.s·nev1·tobacco,.._..apil".g•prOducts.(eg1!1..')t10l\.html>

Proposed legislaaon

33 K~v1n Ma mann, "Teens Vtlpc !01 'Coot rac tor S1udy Snows £.cga1e 11e Use Is High Amof\g 'r'OUl\Q P~oph'(, Metro Nevis fdmorttan 126 ~ty 2016), on1100 <i'\llP//https/tissuu,eom/melro_caM'J.a/ do~/20160726_C('j_edmon1on>.

34 CaMd!an Pr~ss, ·-s1rong and Robus l L1n~9= Belv1oon Vaotr\g ;.l')d Si.Jbs~uent Toba::oo use· (30 October 201 n, o ~ine <nu p I /v.ww .c oc .cal nev1s/heatth /e-c gare nes ·you l\'¥ 1 A37?940>

35 ror a desc1ipli0!\ or orovioc:ittt and rnu~ieip.l! tm ... on vap1Dg oc1oss 100 country, S(X'? CBC Nev1S, Vap1f"i9 and £·C9ar<:ne R~utatons across CaM:la-{19 October 2016J, 0!11100 https //www.cbc.ca/f'K.,v<;../caM:la/ vaping-regutatiOM·l 38!2180.

3b ror a Mrt o;tarty hetpfut account or how a DI t«omes ia, ... at a rooeral 5evet see Cou111'10use libr('j11es, BC. "Ho-" a Blt Becomes Law In C.a~d~l Online <hllps//w...,,.. ... oourth0Jsetil)1ary.ca/1ra1n1nQ/HowT0GtJdes/ reoLegGuide/Hov1ABIBecomesl..av1lnCal\a<!aasox>

3i See too Tct>Acco Aa as amend«! by the Tobacco Md Vtl(JJng Products Act, SC 2018 c 9, sec: tiOI\ 14 {in ro1ceJ and s~Clion 37 tv1h1Cil v1tl come 1n10 lorce 1n November 20!SJ, on1ine <http·//vt..Yw.parl.!°.a/Cklcurmn1V1&-1er/ en/4 2·1/D'.l/S·5/1oya1•assen1-#i'?nH2567>

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Bylaws

laws made by the muni c1pal level of government

Formal executive

The branch of government respons1 ble for the ceremonial features of government

PoUtical executive

The bran ch of government responsible for day· to· day operations. including formulating and PXecut1ng government policy, as vvell as administering all departments of govern men·

cabinet

A body composed ot all ministers heading government departmems as well as the prime minister or premier

Regul ations

Rules crea·ed by he pohacal execut1v•? tl1at have the force of law

Business is affected by all levels of government, but it is most impacted by the provincial and municipal governments. The regulation of business is generally a provincial matter because the provinces have jurisdiction over property and civil rights.38 Municipalities have jurisdiction to legislate in a broad variety of matters, from levying taxes, to regulating local zoning, parking, and subdivision, to req uiring the licensing of businesses and d ogs. Municipal legislation takes the form o f bylaws .

An important exception to businesses being largely regulated at the provin· cial level a rises in banking, international or interprovincial transport, and com· munication (e.g., telephone and cable). These are areas o f fe d eral jurisdiction and , accordingly, such businesses are subject to fed eral law concerning licensing, labour, and o ccupational health and safety, to name several examples.

The Executive Branch of Government The executive branch of government has a formal, ceremonial function, as well as a political one. From a formal or ceremonial perspective, for example, the execu- tive branch supplies the head of the Canadian state, the Queen . The fo r mal executive also has a significant role in the legislative process, since the executive branch of government, represented by the governor general {the Queen's fed eral representative) or lieutenant governor (the Queen's provincial representative) , issues approval as the final step in creating statute law.

The political executive is o f great relevance to businesses because it performs the d ay· to· d ay operations of government by formulating and executing govern· ment policy and administering all departments of government. It is also the level of government that businesses typically lobby in ord er to secure favourable or improved treatment under legislation or with respect to policy formation.

The chief executive of the federal government is the prime min ister, while the chief executive of the provincial government is the premier. Other members o f the political executive- both provincial and federal- include cabinet ministers, civil servants, and the agencies, commissions, and tribunals that perform governmental functions.

The cabinet- mad e up of all the ministers of the various government d epart- ments, as well as the prime m in ister or premier- also has a very significant law-making function. It is often the cabinet that passes regula tions providing d etail to what the statute in q uestion has enacted. When the cabinet enacts regulations, it is known by its formal name: the lieutenant governor in council (provincially) and the governor general in council (federally).

BUSINESS AND LEGISLATION

TOBACCO REGULATION BY THE FEDERAL GOVERNMENT

Regulations are a form of legislation that is more precisely referred to as subordinate legislation. This is because regulations can be passed only if that power is accord ed by the statute in q uestion.

38 Ho99, s upta OO li:! 1 at21· 3

That said, such power is routinely given. For example, und er the Tobacco Act (Canada) SC 1 997, c 13, the governor (general) in council (i.e., the fed eral cabinet) is empowered to make regulations respecting information that must appear on cigarette packages, including requiring

41 NEL

f ~ ~ § especially young people. During debate on second 1;-, ~ ~ reading of the bill in the Senate, the Hon. Chantal 8 < ~. ~ ~ ~ ~ Peti tclerc stated:

Cl .li I;! 'l ~ Through Bill S-5. the government has com- ~~ i' ~ ~ mitted to impl ementing pl ain and standard- Al ji ~ ;l! 1zed packaging for tobacco products to make ~ 2' ':: i tobacco packages and products less attractive I~ ~ ~ , and by virtue of that make sure that our young ~ ~ l1! ~ ~ adul ts are not induced to the use of tobacco.

This image depicts Barb Tarbox, who died of Iring cancer cartsed by smoking. She t<>a s so addicted to dgan?ttes dtat site continued smoking rmtil her deadt. One of her fmal wishes 1"DS that her dying image appear on cigarette pack- ages asa warningtA others. 3S Are sttdt imDJ!:!seffectiw?

graphlc health warning messaging. Cabinet exer- cised thls power through the Tobacco Products Information Regulations in 2011.

These 2011 regulations are set to be com- pletely revamped by the federal government as it moves to plain and standardized packaging (PSP) for all tobacco prod ucts. Thls is because Bill S-5 (whlch was passed into law and referenced earlier in relation to vaping) permits regulations that restrict tobacco prod uct packaging more vigor- ously than ever before.

Only proposed regulations governing PSP were available at the date of writing. These pro- posed regulations would standardize the appear- ance of tobacco prod uct packages and no longer per mit "brand colours, logos, and other images .... 0

Instead, all packaging would have to be in a "matte, dark, d rab brown" colour throughout and include standard graphic health warnings.41

An important goal of the legislation is to red uce smoking as well as to discourage people from taking up the smoking habit to begin with,

Packaging is now one of the very few remaining channels available to the tobacco industry to promote their products. Research shows that the tobacco industry uses the packaging to attract new smokers by creating positive asso- ciations and expectatio ns for consumers. For example. packages w ith creative openings and shapes are perceived as being more contempo- rary and modern.

Honourable senators. research shows that promotio n through tobacco packages and products is especially effective w ith adolescents and young adults. As you know. this is the time when brand loyalty and smoking behaviour is being established.42

Whether the tobacco ind ustry will launch a legal attack on any new regulations remains to be seen. When Bill S-5 was passed into law, Eric Gagnon of Imperial Tobacco stated in the media that there is no evidence that people start smoking because of packaging: "The people who start smoking do not see a package today and say, 'Well, this package has red on it. I thlnk I'm going to start smoking.' That's not the way it works ... [t's more of a P R initiative than anythi ng else."43

He also indicated that Imperial Tobacco will con- sider legal action to protect its intellectual prop- erty rights if government goes on to approve any "extreme" regulations.44

39 Ca'igaiy CTv. ·ramify' of Ta1b0x V/anlS her D~t!tlhoed lrruge on Ciga1atte P~kS- (8 December 2010). onf!f')e <http //c.<1.gary.ctv.ca!s.z1~e1.'~nhoc~lCl\INewsf20101207/CGY _smcke__wa1ningsJ01207/20101208l?hub -Catga1yHOme>

40 GoverrHr"ll.1'nt ol C()nada. ·Regu1atory lrr"l~'lCl AMtystS Sta1~menl re CaM.ia Ga?etle,. Pait l Vdu!'r"E 152, Number 25 TObacco P1txlucts Regulb11ons (PJt.Nn and Sland¥d11ed Appcar/N'tCef 123 Ju~ 201BJ, Onl:il'le < hll o ll-t1vN1 .Ct)rtadt!J9tue ue .gc .ctJ/ r 0•01 I PL'2018/2018·06· 23/1\ I rrl./ r\!!99-e l'\g. hlm! >.

41 Jb.'d.

42 S~nate of CaOOda, Jst Se>S10f\. 42nd Part1amen1. Vdume 150, Issue 87113 Oi!<.'\'!mbe1 2016), onlne <iii tosl/ seocana:ia.Ct)/en/Con1e"ltlSertlcMmber/421/det>atesl087db_2016·12·13·e#46>.

43 Jonn P~1 Tasker. ·Par'11amen1 Passes Ptan Tob.lcco Pac!W91r.g Law, R~91A~tes Vap1r,~f, C.9C Nevis U6 May 2018), ori1ne <huo /,\t1w-t1r.be.cal~ws/pct,1k:s/011awa·P"lll-!)a::~ing•vap1ng~~·l.4662 ll2>

44 lb.'d

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Any su ch in d ustry challenge will likely advance the argument that PSP regulation is a violation of freed om o f expression under sec- t ion 2 o f the Canadian Charter of Rights and Freedoms (Charter). The Charter is a cornerstone o f the Canadian Constitution and is discussed later in this chapter. For specific discussion o f

the Charter's role in the regulation o f tobacco prod ucts, see the Business and Legislation box entitled "Store Owner Challenges Nova Scotia's Tobacco Access Act" on page 37.

Critical Analysis: Do you agree with the govern- ment's initiative to impose P SP regulations on the tobacco ind ustry? Why or why not?

Judiciary

A collec1ve reference to Judges

Judges

Those appointed by federal or provincial govern n·1en ts lo ad; udic ate on a va nety of disputes. as well as to preside ov•~r criminal proceedings

Inferior court

A court with l!m1 ted fi nan cia l JU nsd1 ct1on whose JUd ges are appointed by the prov1nc1al governmen"

Small claims court

A court •hat deals w1;h claims up to a spcc1f1ed amount

The Judicial Branch of Government It may seem surprising that the judiciary is a branch of government, given that the judiciary is supposed to be ind ependent of government. Expressed more com- pletely, however, the concept is t:IUs: the judiciary is to be ind ependent from the legislative and executive branches of government.

The judiciary is composed of j udges who are appointed by both fed eral and provincial governments. These judges are required to adjudicate on a variety o f matters, including divorce and the custody of child ren, civil disputes such as those arising from a will, breach of contract, car accidents, wrongful dismissal, and other wrongful acts causing d amage or injury.Judges also preside over crilninal pro- ceedings as well as settle commercial disputes.

The System of Courts Judges operate witl'lin a system of courts that vary somewhat from province to province. Despite these variations, each provincial and territorial system of courts has three basic levels: trial, intermediate appeal, and final appeal. Figure 2.2 indi- cates the h ierarchy o f courts relevant to commercial disputes.

Trial courts are of two types: in ferior and superior. An inferio r court is pre- sided over by a judge appointed by tl1e provincial government. These courts are organized by type of case, such as crilninal, family, and civil. The civil court- sometimes called small claims court- handles disputes involving smaller

FIGURE 2.2 Courts Dealing With Commercial Disputes

Supreme Court of Canada

[ Courts of Appeal

(in each province and terri tory)

I Superior Courts

(in each province and territory)

I Small Claims Courts

(plus other provincial courts dealing with crimina l law, family law. etc.)

L Federal Court

(Appeal D ivision)

Federal Court (Trial Division)

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amounts of money. The amount varies from province to province. For example, $50 000 is the limit in Alberta;45 $35 000 is the limit in British Columbia;46

$ 25 000 is t11e limit in Nova Scotia, and Ontario;47 and $30000 is the limit in Saskatchewan.•• The small claims process is designed to be simpler, quicker, and less expensive than mainstream litigation. Parties often appear in this court without a lawyer. Superior courts- whose jud ges are appointed by the federal government- have the jurisdiction to handle claims involving an unlimited mon- etary amount. In addition, they arethe entry level for the more serious criminal matters. Here, the procedure is much more form al and technical, with parties usually being represented by lawyers.

Provincial courts of appeal hear appeals from these lower courts, and from there cases go to d1e Supreme Court of Canada. In most commercial cases, liti- gation tends to end in provincial courts of appeal because appeal to the Supreme Court of Canada is available only after permission or "leave" to appeal is granted by tlle Supreme Court itself. Ordinarily, the Supreme Court of Canada will hear only appeals that involve questions of national concern or significance.

The Federal Court of Canada has special authority to d eal w ith certain cases in which one of the parties is tlle federal government or one of its agencies.

The Canadian Charter of Rights and Freedoms An important responsibility for jud ges is determining whether a given law meets the requirements of tlle Canadian Constitution, including the Canadian Charter of Rights and Freedoms (Charter) . Created in 1 982, the Charter is intended as a judicially enforceable guarantee that the government will act consistently with the values associated with a liberal democratic state. The right to freedom of expression and of religion, the right to a fair and speedy trial, equality rights, and the right to vote are all examples of Charter protections t11at reflect a set of constitutional values founded on individual freed om. Two protections that are particularly germane to business are contained in sections 2 and 15.

Fundamental Freedoms 2. Everyone has the following fundamental freedoms:

(a) freedom of conscience and religion;

(b) freedom of thought , belief, opinion and expression, including freedom of the press and other media of communication;

(d) freedom of association.

Equality Rights 15. (1) Every individual is equal before and under the law and has the right to t he equal protection and equal benefit of the law without discriminat ion and, in

45 N.berlaGovernftt'nt. ·1-fi9Aer Sma! Oa1msCou11 Um1L IOCrE!.as-:?sAccess 10Just1ce· (21Juty 2014),00(100 <hnp//atoer1a.ca.'1e(t.'!ase crm?x.ID-368S6r64SA53r·BAS6-A603·942144FBC5372212>

40 Auo1neyCene1atof Bnt1ShCdumb1a.. "Resot\l\ng SmatCtaims OiSput~ in BC .l.Jst CDL Easier" {24 Maich2017J.

ol\l:ioo <!\lips /fne, ... s.9ov.bC.ca.'i~~~s/2017..lAG0007·000693> 47 See Iha Cour1s ol Now S:otta. ·rneSmal Cta ms Courl" lur\d(") tedl oolloe <hllp//courts ns.!°~/s!'na.~_daims

_cou11/nsscc_l'l0ma .h1m> a!'ld The M rnis tryol t'W! Att01'\eyGenera!of Ont.:1rO. ·smat Oa1msCour1· 1u!ldated), o nli!'\E! < hllps //v;.,u,•1.att01fv:!yge ~rat.Jus.gov .on.Cale l'\gtis t\/cou rl s/scc/ >.

48 See Court s of $askatchev1an. -Sm#!! 0.lims Co1.11r lundatt?dJ, onf1ne <http //vr>1r>11.sask.t<·N1C.Ourt.s.ca/index.oho/ h0rr-E/pr0v.n<':ia4-coo1 r/smat-d~ ms·courL>

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Superior courts

Courts wit11 u nil rni ted 'inanc1al 1urisd1ct1on whose judges are appointed by the federal governrnen

Supreme Court of Canada

'he final court for appeals 1n "he country

Federal Court of Canada

~he court "hat deals wi;h sorne types of l1~1gat1on involving the federal governrnem

Canadian Charterof Rights and Freedoms

A guarantee o' spec1f1c ngl1 ts and freedoms en sh nned 1n 'he Const1;ut1on and enforceable by the judiciary

particular. without discrimination based on race. national or ethnk origin. colour. religion, sex, age, or mental or physical disability.

The Charter is a powerful constitutional document because it provid es protec- tion from improper or oppressive government conduct- conduct that most often takes the form of legislation or policy. In short, section 32 of the Charter prohibits government and government alone from violating any of the rights or freedoms recited. By wa y of contrast, violation of rights in the private sector, such as through employment discrimination, is a matter for provincial and federal human rights codes and thus is addressed according to a separate set of rules.49

In order to d etermine whether legislation such as Nova Scotia's Tobacco Con- trol Act is unconstitutional, the court must first determine whether it violates a Charter right, in this case freed om of expression. Note that even though the expression restricted under the Act is commercial expression, it too receives con- stitutional protection. As the Supreme Court notes:

... [oJver .and above its intrinsic value as expression, commercial expression \vhich. as has been pointed out, protects listeners as well as •peakers, plays a significant role in enabling individuals to make informed economic choices, an important aspect of individual self-fulfillment and personal autonomy. The Court accordingly rejects the view that commercial expression serves no individual or societal value in a free and democratic society and for this reason is undeserving of any constitutional protection.50

But demonstrating a violation of section 2 does not automatically render legislation unconstitutional because the rights and freed oms guaranteed by the Charter are not absolute. On the contrary, the Charter acknowledges that the gov- ernment is entitled to restrict freedom of expression- as well as any other right recited in the Charter- but only if it has balanced all relevant interests carefully and reasonably, as required by the very first section of the Charter.

1. The Canadian Charter of Rights and Freedoms guarantees the rights and freedoms set out in it subject only to such reasonable limits prescribed by law as can be demonstrably justified in a free and democratic society.

Section 1 requires the government to justify why it is infringing a r ight, as well as to demonstrate that, in do ing so, it is restricting the right in question in a reasonably measured, controlled, and appropriate way. If the government is unable to do so, the legislation is struck down by the court, that is, it is declared to be of no forc e or effect. In essence, the legislation is thrown out because it is unconstitutional. The court's authority to order such a powerful remedy is set out in sections 24 and 52 of the Charter.

The next box concerns an individual store owner who brought a Charter chal- lenge against Nova Scotia's Tobacco Access Act and provid es a very helpful example of how the courts will approach such matters.

Judges have the power to strike down legislation if it proves to be unconstitu- tional but not all Canadians agree that such a power is appropriate. Some believe that it is undemocratic for the courts to have the right to eliminate or amend a law duly enacted by elected representatives. However, those who support the Charter argue that even a majority (the elected representatives who enacted the

4 9 ror a, discussion 0 1 hul'f1:)n 1ighlS codes 1n al\ emptoymenl context. sel<'! C:h.-..,p1e1 20. SO l'ord v 0...-e- jd.11om"'; G&walJ. ~9881 2 SCR 712 at 767

45 NEL

BUSINESS AND LEGISLATION

STORE OWNER CHALLENGES NOVA SCOTIA'S TOSACCOACCESSACT

Robert Gee owns a store in Kentville, Nova Scotia, that focuses on tobacco sales. He was chaiged with displaying tobacco products contrary to the Tobacco Access Act. Though Gee had been com- plying with some provisions in the Act, he had been refusing to cover up his tobacco products. Gee expressed his position to the press in this way: ·1 find it troubling that government is coming into my business and telling me what I can and can't do selling a legal product. It's to the point we can't show the product. If they [governmental authori- ties) don't want it, they should make it illegal."'1

In response to being charged, Gee challenged the constitutionality of the Tobacco Access Act. In short, if the legislation were unconstitutional, he could not be convicted under it and, moreover, he would be free to display h is tobacco products out in the open.

Gee's lawyer was successful in convincing a court that Gee's freedom of express ion had been violated. That is, the judge ruled that the Tobacco Access Act constituted an infringement of a pro- tected form of freedom of expression-namely product clisplay." Indeed, the legislation restricted "communicative activity" with respect to the sale of tobacco products," thus running afoul of a Charrer guarantee. In short, commercial expres- sion is protected expression under the Charter.

However, the Crown was successful in showing that the legislation should be saved under the section 1 analysis-that the violation of freedom of expression caused by the legislation was "demonstrably justified in a free and democratic society" as previously d.iscussed. Though the court's section 1 analysis was technical and lengthy,>• the gist of the judge's analysis was as follows:

the purpose of the legislation under attack was to protect the health of Nova

/Wbert Gee

Scotians, particularly that of youth. Its goal was to red uce tobacco consumption by reducing the public's access to it.

the purpose of the legislation was important (i.e., pressing and substantial) given the danger of tobacco products. the ban on clisplay was a rational means of achieving the legislative goal of protecting health. As the court observed, a clisplay of tobacco products could, for example, cause a former smoker to lose his or her resolve and also make it difficult for the smoker who wanted to quit. the legislation was careful not to impair Gee's rights to operate a business any more than was necessary to achieve the purpose of the legislation. Gee could still offer information about the products he sold and show the product at time of purchase, for example. As well, the det- rimental effect on store owners like Gee

51 K11k. ~t.an<>tt "Wont Ctv<' l)p Tot>lleco StortOwne1 Vows to~<'.! Lcqat Bame Tr110\J9n to Bitter (l'>d' Kings County News O JiJty' 2009J

52 Rv MJdc,.s Tooocoo $tmdtd 2010 NSPC 52 tC..nLtO

54 ThQ courl !. se<:lon 1.,)1\iVy'S•!'. t!'. conta,rwd '"a scpat<ltc Judgment SOl'! R v Mader's Tobacco Starc Ltd, 2013 NSPC 29

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was m inimal while the legislation could potentially reduce tobacco related disease and d eath.

All these factors meant that the legislation survived Gee's constitutional challenge.

The court went on to fin d Gee guilty on charges of violating the Tobacco Access Act and

fined him $430.55 Gee's legal expenses in chal- lenging the legislation amounted to $60 000.56

Critical Analysis: W ith whom d o you side in this conflict: Mr. Gee or the Nova Scotia legisla- ture in passing the law it did? Why?

legislation) should not have the power to infri nge on the rights of others. Put another way, a liberal d emocratic system of government is not just about majority rule, as reflected in the following statement from Mad am Justice Wilson of the Supreme Court of Canad a:

The Charter is predicated on a part icular conception of the place of the individual in society. An individual is not a tot ally independen t entity disconnect ed from the society in which he or she lives. Neither, however, is the indi vidual a mere cog in an impersonal machine in which his or her values, goals and aspirat ions are subordi- nated to those of the collectivity. The individual is a bit of both. The Charter reflects this reality by leaving a wide range of activities and decisions open to legi timate governmen t cont rol while at the same time placing limits on the proper scope of that control. Thus, the rights guaranteed in the Charter erect around each indi- vidual, metaphorically speaking, an invisible fence over which t he state will not be allowed to trespass. The role of t he courts is to map out, piece by piece, the param- eters of the fence.57

Though the court has the power to assess the constitutionality oflegislation- and to strike d own the law, if need be- it is the legislative branch of government which has the last word in many cases. That is, the Charter permits the govern- ment to override or disregard a judicial decision that a given piece of legislation is unconstitutional or to pre-empt judicial involvement at the start. Section 33 of the Charter allows the government to enact legislation "notwithstanding" its unconstitutionality. While the government does not have this option with respect to all rights and freedoms guaranteed by the Charter, it does have this option for a great many of them, including the right to freedom of expression.'"

There are, of course, political consequences to using section 33, as when the government of Alberta invoked thi s provision when it i ntrod uced Bill 26 in 1 998. The purpose of this bill was to lim it the right o f recover y to $1 50 000 for those wrongfully sterilized under that province's Sexual Sterilization Act, wh ich was repealed in 1972. As a result of public outcry that the government would deny sterilization vict ims their r ight to establish in court that they had

55 Go1doo Del~~y, "Tobacco Vendo1 OutlS &tt\E:f, l./ef<)k/ News {28 M<.iy 2013; tJpdalOO 29 M~ 20131 o:ltix <http //1~ch1onic:~ho12id.ca.'n0v~sco1 a.'113'18.U • lobacco·vendor<;uits~bat t5e>.

So Ibid. 57 /Iv Morgenra."''- 11988) 1 SCR 30at 164. 630R i2d) 281. 58 SGc1on 33 of the Chartcu pe1rn11.S 9ove1n.men1 to vo\a1e a ta•ge ~mbcr ot 119hLS <lnd freedoms, 1r.dud'ng

lreeoorn o f conscience and 1e(19i0n, h~dom ol thCAJgtu .. OO(iel, opinlOI'\ exoresSiO!\ a'ld oeocelul assembly; lfeedom of assodatiOn; the 19'l1 to Me, tiber ty, and seetJ(ty ol the IX?l'-SO!\, the righl to ba tree from ume~SO'l()b'le sea•ch a!'Y.I se1rure. the nghl 10 ba flee hom ~rb tra')' deten1,on alld ;mp1ison.imnl; Iha 119 hl 001 to be sub;e: t 10 cruet 01 unusual punishl'r"lent. Ille right <qail\Sl sdl~incnm1Ml10n. and Ille righl to equaf!ly.

NEL 47

suffe red damages exceeding $1 50 000, the government quickly withd rew its proposed legislation.59

The Charter governs the relationship between the person and the sta te, restraining government action that is, for example, discriminatory. By way of contrast, certain kinds of discrimination in the marketplace by one person against another are made illegal primarily by human rights codes as well as by related forms of legislation.60

Because of its foundati onal importance, it is intentionally very difficult to amend Canada's Constitution. For example, the general amending formula (sec- tion 38) requires resolutions of the Senate and House of Commons and "resolu- tions of the legislative assemblies of at least two-thirds of the provinces that have, in the aggregate ... at least fifty percent of the population of all the provinces."61

Sources of Law There are two main sources of law in Canada: statute law (discussed previously) and judge-made law.

Judge-made law is the end product of disputes that come before the judiciary. That is, to resolve a legal conflict, a jud ge renders a judgment (sometimes called a decision) which is a formal ruling in the matter as well as reasons for that out- come. The body or collection of judge-made law as recorded in those jud gments is called the common law.

Ordinarily, a judge does not just give a bald resolution to the dispute in ques- tion. Rather, the judge seeks to explain, justify, and account for whatever decision she has reached. In doing so, the court relies on decisions made by other judges in other cases that are relevant to the matter at hand. These cases are known as precedent.

The key principle of precedent can be summarized as "like cases should be treated alike." This means that judges should rule in a given case in a manner consistent with the way judges have adjudicated on or dealt with similar matters in the past. In shor t , the judge looks to the common law in order to resolve the matter at hand.

A number of rules govern the application o f precedent, including the following:

a lower court must follow a relevant precedent created by a higher court within the same jurisdiction.

not all precedents are of equal value- the higher the court that created the precedent, the more valued the d ecision is.

the Supreme Court of Canada- the highest court in Canada- is entitled to decide a case in anyway it sees fit.

The main goal of precedent is to advance certainty and predictably in the law. Therefore, a lower court must follow the a pplicable d ecisions o f higher courts unless there are extraordinary circumstances at play.62 As the Supreme Court of

59 Coin Kenl'fy ·Klein Goveinmen1 Drops Bl to Compensate Vici !ms· Ill March 1998) o"1::ne Cl tCP9S) Cugenies ts a dtsc1edited ~Cf tMl. tniougn se\ectNe "b1eed1n.g·, the ·quat1ty· of toe human r()Ct'! can be imp1oved

60 ror a discuss Oil ot human r.gh.ts cooes 1n. 1(!(ahOfl to em~ymt?nt, see CMpte1 20. 61 See Hogg, su(m) note 7 at 4 ·16 to 4-1 7. 62 R v Come<NJ, 2018 SCC 15 at para 26. F'Of ex.am~. l!le Sucneme Court of <:.anooa Ms confirmed in Can/Ida

(Auo..-ney GeMf;)I] v. Bedfotd. 2013 sec 72. 1201313 SCR llOl, 11\alakr~~I COUii l't"l<\ydectine to fdbv1 a 01oc~dt'!nl if a f')E;?w ~gal issue ar;Ses ~use of ·s;gn1ficanL de\etopmenLs ;n too law~o1 1f 100-e ;s a change in ttK!cncumsta~es orevd<.'!nctl 1M1 tundamen~ty shills me pa1~rrn!te1s of 1ne debate' at par(). 42. Tn-s passa9ev1ascrt~d v11tl'tapp1ova1 ,nCome.lU at pC!iia 29

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Judgment

A formal ruling 1 n the mat,er as well as reasons for t11at :•uccome

Common law

The body or collection of JU dge made law as recorded 1 n JUdg men ts

Precedent

An earlier case used to resolve a current case because of 1ts s1 mi lamy

Equity

Rules tl1d: focus on what would be fair given the specific circumstances ot the case. as opposed to what the strict rules ot common law mght dictate

Canada explains i n 2018 , without such an approach, "the law would be ever in flux" and be "subject to shifting judicial whims."63

While the process of applying precedent is reasonably easy to describe, it is inevitably r iddled with some ambiguity, uncertainty, and subjectivity. Although judges endeavour to be impartial, unbiased, and objective, such a standard is probably impossible to consistently achieve. Furfuer, even reasonable people may diffe r in interpreting whether a given case from the common law applies to the dispute in question. This is not to imply that the study of law is futi le or that the judicial application of precedent is without r hyme or reason. It is merely to sug- gest that the outcome in any case cannot be fully predicted.

When resolving a legal dispute, jud ges can apply two kinds of rules: common law rules and the rules of equity. Historically, common law rules were d evised by English common law courts which followed a more "confi ning, r igid, and predict - able"64 approach. Rules of equity emerged from the English courts of equity which followed a more "flexible, discretionary, a nd individualized"65 approach. Indeed, the role of equity evolved to provide assistance to the d eserving person who oth- er wise would not receive adequate help under the strictly applied rules of common law. This is not to suggest that "anything goes, as long as it's fai r." Eq uity itself is constrained by principles that limit when it can render assistance. For example, assume that a businessper son has transferred some real estate to her spouse in order to hide that asset from creditors. If the spouse later refu ses to transfer that property back, the businessperson may be in some difficulty. Should fue business- person seek help from a judge on equitable grounds to get her property back, a court would have the discretion to refuse. This is because- according to an important eq uitable prin ciple- eq uity assists only those with "dean hands." There is a good argument that the businessperson fai ls to meet this description.

Under the modern system of courts operating in Canada (and England), there is no longer a distinction made between common law and equitable courts. The two courts have now been merged into one with judges applying both sets of r ules. However, judges and lawyers continue to refer to rules of common law in distinction to the rules of equity because these two kin ds o f rules still remain distinct. Of particular importan ce is that equity provides its own unique set of remedies- rectific ation, quantum meruit, rescission, specific performance, and the injunction- which will be described in more detail in later parts of thi s text.

The main sources oflaw fo r business are presented in Figure 2 .3 . In coming to their d ecisions, judges are bound to apply relevant legislation enacted by

FIGURE 2.3 Main Sources of Law for the three levels of government even if the legislation has the effect of reversing a common law or judge- made rule . The only exception relates to the con-Business stitutionality of the legislation in q uestion. If such

Sou rces of Law legisla tion violates the division o f powers between the levels of government or violates Charter provisions, a court may d eclare that it has no fo rce or effect , as the chart in Figure 2 .4 illustrates. Otherwise, statute law

Statute Law Judge-Made Law

63 !bid.

trumps or has priority over the common law. Note too that the courts can make common law about statutes and how to interpret them.

64 S1ephel'l Subrin.. ·Ho\.,. EQuiry Coooueied Common Lavi·. U9Sn 135 univers1iy of Penn5?J11vtJn9 LaY1 Review 909 01920

65 Ibid

NEL 49

FIGURE 2.4 Sampling of Constitutional Challenges Brought by Business

Case Nature of Alleged Charter Result Violation

Association of Justi!e Cortnsel v Canada (Attorney General), 2017 SCC55

Saskatdtewan Federation of Labo!lr v Saskatdtewan, [ 2015) 1SCR24566

Siemen.~v

Maniwbo (Atrorney Geneml), [ 2003J 1SCR6

RvBigM Drug Mart, [1985] 1SCR295

R vEdwards Books and Art, [1986] 2 SCR 713

Lit.tie Sisters Book and Art Emporittm v Canada, [2000 J 2SCR 1120

Ford v Quebec, [1988] 2 SCR 712

Irwin Toy v Quebec, [1989J 1SCR927

Directive by the federal government requiring its i.>wyer-employees to be mandatorily available forafter· hours, stand· byshifts to respond to urgent immigration matters violates the employee's section 7 rights (which protects "life, liberty, and security of the person').

Legislation prohibiting strikes by public sector employees performing essential services violates section 2(d} (which protects freedom of association}.

Provincial !.>w permitting a ban on lottery terminals based on a local plebiscite viol.>tessection 7 (which protects the right to life, liberty, and security of the person). Local businesses rely on such tenninals as a source of revenue.

Federal law prohibiting most commercial activity on Sunday viol.>tes section 2(a} (which protects freedom of religion}.

Provincial law prohibiting retail stores from opening on Sunday viol.>tes section 2(a} (which protects freedom of

religion).

The federal CttstDms Tariff Act that prohibits imporra.tion of "obscene"

books and magazines violates section 2(b} (which protects the right to freedom of expression}.

A Quebec law requiring advertisements and signage to be in French violates section 2(b) (which protects freedom of expression).

A Quebec law prohibiting advertising directed at children under 13 years of age violates section 2(b} (which protects freedom of expression}.

The Charter argument failed (though the action to set aside thedirectivewassuccessfulon other grounds). According to the Supreme Court of Canada, section 7 only protects "a sphere of personal autonomy involving 'inherently private choices' that are linked to Individual dignity and inde~ndence:"' The directive did not violates. 7 since its impact affected family or personal activities on a litnited basis but not 'fundamental personal choices.'

Action succeeded. The Supreme Court of Canada ruled that freedom of association included the right to strike. The legisl.>tion violated section 2(d} because it amounted to a substantial interference with a meaningful process of collective bargaining which could not be saved by section 1. This is because the legisl.>tion did not impair section 2(d) rights anymore than was necessary. The legisl.>tion should have been more tailored.

Action failed. The Supreme Court of Canada ruled that purely economic interests-such as being a ble to retain business income-are not encompassed in the CharteYs protection of life, li berty, and security of the person.

Action sue<eeded. The Supreme Court of Canada ruled that the law was unconstirutiona.l since its purpose was "to compel the observance of the Christian Sabbath:'

Action failed. The Supreme Court of Canada held that the !.>w was valid. Though the !.>w did viol.>te freedom of religion (i.e., its effect placed a burden on those who observed a non· Sunday sabbath}, the !.>w was saved under section 1. The court held that the valid secular purpose of the i.>w- to provide a common day off for retail workers- was suf6ciently important to justify limiting the right of freedom of religion.

Mixed result. The Supreme Court of Canada held that the standard of o bscenity was valid. However, the court identified discrimination in how the legislation was implemented since homosexual literature was disproportionately and without justification targeted by customs officials.

Action succeeded. The Supreme Court of Canada ruled that freedom of expression includes "the freedom to express oneself in the language of one's choice:'' (Note: This Law was re-· enacted using section 33.)

Action failed. Though the !.>w violated freedom of expression, it was saved under section 1. The Supreme Court of Canada ruled that protection of children is important, hence justifying the limitation. As well, since the !.>w permitted the advertisement of toys and breakfast cereals, provided cartoons were not used, the ban was only partial in any eve.nt.

(Contin!led}

66 ror 0 1he1 111caf\L labour &<lv1 cases,. sae Mounted Polk:.e A~0::1;)tK>n ol On:ar.o vCtNlad& (Altorney GeOOt;).1J. 2015 $CC 1.120151 1SCR3.3od Meredtlh v C..niXia (All<YM)' C'81eral). 2015 SCC 2. 1201511 SCR 125

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FIGURE 2.4 Co ntinued

Case Nature of Alleged Charter Result Violation

Rod<et v Royal College of Dental Surgeons, [1990] 1SCR232

Ontario's Health DisdplinesAct violates section 2(b) (which protects freedom of expression}, since it prohibits dentists from advertising their services, including office hours or languages sp<>ken.

Action succeeded. The Supreme Court of Canada held that while maintaining high standards of professional conduct justified some kind of regulation, the Act went too far in banning all advertising.

Slaight Communications v Davidson, [1989] 1SCR1038

Labour board order that an employer provide a reference letter to an unjustly dismissed employee violates section 2(b) (which protects freedom of expression).

Mixed result. The Supreme Court of Canada held that if the letter were ordered to contain an opinion that the employer did not hold, that would be unconstitutional. Where the letter had only to contain "objective facts that are not in dispute", the order can be justified under section 1.

Domestic law -:-he internal law o a given country. which includes both s:atu:e and common law

Inte rnational law law that governs relations between states and other entities with 1nternationa l legal status

Substantive law law 'hat defines rights duties. and l1ab1[1·1es

Procedural law The law govern1 ng <he procedure to enforce ngh ts. duties. and hab1l1ties

Public law Areas o· l1e law tha. relate to or regula;e the relat1onshi p between persons and government a: all levels

Classifications of Law The law can be organized according to various categories. It is important for a businessperson to have a basic understanding of these classifications in o rder to better grasp the nature of the legal problem at issue. Such an understanding will also assist the businessperson to better communicate with legal counsel.

Domestic versus International Law Domestic law is the internal law of a gjven country and includes both statute and common law. Domestic law deals primarily with indhriduals and corporations and, to a lesser extent, the state.

In ternational law governs relations between states and other entities w ith international legal status, such as the United Nations and the World Trade Orga- nization. An important source of international law is treaty law. International law focu ses mainly on states and international organizations.

Substantive versus Procedural Law Substantive law refers to law that d efines rights, duties, and liabilities. Substan- tive law was at issue in all the cases described in Figure 2.4. In these circum- stances, they concerned the duty of the government to legjslate in accordance with the Charter as well as the right of the plaintiff to challenge the government for failing to meet that standard.

Procedural law refers to the law governing the procedure or machinery used to enforce rights, duties, and liabilities. For example, the fact that a trial judge's d ecision can be appealed to a higher court is a procedural matter.

Public versus Private Law Public law describes all those areas of the law that relate to or regulate the rela- tionship between persons and government at all levels. An important aspect of public law is its ability to constrain governmental power according to rules of fairn ess. Examples of public law are criminal law, tax law, constitutional law, and adnlinistrative law (see Figure 2.5).

NEL 51

FIGURE 2.5 Examples of Public Law

ldentifies behaviour that is seriously unacceptable. In the interest of maintainin~ order and security in relations between citizens, the government prosecutes those who transgress basic standards of conduct, and the courts enforce sanctions for that conduct, including fines and imprisonment.

Sets the rules for the collection of revenue for governmental operation.

Sets the parameters on the exercise of power by government.

Administrative law Governs all regulatory act:ivity of the state.

FIGURE 2.6 Examples of Private Law

Provides rules that make agreements between parties binding.

Includes rules that address legal wrongs committed by one person against another, apart from a breach of contract. The wrongs may be intention.al (as in an assau!t) orunintention.al (as in a case of negligent driving).

Sets rules that define and protect property in all forms.

Provides rules concerning the righ rs, liabilities, and o bligations of companies and other business vehicles.

Private law concerns d ealings between persons. Many of the major topics in this text fall within private law, including contract law, tort law, property law, and company law (see Figure 2.6).

The distinction between public and private law is not absolute. Most of the law o f property is private, even if the government is buying, selling, or leasing. How- ever, should the government choose to exercise its executive r ight to expropriate land, for example, issues o f public law would be involved.

Furthermore, a single set of circumstances can have two sets of consequences, one involving private law and the other involving public law. For example, where a personal injury a rises from an assault, the Crown may d ecide to prosecute the perpetrator of the assault under the Criminal Code. This is the d omain of public law. The victim, however, also has civil rights tl'lat can be enforced through tort law, which is in the area of private law. Specifically, the victim o f the assault can initiate an action in the courts to seek fi nancial compensation for d amages from the perpetrator.

Common Law versus Civil Law67

Common law generally refers to judge-mad e law. Outside Quebec, it is used in a totally different sense to d escribe a system of private law. A common law system is one that bases its private law on judicial d e cisions that- if relevant and binding- must be applied to the case at i ssue. The private law i n n ine Canadian provinces, as well as the ter ritories, is governed by common law in th is sense.

67 The tttJtllOrS v;ould t:k.e to tnanlc. Pro fesso1 Mchel Mo1in or l oe FaOJtly ol Law al t he UnivetS,ty o f Mon1reai1 fo1 lltS comments on an E!.1li'1ie1 v2rsion ot t~:S section.

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Private law

Areas o lavnha' concern dealings between persons

Civil Code of Quebec

The rules of priva:e l av, that govern Q uebec

The province of Quebec is, of course, bound by federal law such as the Criminal Code and by rules of public law found in the common law. But its system of private law is governed by a civil code. This relates to Canada being colonized or settled (from roughly the 1600s) by both France and England as well as the passage, in 1866, of pre-Confederation legislation based on the French Napoleonic Cod e called the Civil Code of Lower Canada. When Canada became a country and Quebec became a province in 1867, the status of the Civil Code was ensured by the Constitution Act, 1867. 68 As noted earlier in this chapter, tl1i s constitutional legislation formally granted all provincial governments the jurisdiction to make laws over property and civil rights wjthin tile province, including the regulation of contracts.

The 1866 Code was replaced by tile Civil Code of Quebec in 1991. Like its prede- cessor, the 1991 Code concerns private civil law matters in what is now Quebec, including contracts, property, and family relations. It should be noted that civil codes like this provide basic definitions and are worded in a very general manner . .Judges must give tllem concrete meaning. Note too tllat judges are not bound by how other judges have interpreted the Civil Code, though practically speaking, these interpretations would be helpful and relevant.69 Nor is a judge in a civil code system bound to apply a relevant provision of the Civil Code if to do so would produce an unjust outcome.10

Figure 2.7 shows the various classifications of law and how they are related.

FIGURE 2.7 Divisions/Classifications of the Law*

The Law

lnternationa l law Domestic law

Substantive law Procedural law

Private law

s Const itutional l aw Crimina l law Contract Tort Property Company

Administra tive law law law l aw law

Tax law

These various classifications can be applied to the legal problem faced by the retailer in the chapter opener. The question of the validity of Nova Scotia's Tobacco Access Act concerns

domestic law (not international law) because the Tobaao Access Act was passed by the government of Nova Scotia and does not in any way involve a foreign jurisdiction.

* Source: f'rom CJE?1ak! l Cat The Cantldian !.bgal System. S1h ec 1To1onto C.a1svX!l 2004) rigure 2.7, p. 29. Ad~o1eo by permi ssiO~ of ThOmson Reut~rs Canad.l limited.

68 ro1 d1Scuss1on.. seg, lor ~m~, Oepa11men1 o f Just ca ·o.Jt ol the SMdov .. s The Civi law T1ad111ott in the ~P<'.)rtment of ~stce Canada 1868- 2000' lmOdif ied 1 .l.Jly 2015), on11ne o:ntto//wv.-.. 1.Juslia'.!.gc cafeng/ 1p-. pr/c the 1·au t 1<1/Cr>iiVc ivl. ht -n1>

69 Ger a~ l Gal TheCMtld1tJn Leg~I System, 511\ <:..':1 !Toronto Car!.\.,(!tl 2004) ~t 31 70 Ibid.

53 NEL

substantive law (not procedural law) because at issue is whether the law violates the right to freedom of expression under the Charter.

public law (not private law) because at issue is a law that regulates the relationship between tobacco retailers and the government. More specifically, it involves constitutional law because the challenge concerns whed1er the government has exercised its law-making power appropriately. common law (not Quebec civil law) because the clispute will be resolved by applying Nova Scotia's common law system, not the Civil Code of Quebec.

The elements of constitutional law are summarized in Figure 2.8.

FIGURE 2.8 A Summary of Constitutional Law

Canadian Constitution

[ Canada's Legal System

Legislative Executive Federal government (s. 91) Formal (the Queen. etc.)

Provincial government (s. 92) Political (P.M .. premiers.

Judicial Federally appointed

Provincially appointed

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Municipal government (delegated powers via s. 92)

cabinet m inisters. civil servants. certain agencies. commissions,

and tribunals)

The law

(statutes/regulations/common law)

International Domestic

law law

Procedural law Substantive law

Public law • Tax l aw • Constitutional law • Administrative law • Crim inal l aw

Private law • Contract l aw • To rt law • Property law • Company l aw

Administrative law

Rules created and applied by •hose having govern men ta I powers

Administrative Law and Business Administrat ive law is one of the primary legal areas in whlch government and business interact. This area oflaw refers to rules created and applied by the various boards, agencies, commissions, tribunals, and individuals who exercise a govern- mental function as a result of legislation giving them that power. It also refers to rules o f fairness that constrain how administrative bodies exercise their authority.

Administrative bodies have often been established on a needs basis to d eal with particular problems or difficulties as they have arisen, rather than pursuant to some overall regulatory plan. This piecemeal nature can make the area somewhat perplexing at times.

The functions of ad m in istrative bodies and o ffi cials often vary. In some instances, the bod y or individ ual carries out purely adm inistrative functions, as when the Canad a Employment Insurance Commission processes a claim for ben- efits; sometimes the body also has jud icial functions, such as when the Labour Relations Board settles a dispute between an employer and employee; sometimes the body exercises legislative functions, as when the Canad ian Radio-television and Teleco1U1Uunications Commission (CRTC) passes regulations concerning the amount of Canadian content on radio and television; and sometimes the body has some combination of these functions. As a result, it is often difficult to summarize how businesses are subject to administrative regulation.

Nonetheless, thls area of law has a significant impact on business because so much co1U1Uercial activity is regulated by these bodies- from licensing requests to zoning and subdivision applications and human rights complaints. (See Figure 2.9 for a summary of the administrative bodies and o ffici als that affect business.)

Indigenous Peoples and Constitutional Law71 Another important feature of Canad ian constitutional law concerns Indigenous legal systems72 and the rights ofind igenous peoples. Indigenous peoples had long- standing legal traditions prior to the arrival of Europeans in what is now Canad a. As leading Indigenous scholar John Borrows explains (relying on the Supreme

71 lnaod1Li0n to t hecornments ol schota1s 1eco9012edon ;>a'J '1 23. v1eg1()t~luly atlc.rKNAedg'1 the commenlS o f Proft":ssor <:at!"'..erine Beu iraculty ol Law, u ";versay o f Atberla) on an Mrti~1 ve1siort o l l htS sect'.on o f lhecMpter

'!2 SGe (::.Ne1 e t <11, supra no1e 10 a t 2 It is atso !fn001t:mt to 001e, as John So11ov1s does. t hat ·1neigenous peop&?s a~ dM?1St'! a:"tC'I theu ~ws ~w horn many saJrces ·See John Bo11ows. Can3da's Indigenous CottSllturiOn rrorO'll O Universtly of Toronto, 20 10) .ll 23 .. 11'\digenous· IS not defil\Qd !O Ctln.Y.ian ~ ... bul tS us<:o 1n1e1Ml 1CM1!y by 1~ Un ted Na tiOns 10 de.scuoe peo~s t hat have ·con11nu11y v11t h pre· invason and p1e-coton1~ socie11es toot d{Vefoped on tneir te111to1ies· al'td whO cons~de1 lhc;msetves 'd ist toc t from o t he1 S(!c to1s o r society OO\Y preva1t1~ Of\ these te11!lories· as tv..o impo11anl factors.$~ United N()tiOOS Pe1maoonl roium on. Indigenous l sStJes, ·~ac:tsheel'. Vlh<).~r;,: l neigenous Peopl,es?· Onf1!le UN <h llp//W·.UVI .un.01gksalsocdev/unpfo/documen1.S/Ssess10n_lac1sl'W!eU.pdr'> In Can.¥Ja·s Const l\JhOn. the re fer<?oce iS to ·aoo1>g1ntlf paopt~. As Cra:..~ roicese, Adam Dedek, Pnlip Bryden, Pe ter Car\l'er, RiCMrd Haigh. Maiy l iS lon. aoo Constance Maci ntosh in PubJtC Law : Cases, CM!tnetHal}'. and AAaJy:s1s, 3d t'.!d lToronto· Emond, 2 0 1S) obseM'! a t 53. ·aborig11\c'l! pecp6es· is tJ~d 1n Canaoian \.1iv1 ·as a!\ umbrela le rm to re l a1 10 IM l hree !'1"1¢)j0f 9roups o f ,fldi92oous peoples in C..af\M.-. nrS1 f\btiOOS, l nu.t, and Metis: They also 001e. hOVl<.'Nef, that l nd>gt'!llOUs ~oe4e-s o ften ore!e1 Iha v..ord "Indigenous· over "abo1ig1nar a!'Y.l ll\e au thOrs o t Pu~c L<>w ll'l(:retoreadOPI 11'\at te1minotogy fo1 I heir o v 11\ wrtl i!lg ~e l OO, Haydel\ King, D irector o f l n.2 Ce1u1e fo1

Indigenous Governance a1 Ryerson Uni\.e1s:1y, v1h0 stated 1001 too term ·1:-~cHgenous· Md eme1g cd as 1ne p1ole11ed 1crn"1, ootirlg as lctbws "I l hink 11ldt9:-:ilous iS a term that aCltJat r~live peop{a 11ldiQ<Hlous Qe(')p&'.!s, orig M te:i themS(;'!tves 11 corr'lt'!s hom tJS as a Pe!Op6e, so I l hink that s one 1eason 11\a1 pee*- pie far 11: ~t'.! Conr\le Vl/atker, :lus11n Trudeau S•gn.?As N..~1 App1o.x:h 10 R&uo~hip VVi th lndig en.ous Paophf. CBC News 14 f\bvembe1 2015J,ontu~: <h1tp/,'...,\vw.cbe.c~/news/11ldig<!oous/JUSl ;f\- lrudeau .. sig~-~-epp1ooch•IO •1elati01\sh:p"W!ll'riOOi.g~nous·~op(e·l.3304234> Reproduca:i by permissO!lOI C BC LiCef\S1n9.

55 NEL

FIGURE 2.9 Administrative Bodies and Officials Affecting Business

Legend: F = federal; P = provincia~ M = municipal If you plan to... you may interact with... in regard to ...

establish a business

construct new facilities or make exceptions to existing zoning

regulations

alter the interior or exterior of an existing building

hire employees

manufacture, sell, or store food or drink

sell alcohol

manufacture, sell, or advertise products

import products

practise in architecture. pham)acy, law, dentistry, medicine, or accountancy

sell real estate

carry on a ra.dio, television, or telecomn1unications business

sell financial products

engage in interprovincial trucking

sell a particular agriculrural product

a regional and/ or municipal licensing tribunal, minister, agency, or of6cer (M)

a development officer zoning board (M) a building officer (M) a development appeal board (M)

a building of6cer (M)

a workers' compensation board (P) a labour relations board (P) a provincial human righ rs tribunal (P)

a board of health (P, M) the Canadian Food Inspection Agency (F)

a liquor control board or commission (P)

the Consumer Product Safety Commission (F) the Competition Bureau (F) trade practices legislation (P)

the Canadian Food Inspection Agency (F}

a professional society (e.g., Law Society of British Columbia; Public Accountants Council for the Province of Ontario} (P}

the Superintendent or Council of Real Estate (P)

the Canadian RadioAtelevision and Telecommunications Commission (F)

the securities commission, the financial .services commission (P)

the Canadian Transportation Agency (F)

a product agency or board (e.g., the Canadian Egg Marketing Agency} (F)

Source: Resea1c!led and writt~n by C.ather11•1c~! Br.OOiey-.

a business permit

a development permit a building permit a denial of permit application

a building pennit

an accident or injury unions, collective agreements discrinlinatory practices in the workplace

a food establishment permit packaging and labelling requirements

a liquor licence

product/item hazards fair advertising practices

approval

a licence to practise the profession

a licence to sell

structure, sco~, and content approval

licensing and procedural requirements

a business licence

a production and sales licence

Court of Canada in R v Van der Peet),73 Indigenous peoples historically "regulated their affairs and addressed their disputes by reference to a vast array of laws, practices, customs, and traditions."74 That is, in Borrows's d escription, Indigenous peoples "possess legal traditions and continue to possess them." "

73 Fl v Van d& Pee!.11996] 2 SCR 507, 1996 Conlll 216 !Van der Peet] 74 John Sonov..s, ·1ndigt'!OOOS Con!ihlutonatism Pie £lt!Sling L~al Ge~atoges 1n CaM.i<f. in O:ivct. M<>::~m

b Rosiers, supra llOte I O at 13 rort'!x.arnp«a U'\e SupremeC0011or Ca~dawr•te-s inR vvan der Pee:,ib?d, as fdlO\Ys: • 01101 1o thaa11iv~of£u•opeans 1n N01thAin~ricaab01lginatoeoptesttv12doa1he\.lnd 1n dtSlir..Chve soc~tes, \ ... 11h 1he.1 own cnoc11ces,cuslorns and traditions· a t para 44.

15 Jonn Borrows_ supta OOli:! 72 al U retying on Van der Peet, supta note 73

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Treaty rights

Right s arising in rel ation to official agreements between the Crown and Indigenou s peoples

Aboriginal or Indigenous rights relate to reconciling the impact of the arrival of European colonists on lands and life in what is now Canada.76 A crucial foun- dation to understanding these rights is that the geographical area which became Canada was already "occupied and governed" by Indigenous peoples.7' As a direct result, these rights exist in a free -standing and independent way because they have survived assertions of British and French sovereignty, 78 albeit having been subject to some change and constraint."' That is, and according to the Supreme Court of Canada in Rv Van der Peet: "'the doctrine of aboriginal rights exi sts, and is recognized and affirmed ... because of one simple fact: when Europeans arrived in North America, aboriginal peoples were already here, living in communities on the land, and participating in distinctive cultures, as they had done for centuries. It is this fact, and this fact above all others, which separates aboriginal peoples from all other minority groups in Canadian society and which mandates their special legal, and now constitutional, status."""

The rights of Indigenous peoples under Canadian law are expressly protected by section 35 of the Constitution Act, 1982, which provides as follows:

(1) The eicistingaboriginal and treaty rights of the aboriginal peoples of Canada are hereby recognized and affirmed.

(2) In this Act, "'aboriginal peoples of Canada" includes the Indian, Inuit and Metis peoples of Canada.

According to the Supreme Court of Canada, section 35(1) provides "the consti- tutional fran1ework through which the fact that aboriginals lived on the land in distinctive societies, with their own practices , traditions and cultures, is acknowl- edged and reconciled with the sovereignty of the Crown."3 1 In this way, section 35 is momentous because i ts purpose is, in the words of Justice Binnie, the "recon- ciliation of Aboriginal and non-Aboriginal Canadians in a mutually respectful long-term relationship.""2

Section 35 does not define what it means by "existing aboriginal and treaty rights." As understood by the courts and summarized by Monahan and his co-au- thors, treaty rights relate to "official agreements between the Crown and Indig- enous peoples."83 Treaty rights include rights derived from treaties dating back to the early 18th century as well as eleven numbered Treaties following Canadian Confederation in 1867.84 These numbered treaties have been interpreted as Indig- enous peoples ceding aboriginal rights, including very large amounts of land, in exchange for reserve lands, annuities, ammunition, and rights to hunt and fish,85

though it is important to note that such interpretations have also been severely

16 ro1 d1SOJss1of\. se<.'! roicese er ~ supra nol~ 72 a t S6 and fdl01u ing. 77 Jb:d. 78 SGe. 101 gx.arn~e., John Bor1ov1s l:t Leoooid Ro1ma'l.. Aboogm~ Leg.W Issues. C<1ses. /VVlter~ls h ComrriMt<N).'.

41h: .ed {Markarn Le.xisN~xiS CaMda Inc. 2012) a1 9 1 aoo tneir 1eraoce onR v Vbn der Peet, supta 001e 73 See too MUChdl v MN!? 2001 SCC 33, 1200111 SCR 9 11 at para 10 "(tJ!Opean 1.etltemenl dd oo t te1m ,n.-")te the 1n1eres1~ or abo1ig1na1 peo~s ansing hom I OOir h!StorlC occupato n and ustl o l lhe tand. To the contrary, a!X)r9 1na1 ,n1ere>lS aoo cus1oma1y tav..s \...are p1esumec 10 survNe the asserlJOr\ of sovereignly, aoo v..ere aosorbed !nLo too common ta, ... as 1'Qhl S · N:') te 1na1 the1e a1e ex.ceptiOns 10 tncse !nt~1es1s continuing, as oult1!"K'.!d ;n Iha .ud91t'(!nl a nd as ooted in r.01cese e t <1., Ibid at 65

1'-J S'.J1f0vl!.. supra note 72 a t 11 BO Van oe1 Peei. supra note 73 at para 30. 81 Jmd at pa1a 31. 82 lleckmll(t v Wiie Salmon!Carmac.ks f.sr NarKJn. 2010 SCC 53.120101 3SCR 103 a l pa<a 10 S.' Patrick Mcf\C':aha O.. Sy10!') SMw b PadraiC fo/.')r\ ConsututKJnt).1 t.<r.•1 SU\ ed lV:'.>ronLo 1r .... ir\ Law. 2017J at 4SL 84 Jb<d. 85 As S\J1nmari2ed by Mnf\ah;)f\, Shaiv1 & ~an. ibki

57 NEL

criticized.'"' For example, Harry LaFonue (now a member of the Ontario Court of Appeal), writes of treaties as "agreements of co-occupation and co-existence within the territory. That is, tl1ey were not ... the surrender and capitulation of any rights to sovereignty or self-government by the Aboriginal people."87

Modern-d ay treaties have also been negotiated. By June of 2016, there were 26 such treaties, dealing with such matters as "land title, self-government rights, fishing and trapping, financial compensation, and other social and economic ben- efi ts."88 For example, the Nisga'a Treaty came into force in 2000 and is described as British Columbia's first modern treaty."9 [t recognizes extensive legislative powers of a regional Nisga'a Lisims Government.00 With some limitations, this Indigenous body "may make laws in many areas and has principal authority over some, including ad rnirustration of government, management of the Nisga'a Nation's lands and assets, Nisga'a citizenship, language and culture."91

Byway of contrast, aboriginal rights exist where treaties have not been nego· dated. They include rights relating to occupation of land92 as well as rights which arise "from a distinctive practice, custom, or tradition that may or may not be connected to a specific location or piece of land."93 The Supreme Court of Canad a in R v Sparrow"' offers an example of an aboriginal right. Following anthropolog- ical evidence, the court held that the Musqueam of British Columbia possessed an aboriginal right to fi sh fo r food, social, and ceremonial purposes along an area of the Fraser River. 95 The court also noted that the salmon fi shery had "always constituted an integral part of ... [the Musqueam's] distinctive culture"96 and that the Musq ueam have "always fished for reasons connected to their cultural an d physical survival.""'

The Indian Act"' recognizes First Nations band councils as having the power to pass bylaws governing the reserve commuruty in such areas as, for example, health, law and ord er, and the resid ence of band members.99 And Indigenous peo- ples who have modern treaties assert broader legislative power, including in rela- tion to taxation, resource use, and ed ucation. What is even more recent is the creation by the Mohawk band council of Akwesasne (a reserve which strad dles the Quebec- Ontario bord er) of its own Indigenous legal system. That is, the band

86 James !Sbkf?j)YoungDbod Hef"tde1so"- in ·i:moa,o..ering Trea1y Fede1.,.ism· (1994) .58St)Sk.1'tchewan L~1 R'-VK!'W 241. v1n1es IMI I~ lfe.tll!e-Sdid OOl 11'WdW? lhE!~edi!'\g of land btJl rAthel tlS SM!il\g. Thal iS l!eat:es ·creatoo a b1tatora! sovereignly of a kinship stall'.\! in a shared 1~rr 11ory· al 248 1-lendorson, goes 01') to desc11be

L!"'..e 11ea1y order as a 1ivin9 orocess·, a1 30t and obSe1ves rMt the ·mo1ai and ~at fO!Ce behind the tr~t.ities rS the pri!'ICi~ cf ootooorny aM trusr at 301.

87 Har rt La For rm. "lfldlt)n Sowreignty· WhM D:>es II ~an?· U991) 11 Can;>dNN: Journ/11 of NtnNe Stud/Cs 253 al

255-2.56, Online <vNm3 .b1a~O!lU.Ca!C,ins/ll.2/lalorme.pdf> SB MoMMnet .at,wpra note B3at 4B2 ~ootnote omilled] 89 N!Sga·a L1S\ms Gow1nimn1,, ·uooerst.111\d mg Ille T1~1y', Online <hllp//v1\•1, .... nisgaaMtiO!l ~/und~1s1a001ng

treaty> 90 ror diSCt>SSbl\ ~e Sr.aid lord MorSe, "AbOngi!\t!lt a~ Tre.aty Righls !n <:.aM:1.ai· in E'.rrot Mendes aoo & S1epMnie

Seautoc. CantJdl/N't ChtNuu of 1?19,.us tJt!d freedom$ 5th ed (Ma1k.Mm, LexiSNex.1s C,an.)ja Inc 2013) al 1287 anc falov .. 1ng

91 Nisg~·a L1s:msGovern~n1,, supr;, note89 92 Monahan e: ,w supt/J rDte S3 at 47 7. Note '""'' MOM Mn et at can these rights ·1!lc'li9'?oous 1 ights • ro1

diScussiOn of a!X>r91na1 lttk>. s~ Cnaoter 1701 lhis te.xl, inc1uding asdiscuSSiO!\of TMhqol.H'I Nt1J1on v BnliSh CoJuml'Jh>, 2014 SCC 44, 1201412 SCR 257. r.'or b1iefQ1 mentcn, ~e Chapters 4 .aind 26.

93 Jbkt at 478, su1nma••2'fl9 t~ posihon ol Larm1CJ 10 Oe!gt1muuklv v St:!i!J'I CoJLJmb,.;>. 119971 3 SCR 1010 94 R v S{Nlftcm, 11990) l SCR 1075 al pat a 40. [19901 SCJ No 9 95 Jb.'d a1 ~,~ 30. 96 Jbktat pa1a40 91 Jb:d. Note 1001 Sp;Nrow Ms OOt'.!n.Cr 11ci200 asespcusing 100 1eslr'Ct<ve.aiilonderstanding of ()boriglf\al nghlS oy

Bo1rO\YS alld Rol"l"lan. s1..1pr;> oote 78 al 178. 9B RSC 1985 c 1·5 99 lb.d ... ill.

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Aboriginal rights

Rights that exist where <re a ti es have not been negot1a:ed and include rights relat1n g to the occupaaon of land as well as nghts which anse "from a distinctive practice. custom or •rad1t1011 that may or may not be connected" to land

Cr own

The sta:e or government

Joya Tekahnawiiaks King, directorofjusticeat the Akwesasne Co!lrt in Ontario, wha is pictured with The Hono1m1bk Fronk Iacob11ai (now retiYed) and Candice Metallic (now a partner with Ma1tria? Law), who were visiting Akt.wsasne in 2012.

council passed a bylaw creating a court to "enforce 32 laws that cover civil matters inducting tobacco regulations, sarutation, elections, property and wHcllife conser- vation. Criminal matters are still settled outsid e the territory, in fed eral or pro- vincial courts."100 Having acted unilaterally, the band is seeking to have its court officially recognized and, in response, the fe deral government has begun talks with the Akwesasne as well as the governments of Ontario and Quebec, for just that purpose. 10 1 But in the meantime, the court operates on a mixture of values informing Canada's justice system and Mohawk values. 102 In a supportive eclitorial d escribing the court, the Toro nto Star states as follows: "Instead of focusing on punishment, the new system looks at the talents of the offending party and how they could be used to benefit the community. [fa great lacrosse player were to paint graffiti on a school wall, for example, he or she might be asked to teach students how to play the game ."""

Because of its historic relationship with lncligenous peoples and the require- ments of section 35, the Crown (that is, the state or government) owes legally bincling obligations to Incligenous peoples. For example, the Crown has a duty to consult and accommodate Incligenous peoples in a number of circumstances inducting when projects relating to extractive and infrastructure industries are proposed for lands used by lncligenous peoples for hunting, fi shing, and cultural purposes and will potentially adversely affect their rights. 104 This matter is further discussed in Chapter 4. Adclitionally, the concept of aboriginal title is discussed in Chapter 1 7.

100 CUseppe V~iante .. Ak.v..-esasoe C1ea1a-s rirs t Courl inC-an."tda lor ano by l nd~l21"KXJS Peo~·. CBC News t2 Octot:e1 2016). o!'\1100 · <h1tp//v1\¥.Y.Ctx.': ca..'nev .. s/canOOa/mon11-i'.?ttl/~k.v.~asna·1odigenous-cou11 -canaida•L3787969> ~t'.! too Moh,lwk Couoclof Ak.\•X?sasoe, "Ak.wesasneCour1 Lavi Comes Into rorce· 16 ~ptembe• 2016). onh'E! <hll p/fwwwak.v.<es.')Sne.ca/node/827>.

101 Ecitoriat "New lndigt'!nous Cou11 Sys1em Coutd Set Preca1t'.lnt . .ti.c1oss the Coun11y·. The Star (3 Oclobor 20161 Online'. <hltps //ww,..- l heslar .com/op1nion/~dito1ia1S/20!6/10/01/"!ew-ind;gaoous·court..-sys1em<:ou~ "S~t·p1~cedenlS.ac1oss-1ne<otJntry•E!dito1eth1m1>.

102 Ibid. 103 Ibid. 104 GtJy Hot-ybtJrf\ Marg~i<.'! t Loudermlk b And1t? Wlkc, "The Ot.. ty to COM.Jll t)OO Accommooa t-2 AbOngi!\C":i

Gioops 10 C..arooa· flvey Business SchOOI, l:no19y Potcy ~nd MaMJt'.lmant Cantre, OccE:mbo1 20141 onlioo <hllps //VNN1Ney.ov-...,.c.-,/cmsmedia/!366355/Ney..ene19yce1ur~·briel·.aibor·gil\c'lt·v4·11natP<'r>

NEL 59

The British and French influences on Canada's constitutional ordering are well acknowledged. What is less commonly noted is how Canada is also constructed on Indigenous legal traditions which stand alongside the common law and civil law, as Borrows observes."" Further to this kind of recognition, the fed eral gov- ernment has recently (in 2018) committed to d eveloping, through consultation, a framework "recognizing and defining indigenous rights."106 The stated goal is that the fram ework would be constitutional and formalized in federal legisla- tion.107 In response and according to press accounts, Indigenous leaders remain "cautious" as to what the fed eral government's proposal means and whe.re it will lead.100

BUSINESS LAW IN PRACTICE REVISITED

1. Is Nova Scotia's Tobacco Access Act constitutional and hence enforceable?

R v Made r's Tobacco Store, discussed earlier in this chapter, demonstrates that the legislation violates section 2 of the Charter by forbidding the public display of tobacco products. However, since the purpose of the Act is to reduce smoking in young people and for other reasons given by the court discussed earlier, the legislation is d emonstrably justified in a free and democratic society and is saved by section 1.

2. Who assesses whether the legislation is permissible?

Judges are mandated to hear challenges to the legal foundation of laws passed by all levels of government.

3. Are there any moral or ethical questions that arise from this scenario?

While cigarettes are a legal product, cigarettes cause d eath and serious illness. For this reason, there are moral and ethical issues for anyone associated with the tobacco industry. It would seem, in particular, that retailers would not want to do anything to encourage children or young people to smoke.

CHAPTER SUMMARY Canadian society is bound by a set of constitutional values, many of which insist on the importance of the individual and the right to freedom from unreason- able government interference. These values restrain how government operates at all levels- federally, provincially, and municipally. Constitutional law plays an important role in how government does its job by constraining how the three branches of government exercise power.

Each branch of government has its own work to do. The legislative branch cre- ates statutes. The executive branch is responsible for the ceremonial features of government and for day-to-day operations, including formulating and executing government policy, as well as administering all departments of government. The judiciary has a significant role in scrutinizing the legislative and executive

105 Bcrr<'N'IS, sups note 74 at 8 106 Jorge Bane1a ·rirst Natons Leade1s React V/!th Cauton 10 Just1Ctl T1udMu ·s lndigt'!nous

RghLs Ptar( CBC Ne.<1S U4 rebruary 2018). Online o:htto//VNIWCOC ca.'r~v..sfindigt'HlOUS/ fir Sl · f'k'l to f\S4 reac liOO-lnJde&J~ ind igeoous--r ig htS·~an-1.4 5 36098>

107 Ibid. 108 Ibid.

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branches o f government and can be an important resource for those who believe they have been unreasonably limited, such as in how they are permitted to carr y out business, or unfai rly treated by a governmental o fficer, board , or tribunal. The judiciary also adjudicates on private disputes.

The Constitution places mand atory limits on the power of the legislature to pass any law it sees fit. The court, as required by the Constitution, insists that the power of government be exercised in a manner that is

• within that body's "jurisdiction", as defined by the Constitution Act, 1867.

• consistent with the values and prin ciples contained withi n the Charter.

The judiciary itself is bound by the rules of precedent to help ensure that any given legal dispute is resolved in a manner that is consistent with decisions in pre- vious similar disputes. An important part of preced ent involves the court system since only a higher court can bind a lower court. Jud ges also have discretion, accord ed to them by the r ules of equity, to ensure that each matter before them is justly resolved.

Indigenous legal systems are important to the Canadian Constitution. This is because, fo r example, section 35 of the Canada Act, 1867 expressly protects the aboriginal and treaty rights of Indigenous peoples. Treaty rights concern offic ial agreements between the Crown and Indigenous peoples. Aboriginal rights include rights relating to occupation of the land as well as rights which relate to "a distinc- tive practice, custom or tradition" which are unconnected to the land .

Canadian law is organized according to classifications reflecting the nature of the legal problem at issue: d omestic/international; substantive/ procedural; public/private; and common law/ civil law. This latter distinction reflects the h is- toric importance of France to legal practices in Quebec whose p rivate law operates on the basis o f a civil cod e. The balance of Canad a operates on a common law system. Adm inistrative law provid es protection by ensuring that a fair process accompanies any regulatory decision that affects a business or any other activity.

CHAPTER STUDY

Key Terms and Concepts aboriginal rights (p. 49)

administrative law (p. 46)

bill (p. 31)

bylaws (p. 32)

cabinet (p. 32)

Canadian CharterofRightsandFreedoms (p. 35)

Canadian legal system (p. 24)

Civil Code of Quebec (p. 44)

common law (p. 39)

concurrent jurisdiction (p. 28)

constitutional conventions (p. 26)

constitutional law (p. 24)

Crown (p. 50)

domestic law (p. 42)

equity (p. 40)

exclusive jurisdiction (p. 28)

Federal Court of Canada (p. 35)

formal executive (p. 32)

government policy (p. 24)

inferior court (p. 34)

international law (p. 42)

61 NEL

judges (p. 34)

judgment (p. 39)

judiciary (p. 34)

jurisdiction (p. 27)

legislative branch (p. 26)

liberalism (p. 24)

par.unountcy (p.30)

political executive (p. 32)

precedent (p. 39)

private law (p. 43)

procedural law (p. 42)

public law (p. 42)

regulations (p. 32)

small claims court (p. 34)

statute law (p. 26)

substantive law (p. 42)

superior courts (p. 35)

Supreme Court of Canada (p. 35)

treaty rights (p. 48)

Questions for Review 1. What is the key idea upon which the Canaruan

Constitution is based?

2. What d oes "jurisdiction" mean?

3. What is an example of a constitutional convention?

4. Which document determines whether a government has the jurisdiction to pass a law or not?

5. What is the d octrine of paramountcy?

6. Which level of government d oes paramountcy seem to favour?

7. How d oes the authority o f a murucipal government come into existence?

8. What is the difference between a regulation and a bylaw?

9. What is the executive branch of government?

1 0. How is the executive branch rufferent from the legislative branch?

11. What is preced ent? Why is a system of courts essential to its creation?

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12. What is the common law? Who creates it?

13. What is the Canadian Charter of Rights and Freedoms?

14. What can a judge do if he determines that a piece oflegislation is unconstitutional?

15. If a law is foun d to violate a person's freedom of expression pursuant to the Charter, is it automatically struck down? Is there something in the Charter that might allow the government to justify violating that person's freed om of expression?

16. Describe aboriginal rights and treaty r ights. How are these r ights protected?

17. What is the difference between public law and private law?

18. Which Canaruan province operates under a civil law system?

19. What is the role of eq uity?

20. What is one important function of admirustrative law?

Questions for Critical Thinking 1. Women pay higher prices for certain products

and services compared to what men are charged- from d ry dearung to haircuts. This is known as gender-based pricing. Is gender-based pricing objectionable? Should government regulate price when it is discr iminatory or should that be left to the free market?

2. Under a common law system, judges follow precedent when making d ecisions or resolving disputes. What are the ad vantages of following precedent? Describe a situation where it might be inappropriate to follow precedent.

3. Why is the constitutional recognition of aboriginal r ights so important? For example, in what ways can this recognition advan ce reconciliation of ln rugenous a nd non- In rugenous peoples in Canada?

4. Review Figure 2.4 on page 41. In your opin ion, how has the Charter affected business activity?

5. Do you think that the Charter strikes a good balance between protecting the rights of in ruvidual citizens and allowing governments

to legislate for the benefit of larger groups, or even all members of society? ls section 1 of the Charter necessary, or should an in dividual's fund amental rights and freed oms be absolute?

6. Dozens of administrative tribunals- such as the Labour Relations Board, the Canadian Radio-television and Telecommunications Commission, various human r ights tribunals, and the Occupational Health and Safety Commission- have been established by both the fed eral an d provincial governments. Why d o you think a dministrative tribunals are such a p redominant feature in Canad a? Why have they been established ?

Situations for Discussion 1 . Through the Healthy Menus Choices Act, 201 5

SO c 7, Ontario has recently enacted legislation to fight childhood obesity, among otl1er goals. This Act req uires all foo d-service chffins witl1 2 0 or more Ontario locations to post on the premises the calorie counts of the food and d rinks. According to the Minister of Health and Long-Term Care, Dr. Eric Hoskins, tl1e goal is to help people in Ontario to "make informed, healthy decisions for themselves and their families."109 In 2 017, the Toronto Star reported that the Freshii restaurant chain in Ontario (which serves salads, quinoa bowls, and wraps, for example) was not complying with this new law because, while it posts calorie counts online, it does not d o so in its restaurants. Freshii, whose motto is "count nutrients, not calories", uo regard s the Ontario law as "overly- s implistic."lll Dr. David Jenkins with the University o f Toronto agrees w ith this kind of assessment, observing that calorie count is likely less important than tile nature of the food itself, a dding: "I'm more interested in what

109 Onta11C n0 .... s releas<! "C".ab1ie Arrounts Com 1.ng 10 Ontario Menus Beginnillg .laooaiy i · 130 Oeoeemba1 2016),onli~ <hllps //r..ews on1<!!1io.ca.'mot\ttclen/2016/12/cab1~·amcunlS<omil)Q40-0r\tafC • rnenu s · beg 1n nin.g· ~nua1y· ls th Llrl >

JJO Pe1er Gotfin b Ateksano1a Sagan. "F res.hi: C..ats. Ontario Calorie COUl\li~ Law Ot1elty·Simpt~liC". The St;)( 9 May- 2017}, Online <hltPs//v1w<11.the.sta1 com/busi~s.s/2017/05/09/tresh•t-OOI ·posh ng <:alo1 le-<:ou nl s·on-lhe i1 ·me l)US•on1ano·9ov(! rnmenl •S<lyS.hlmt>

ill JbkJ.

McDonald's are do ing." Meanwhile, Freshii has recently agreed to "meet the m inimum compliance as requ ired [by tl1e legislation]."112

Do you agree with the calorie counting legislation? Why or why not?

2. A brawl at a popular Halifax nightclub called tile Dome resulted in 38 arrests and the suspension of tile Dome's liquor licence. Government officials believe tlut one-dollar drinks offered by tile Dome are one fac tor contributing to such violence. "This has blown into a cultural problem, and one of the issues we have identified is low-price, deep- discount drinks", sffid Barry Barnet, tllen Nova Scotia's Minister of Healtll Promotion and Protection.U3 The Nova Scotia government expressed its hopes to develop recommendations to address problems associated with excess alcohol consumption. 114 From a risk management perspective, how should local bar owners approach governmental concern over bar violence?

3. The fe deral government legalized recreational cannabis as o f October 17 , 2018, but only in lim ited situations. For example, the Department o f Justice website states (among other things) that, subject to provincial or territorial restrictions, those who are 18 years of age or old er are now legally able to:

possess up to 30 grams of legal cannabis, dried or equivalent in non-dried form

in public

share up to 30 grams of legal cannabis with other adults

buy dried or fresh cannabis and cannabis oil from a provincially-licensed retailer

0 in provinces and t erritories without a regulated retail framework, individuals are able t o pur chase Glllnabis online from federally- licensed producers

112 CBC N~ws, ·F'a!il•F'ood Chain rroshu Ag1oes 10 Compty Wil" <:.a!Orie Counts on Menu Boo1ds· t9 May 2017), 0~1~ <hUO//WHY1.cbC..c~ news/heal th/hes h 11·ca!o1 :~ rnenu· l Al 07 218>.

113 03k!ihaM ~sca1amurty, ·ouk':iats B\a~ $1 011nk.s 101 Hal1f()x Brav1r. The Globe and Mtlil 120 Decemt<H 2007) Al2.

114 Jb.d. Note 1hat NOV.') Sco1ia no, ... rnar>-J()tes m1n1mum drink prieas by "'9ulaton. See NS Reg 36Sl2007. as amended up to 0.1.C 2014- 28 !Januaiy 28, 2014), N.S. ~(!g . 1512014 Sect·on SOAUJ s1a1es.lS loHows, Cxcept 101 the oft~p·em:ses s~ of beet under S~c1ion SSS, a licensee rnust not ofte1 lor sate O! supcty a serv1.ng or ti(!uor lor te>s l h.?i!)a Io l a!: purcnase 011c:e or $250. ioc\Jdu~ af'fy app(~~b4e tax.es

NEL 63

grow, from licensed seed or seedlings, up to 4 cannabis plants per residence for personal use

make cannabis products, such as food and drinks, at home as long as organic solvents are not used to create concentrated products"' ....

The current regime for medical cannabis remains unchanged.'" Do you agree with the federal government's decision on legalization? What are the pros and cons of this decision?

4. An accounting student is researching the deductibility of business expenses. She has found an amendment to the federal Income Tax Acr that states that certain expenses a re not deductible. However, she has also found case law that states that the expenses are deductible. Which law prevails? What additional information do you require to answer this question?

5. Several provinces have passed legislation that restricts the sale of violent video games to

115 C.,,ifl.H>.l.S l.C:gt).1Jzar.icn .Jnd /?cq41l'1li0tt, 2018. http\ //www ~stiee.gcCA/ ~f"9/Cr1p'c<>nMblS/ l«'Pf<XluCCd will\ tl\c' pc1m ssonor 100 °'2Plrtt'l"lenl of Josl co Ctin.ada 2018 Cn1pM-.,s 4>1\d lo1rn"ltt1nq in It~ ongimt

116 11>/d

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children. m How could this legislation be challenged under the Charter? Explain. Are there any ethical considerations when contemplating such a challenge?

6. The government of Alberta has passed regulations that include requirements that home inspection businesses be provincially licensed and carry $1 million in errors and omissions insurance. Beyond this, the province has mandated educational standards for home inspectors with the goal of improving the quality of work done by the home inspection industry. Then-Opposition Liberal MLA Hugh MacDonald endorsed the regulations as a means of clamping down on fly-by -night home inspectors, observing: "If rm making an important decision to purchase a home based on information fm getting from a home inspector, that person should be licensed and have minimwn credentials.""" Do you agree that government should regulate such an industry? What are the costs and benefits of such regulation to the consumer?

ll7 Ch11s Mc tcalJe b Cnn~ ~nnctL ·comincnwiy An t • Voktnco Legisfat Oll Oil V:doo Gamci. PaS!.CS Ca!oty Unc.l<ll Cht>11C1° J.11wyc1~ IM1""1Y & Ma<Ch 2007) S

llS l<ar(!ll K~!Ss, "Homu Buyers Get Moro PfO IQCl,on· The Cdrrionton Journal 114 May 2011J

OBJECTIVES After studyi ng this chapter. you should have an understanding of

• methods of managi ng the leg al environment of business

• the development of a leg al risk management plan

• the importance of anticipating and reacting to developme nts in the leg al environment

• how to access and m anage leg al services

BUSINESS LAW IN PRACTICE Northland Milling Inc. ("Northland") is a ruckel mining company located in northern Ma rutoba. W ith all its operations situated adjacent to a town o f 10 000, Northland extracts 3000 tons of ore per day from und erground mines. In adclition to several mines, the Northland property contains an on-site processing fa cility, a large maintenance shop, a builcling devoted exclusively to office space, and a lake which is used to hold "tailings" or mining waste after nickel has been extracted. Northland cliscards about half of its tailings back into the ground with the remaind er being d eposited into thi s lake on a regular basis.

Most of the company's und erground extraction process relies on a continuous mining machine, which cuts ore from the mine walls. Upon extraction, the ore is hoisted to the surface where it is crushed, washed, and conveyed to the processing plant which, in turn, pro- duces a ruckel concentrate. Northland employees transport this con- centrate by truck to the railway so that it can reach customers in eastern Canad a and the United States. Most of the customers are stainless steel manufac turers.

Alex Tanguay, president of Northland, is pleased with the com- pany's success to d ate and wonders if Northland should begin pur- suing opporturuties to operate mines in South America, including Peru. To help d eliberations on this point, Alex asks Marie Gagnon, the director of insurance and security for Northland, to und ertake two related investigations. First, he req uires a review of Northland's entire legal risk ma nagement plan. Second, he wants an assessment of the kinds of new legal risks Northland fac es should it take some of its operations global. Alex wants an assurance that Northland has identified and ma naged all the majo r legal r isks associated with its Canadian operations before it und ertakes any new projects in for- eign countries.

1. What is a legal risk management plan and how is it d eveloped?

2. What are Northland's major legal risks from its Canaclian operations? How should Northland manage tl1ese risks?

3. What are Northland's legal risks should it decide to operate in a foreign jurisdiction such as Peru? How should it manage these risks?

NEL 65

Assessing the Legal Environment Many factors d eterm inethe success of a business organization. It must be able to analyze and evaluate its activities, forecast changes in the business environment, and react effectively to unexpected d evelopments. Of central importance is the ability to strike the right balance between managing the present and planning for the future.

To meet its goal of producing a product or d elivering a service at a profit, the business enterprise must have a set of functions and systems in place, including finance, marketing, and human resources. To ensure the smoothest possible oper- ation of these systems, the business also needs to d eal effectively with the legal environment. By doing so, the business will reduce the likelihood and impact of mis takes that a re

costly in terms o f the expense of legal services and damage claims.

distracting in terms o f time and effort.

harmful in terms of relationshlps and reputation in the industry.

This chapter explores how a business can manage its interaction with the law and legal issues. It considers two basic approaches- preventive and reactive. The preventive approach requires a thorough evaluation of the risks associated with the business's activities in order to minimize their impact . The emphasis is on compliance with legal requirements and anticipation of changes in the legal envi- ronment. The reactive approach recognizes that legal problems may still materi- alize, so the firm needs a strategy in place to deal with such developments. These two approaches are combined in a management plan that reduces the impact of legal risk on the organization.

Legal Risk Management Plan Managing the intersection of law with an organization's activities requires com- pleting a comprehensive assessment of legal risk exposure and d eveloping a legal risk management plan. This process is often part of a broad er exercise- called enterprise risk management- in whlch all risks within an organization, includ- ing those with legal implications, are assessed and managed. In essence, legal risk management attempts to identify and then manage threats that could generate negative legal consequences such as fines, penalties, compliance orders, licence suspensions, and liability for the payment of money. This requires an understand- ing of what could happen, how it could happen, and how its impact could be most effectively managed.

Large businesses like Northland may have a department head ed by a senior manager with a title such as risk officer or compliance officer (or, as in Marie's case, director of insurance and security) to organize and oversee this process. In smaller organizations, the risk management function may be performed by the chlef executive or delegate or even by someone outside the organization, such as an insurance agent or a risk management consultant. Lawyers may also be involved in the process in a variety of ro Jes as d etermined by their familiarity with the legal risks of the business.

Regard less o f where primary responsibility lies, risk management is not a task for any one individual since no single person w ithin an organization has complete knowled ge. Risk management involves the cooperation of managers and employ- ees at every level. The challenge for those responsible for thls function is to iden- tify the players inside and outside the business who can help in the development

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Legal r isk

A business ns~ w1tll legal 1mpl 1cat1ons.

Enterprise risk m anagement

Tile process of 1dentify1ng and man ag1n g all business risks.

of a useful plan. Those involved may use a variety of methods and approaches, such as surveying or interviewing managers and employees, forming workplace committees, or convening a panel of experts.

Creating a legal risk management plan is a four-step process:

Step One: Identify the legal risks.

Step Two: Evaluate the risks.

Step Three: Devise a risk management plan.

Step Four: Implement the plan.

Applying the Four-Step Process Identify the Legal Risks 1he most critical step in the d evelopment of a legal risk management plan is the identification of risk, because a risk which is not identified cannot be managed. That said, it is probably not possible to identify all possible risks. The goal is to be reasonably certain tl1at no significant risks have been overlooked. There are many methods thata business can use to identify its potential exposure to legal risks. For example, in applying Step One, a business may assess its functional areas, that is, the areas traditionally recognized in business school curricula (such as marketing and sales, human resources, finance and accounting, and information systems). It could also approach the problem by assessing its business d ecisions, its busi- ness relationships, or its operations and transactions. The approach or approaches used will vary depending on the nature of the business and the industry. A highly departmentalized company might choose to focus on evaluating the risks associated with its functional areas because relevant information is organized in this manner. A small consulting firm would not be organized by functional areas and therefore it , by way of contrast, would more likely focus on legal risks arising from its busi- ness relations, that is, client relationships. A utility company with varied sources of power generation (hydro, coal, oil, nuclear, and wind) and a transmission and distri- bution system would concentrate on its operations. 1his is because its major risks arise from operating procedures and systems relating to the production and delivery of power. There is no single method which is the correct one for any particular situa- tion. The key is to be systematic so that major risks and threats are not overlooked.

Step One: Identify the Legal Risks

,/Assess the organization's functional areas.

,/Review the organization's business decisions.

,/Examine the organization's business relationships.

,/Analyze the organization's operations and transactions.

In reviewing how her predecessor identified legal risks at Northland, Marie concluded that his focus had been on the functional areas of business only. What follows is the list he assembled of activities and events that have possible legal consequences:

Marketing and sales: aggressive marketing progran1s by Northland could result in fines and penalties under the Competition Act'; the improper

l RSC 198~ c <>34

67 NEL

transportation of mine waste could result in prosecution under The Dangerous Goods Handling and Tra nsportation Act2 of Manitoba; the sale of inferior nickel or the late d elivery o f nickel could result in customers suing for breach of contract;

Production: processes used by Northland could harm the environment and result j n prosecution under environmental legislation or civil actions by affected people; machj ne breakd own could result in a loss of production and an inability to fulfill contracts resulting in lawsuits for breach of contract; members of the public could be injured on the property, resulting jn liability under occupier's liability legislation;

Human resources: jnjury to Northland workers could result in prosecution under occupational health and safety legislation; employee harassment could result in human rights investigations and penalties; improper termjnations could result in actions for wrongful dismjssal;

Finance and accounting: harsh credit terms from suppliers may result in Northland being unable to pay debts as they fall due, thereby triggering legal action by creditors; aggressive accounting practices could result in an jnvestigation by the securities com1uission.

Marie's predecessor correctly identified several important r isks relating to pro- d uction and human resources. Northland prod uction processes d o pose environ- mental hazards and, most certainly, Nortluand workers could be injured, harass others, and be wrongfully dismissed. However, the predecessor did not take ms analysis far enough. For example, he failed to consider possible cha nges in the law that could negatively affect Northland's operations and he failed to iden- tify risks that crossed functional lines. Most significant was a fa ilure to identify technology-related risks, including those posed by hackers. Tiu s is a particularly important risk to identify sin ce a successful breach by hackers m ight result in not only a disruption of Northland's operations but also a loss of customer and employee d ata. Such losses could result in lawsuits as well as penalties under pri- vacy legislation. The following Technology and the Law box provides examples of the risks and costs associated with the loss of d ata.

TECHNOLOGY AND THE LAW

THE RISKS AND COSTS OF A DATA BREACH

There are t hree types o f entit ies in t he world of cybersecurity: Those w hose systems have been hacked. those w ho don't know t hey've been hacked and t hose w hose systems are about to be breached.'

Data and pr ivacy breaches are major legal a nd business r isks fo r Canadian businesses. The unauthorized access and retrieval of sensitive

2 rlSM 1987, c 0 · 12

financial, personal, health, and other info rma- tion most often occurs as a result of a cyberat- tack. A malicious entity or hacker gains acce.ss to a computer or computer network and compro- mises personal data .

One of the la rgest known data breaches o ccurred at Ya hoo! Inc. In September 201 6, Yahoo announced that in 201 4, hackers stole account information including names, emails, addresses, birth dates, and encrypted passwords

3 Ian Haivey, ·~nnil\g 101 Cybe1b1aaches". Can/KJn'Nl laYtj'E.-'f Magazme 127 februa•y 2017). oohne <hllp //w.'l>N c.a!\adiarl\c:'twyerm<Yi:J.COni/6333/Planning•fOr·cy!:x'!rtneocnes.hl!'Ylt>

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o f at least 500 million users. At the end of 201 6, Yahoo further announced that a separate cyber· attack in 2013 compromised more than 1 billion users. In 201 7, Verizon Commurucations, which acquired Yahoo, disclosed that the 2013 attack affected all 3 billion of Yahoo's user accounts.

The Canadian d ata breach that has received the most media attention was the 2015 hack o f AshleyMadison.com, a Toronto· based web- site d esigned to fac ilitate discreet extramarital affairs. The hackers, a group known as Impact Team, released the names, email ad dresses, credit card information, and other personal d etails including height, weight, eye colour, and ethrucity of 36 million account users. The group said that the attack was an attempt to shut d own the site because tl1e company was marging users a fee to d elete their information but were not d oing so. While the Ashley Madison hack may have been the most titillating, hacking and d ata breaches have o ccurred at many businesses.

In 201 7, Eq uifax, a major consumer credit reporting agency, announced a cybersecurity b reach that exposed the personal d ata of about 1 43 million Americans. The information gained by the hackers includ ed names, addresses, social insurance numbers, and, in some cases, credit card numbers. Th e company also reported that the personal information of about 100 000 Canadians may have been exposed. Also in 2017, Bell Canada revealed that nearly 1.9 million customer email addresses and 1 700 names and phone numbers were illegally accessed. McDonald 's Canad a announced that the job section of its website was hacked and the personal information of about 95 000 applicants a ccessed; and Holid ay Inn revealed that hackers stole credit card d ata from

more than 1 000 locations including more than 1 00 in Canada .

A d ata or privacy bream can be expensive. It has been reported that in Canada the average total cost of a data breach in 2017 was $5. 78 million or an average of $255 per lost or stolen record.4

Costs associated witl1 a privacy breach includ e:

direct d amage costs (e.g., decline in reve- nue related to the bream, extra expenses to restore assets) .

liability to others' (e.g., compensation to affected clients from unauthorized access to personal information; costs payable to third parties such as credit card issuers' marges to reissue credit cards).

the cost o f preparing a response plan (e.g., costs of public disclosure to clients, includ- ing letters and advertisements;• regulatory costs and fines; crisis management costs, including costs of establishing a call centre to handle inquiries; the cost of advice from legal and public relations professionals).

Ho w shottld a business respond to a breach of data?

4 ·can.ada Second MOSI Cxpensive Counliy for Data S1eacoos IBM and Ponernon lnSl!luti'! Study· C<1tladian UndetYlftUU t.20 .Juoo 2017), oniline <http//v.ww ~nad~nunde1w11te1 ca/insurance/ canada•s<?CO~·ex~nsrve-countiy~data•breacl\es~ibm·poMmon-1nslttute-stody•l004US4B7/>

5 T~ risk exposure 101 OiJSioesses Ms ioc1eased sigrfl)ca1uty t>ecaJse of 1he iecognllOI\ of the 1-:irL of intr usion uoon sec..,sion tsee c 12)and 1headven1 of c"ssacliO!')s in tl'\is area (s~ c4J.

6 The l"derat p11Vacy tegtSk') tlOn, P1P£0A, SC 2000, c 5 Ms bee11 al'l'Y.!nded by ttK! 0191t/JJ PrNilcy A('l SC 2015, c 32. ~chonlO 1 llJ and 13) 1equ,1es oosi~ss to notity 1ne P1tvacy Comm ss,oner and affecled indiviouats or a daia breach I mere isa 1~t risk of sign.hcant Mrm. ThiS rule 1.akesef1~clon NavemMt L 2018. See Gow1nimn1 of CaMda.. 01de1 1n Council 201~0369 ltJ'.()1Ch 24 2018) al <hllP //ordors•tll·COuncit.can-ada c.al att.x:hm~n1.php?a1 ta:l\-36009&\.ing-~n:> Atoer-t<fs Persottt'JJ 1n1orm11uon Protec11on Act, SA 2003. c P·6.S.. s 34 1 requires d~ta t>reacM-s 10 be rt'!ported to the Pr Nacy Comm ss0001. Man11ooo·s Petson/JI fnforrmfion Protection tN'1d JOOtttlty Theft P1event10n Act SM 2013, c 17. \"11'\1ch is r.ot ~l in lorce, 1~qu11es 1~!):'.)1t:ng to affecled ind1v10uafs

69 NEL

Critical Analysis: How can the risk of a data or privacy breach be effectively managed?

Souroas: N!OO$a PertfOt!\ "At! 3 Bliol\ YahOO Accounls We10AlfeCt'.i!d 'J1 2013 Attoc!(, The NfN1 York TH't'les f3 October 201n. ontioo <hups// \'IV·N1.l\ylimes.com/2017/10/03/tech.notogytyahoo·Mck·3·bUiOn 1JSers f"ILl'r'll>, "(Qu lax. $.iys lOOOOOCa:mians lmpt:tetOO tyCyt)l.~rsea,1 ly Breoct·t, CBC Na•1s {19 Septembe• 2017J, o~inc <http//wwvu:.'OC.c.af l'Wh...s/0...Si~SS/l'qu tf,\X. •Ga nOOa<:yberbte.o/.: n-1.4296475,.. "Mc OoMkl'S Canada Says Joo Sit~ Hack~. '95000 AppfiearHs Com;:n·omi'Soo· The Taroncosun {31 March 20171. ontinc <hllP /lw_.,, ... .101onto~n.comt 2017103/31/ mcdonald S•CaMda·says ·jobs· site -.ha: !(ed .. 95000· appUca"ILS·COrr'iprO:ntsee>. Jos>\O Kar(! "BettApd0912:es to Customers Alte1 Data Bft'!aco Hts 1.9 Mll:on l>Ma·' Add1Etsses·. The Clote and Ma..V t.16 May 2017J. oolioo <https/lv1v.w.1Mgk>tieanomal.com/ repc11 .. on·bus1ness/bel..apotog1z€:.S•10-customers·afle1·dat:)·b1each

·tl1lS· l 9-·mltion·e·mal·addresses/artiCte35004027 h•, Luis M lt.ln, ·PrivacyV/alc~o90pens0001 loMo•e PovRrs:·. The!ay,.yets Vlee,l.:Jy 130 Sep1ambe1 2016) S, 'Tep 10 Legal Risk.s fer 6usir\less 1n 201r Borden Ladner CeNa1s U6Janua1y 2017J, Online Mondaq <nup // v1,>1w mondoo .com/canada/x/560336/KnovAadge+ Managi.?man1 ! Top+lO +Legat tR 1sk.s + ro r+ Sus iness+ 1n+2017>, Pele £vans, 'Hackers Stole Credit Card Data rrom Mort'! Than 1000 Holiday Inn LocaliOns aOO Other Hote(s· CBC N<w1s {21 Aoril 2017J, onllne <ht to:/ /ww\IV .cbC .ca/ nt.!\ ... s/ bu slness/ hOtiday•lnn· hOlet ·Mck~l.4079202>. ·Jona1han StOUC!r. ·oata Breaches· 1rs More Cxpe~rve to Rettc:t T~n Preve!\1·. The Globe and Mav t23 May 2013) Bl3. Jenmler Brow!\ ·comooniesWlt LNe and D ie o!l Oat.a Breach Policies Cxpe11s· Jn House 124 f"eoruary 2014). ootine <n1tp// VN1v1.canoota!'l&a\vye1rna9.com/S024/Com~nie-.s·wlf.lrve·and ·d ia ·e11-da1a · b1ea::11-pot1cles·exP'!1 ts. hi mt>. JC\couet1~ Nets on. ·rne Tru(' Cos1 of Cyoe•secu1ity-, The Globe and Mall t23 May 2014) B4, Oona!t':E! MouHon, 'Cybarstorm· (-orettsic Accounting t'Jtfd fr/Jud 3 l (2013) u .

At the same t ime, Marie also noted that r isks that were not particularly relevant to Northland had somehow been put on the list. For example, the risk of an aggressive marketing campaign was identified yet Northland, as a miner of nickel, has no need to market its product at all, let alone aggressively.

Marie d ecided to use a combination of risk management approaches based on consultation with a broad spectrum of people in Northland, several risk management consultants in the mining industry, and the global mining and metals group of an international law firm. Asa result of this better process, Marie d eveloped a list of legal risks that was much more reflective of the mining industry at large and included challenges posed by technology, the regulatory environment, and operating in a foreign country. Th.is list is contained in Figure 3.1.

The approach taken by Marie in identifying risk is superior to what her pred ecessor had d evised. Th.is is because, rather than identifying and treating each risk individually, she has utilized a combination of approaches that assesses and addresses the risks from all sources. The focus is on the corporation's entire r isk profile rather than risks emerging from individual departments.

FIGURE 3.1 Legal Risks at Northland

Whether Northland continues to O!"'rate only domestically or decides ro expand intemationaUy, it faces a number of legal risks, including: Environmental: damage to the environment (including wildlife and fisheries) by tailings waste; harm ro the property of adjacent landowners and contribution to climate change by plant emissions; impact on land s urface and the wate.r table by drilling and extraction; Liability triggered by improper closure or remediation of m ines; Human resourc.es: injury to workers due to pit failure., underground collapse, or large equipment failurei h ealth risk to worke.rs (noise.induced hearing loss, dermatitis due to cont.act with solutions con raining nkkeJ)i injury to employees \Vhen transporting product; harassment and te.rmination of employees; Operational: breakdown of machinery and equipment; production of inferior or defecti\le product; injury to visitors on property; damage to property or vehicles when product is in transit; injury to employees or members of the public when the product is in transit; Regulatory: changes to regulatory, legislati\le1 o r compliance regimes (i.e ., occupational healt h and safety, environmental, licensing requirements} impacting on operations; changes to laws in foreign jurisdictions affecting the viability of compan}'; o~rations in foreign countries resulting in liability under Canadian law; Financial: inability to meet obligations as they become due; incomplete or poorly performed contracts; extending credit to customers who do not pay the.ir bills; errors in financial state.men ts that mislead the public; Technologi:cal: lack of security in electronic transactions; failure of computer syste.ms and networks.

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What are the legal risks from mining operations?

This first step in developing a legal risk management program may seem to be unduly negative because it seeks to identify everything that could possibly go wrong in a business operation. The purpose of Step One, however, is to provid e a realistic assessment of the potential legal dangers of doing business, with a view toward minimizing loss.

Evaluate the Risks The techniques used in Step Two vary from a simple, subjective evaluation to a complex, statistical approach involving actuaries and other professionals. These techniques involve assessing both the probability and the severity of loss.

Step Two: Evaluate the Risks

.J Assess the probability of loss .

.J Assess the severity of loss.

Most organizations have a wealth of information to assist in perforrrung such assessments, including the organization's loss history, industry statistics on losses, and expert opinions from both within and outside the organization.

A h igh probability that a particular event will occur can be offset by a rela- tively low level of loss should the event actually occur. Events that are unlikely to occur also deserve dose attention if the potential loss is high . In the Northland situation, employees may occasionally come into contactwith solutions that con- tain nickel, despite the use of protective clothing and precautionary measures. However, the contact is unlikely to result in serious injuries that could jeopar- dize Northland's operations. However, if an employee is seriously injured or dies in a workplace accident, this can result in severe penalties. Other risks, such as environmental impairment or breach of contract, may have varying conse- quences depen ding on their severity. The expansion of Northland's operations into a fore ign country such as Peru also poses risks. Although there are many multinational corporations operating in South America and there is the poten- tial for profits, there are considerable risks for a company like Northland. The International Perspective box below explores risks that arise from international mining operations.

NEL 71

The international law firm advising Marie indicates that expansion into South America poses the risk of expropriation. Bolivia and Argentina have nationalized foreign operations and Peru could do likewise. Also, because mining has a tremen· dous impact on the natural environment, Northland-due to its inexperience in operating abroad- could run afoul of local legislation. Even if Northland obeys Peruvian laws, there is the risk that it could become the target of legal action by environmental activists in the Americas and beyond.

The point in evaluating risks is to recognize that not all risks are alike, nor should they be treated alike. Some risks crystallize into liability fairly often, but their financial and legal impact is relatively small. Other risks materialize infre · quently, but when they do, their impact is severe. A business can use this assess· ment to determine priorities for risk management and as guidance in choosing how to manage a particular risk in Step Three.

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INTERNATIONAL PERSPECTIVE

RISKS IN MINING ABROAD

Canad a is a global leader in mineral exploration and mining development and Cana di ans have a long hjstory of participating in mi ning at home and abroad. However, environmental concerns, human rights abuses, and sensitivities about for- eign ownership have made mining abroad a very risky business. Consider the following examples of legal difficulties encountered by Canadian mining companies:

Nevsun Resourtes Ltd, which owns 603 of the Bisha gold, copper, and zinc mine in western Eritrea, is being sued in British Columbia by three Eritrean refugees who allege Nevsun was complicit in human rights abuses. They allege that they were forced to work on the construction of the mine against their will; were subjected to long hours, intense heat, and threats of torture; and received less than US$30 per month in pay.

• Acacia Mining, owned by Canada's Barrick Gold Corp., has been in a dispute with the government of Tanzania over taxes, royal- ties, and exports. Acacia has been accused of tax evasion, not declaring all metal exports, and operating in the country without a certificate of registration.

• Vancouver-based Goldcorp has been investigated by Mexican authorities over

whether the company broke environ - me ntal regulations in handling a leak of cont aminated water at Pei\asqulto Polym etallic Mine, the country's largest gold mine. The allegation is that ground - wa ter n ear the mine had elevated levels of selenium (a potentially toxic chemical by-prod uct of mining) and nearby villag- ers were not informed. Goldcorp claims its tests showed that the leak had not affected groundwater beyond its prop- erty lines.

HudBay Minerals Inc., a Toronto-based mining company, is facing three Canadian lawsuits in connection with its activities in Guatemala. A group of 11 Guatemalan women allege that HudBay was complicit in gang rapes suffered by the women at the hands of security personnel hired by HudBay. A widow of a community leader who was protesting the company's Fenix nickel mining project is also suing H ud- Bay. She is alleging that security guards from the Fenix project beat and killed her husband. A survivor of a shooting incident a t the Fe1llicproject who became paraple- gic is also s uing Hud Bay. He is alleging that he was shot by tl1e chief of security for the Fe nix project. HudBay has since sold the mine.

Sources: Dougas Maso:\, ·one Area 'Nne1e We Ar.e Nol Ris k. Adve rs.:z!", TIW GJobe and Mail t22 Novemo~u 2012) BS. Jodie V'/olk.Otf, "£.xoanding Abro.ld? Proceea V'/11h Caul1o r) The L.-rvl}'a-·s Vleekly 114 Oecembe1 2012J 21. .)etf G1ay ' Nevsun nesou1CCS f.'a~s l ffi ... $\Jil Over ·rorced Labou r" in (r1t1e<f, The Clobe and Mt11,' 120 November 2014). ori1ne· <hllPS //w,v,v.theglobeaoomaK com/ 1e po1 l •O r>- bus1ness/<:;a1a 1 ~ backed · <:; ki·close-10 ~1- b ill io n· o ia ·lor·NN$un/a!lie~2lb70095/>; Ang~es Rcxhiquez. ·Gok!coro l'lSISLS It P\.lyoo t:ly the Book. Folov.';"9 Water Con tamlootle rf, BNamerJCas !25 August 2016), o nl:me <i"lllps·//v1ww.bn.')ft'lencas.comten/l'H:1v1s/ m ining/ gotdcor p ·11\SiSI s -11-ptayE?d · t'>y •I ~ · bOOI<· 10110, ... 1 f\94 ••1at(!r •Conlal'f1 ;nalion l >, 'Go1oco10 St109g!es 'J'/!lh Leak al Mexican Mine·. Reuters !24 Aug ust 2016), o n1:1 00 BNN <n1tp//wv1wbnn~a/

; gotocorp•Sl1uggtes·\ ... i lh·~alt•at• IT'IE?XiCan•mine-J.55449S>, Omar ::i Monammed Hete n Nyambura •Mwau ra & Thomas Bieshci.vet. f "T.!tn i-an ie!in Governm~nl Accu ses Acacia of M ining Gotd llegatty·, ~ SJoom.'>ergU2Jurl'! 2017J,0:11re <httos//wwwbbOmbarg,eom/ncNIS/

Protest at a meeting of HudBay Minerols Enc. s shareltt>lders artic:tes/2017·06· 12/ tan zan an•government ~aceuses •acacta ·ot m 1nir>g ·901d •1 lk!9.14lty'>, Mt'!l!nd.'.11 Matdonaoo. "M ;r\if').d tor toe T1u th in Gut)tem~a·. /vl;)CleJJns {8 J uty 2014), o!'liline <ht1p//wvN1.m~~a~ ca/ne-.•1S/wor't/J/minillQ· fo1 • lh(? •t1Ulh-in-9uatem~/>. St.it.2lfllle Oa'ey ·cuaternatan \f/omer'f S C ta :ms Put rot\J S o n CaM:lian r nms· Con• d uC:l Abro.&:1·. The New YOrk r..mes t2 Aprit 2016). Of'\llil\e: <hllPS// www .nyt , mes .com/2016/04/0 3/wortd/ a me r 1cas/9 u.lle ma ta n -womens-cta1 nis•put·focus-on-cal'\adan-t11ms<:onduct~br0M.ntll"lf>

Critical Analysis: What steps should Canadian m ining companies take to manage the r isks of operating abroad?

Risk avoidance

Ceasing a business activit y because the legal nsk 1s t oo great

Devise a Risk Management Plan A business can follow a numberof methods to manage its legal r isk, including risk avoidance, risk red uction, r isk transference, and risk retention. Choosing one or more approaches involves evaluating the risk matched with the organization's resources, financial, or otherwise- in other words, do ing a cost- benefit analysis.

Step Three: Devise a Risk Management Plan

../Avoid or elimmate the r isk.

../Red uce the r isk .

../Transfer the risk.

../Retain the risk.

Risk Avoidance

Eliminating r isk, or risk a voidance, is appropriate when the r isk is simply too great or when the undesirable result of the activity, product, or service is greater than the ad vantages. In the Northland context, Marie has determ ined that the legal r isks associated with expanding to a foreign jurisdiction like Peru are too high relative to the benefi ts. As indicated above, although there is potential for profi ts, there is considerable r isk that the operations will result in liability.

Another example of risk avoidance relates to Northland's Canadian operations. 1he company can avoid potential liability under legislation that protects endan- gered species, such as the boreal woodland caribou, by operating in areas away from where these animals herd and graze. Similarly, they can avoid Indigenous people's hunting and burial grounds by not locating operations near them.

NEL 73

Businesses often eliminate prod ucts and product lines, discontinue progra ms such as tours and job-shad offing, and stop activities as a way to avoid the asscr ciated risk.

Risk Reduction A business can und ertake risk reduction in relation to most risks that cannot be avoided. 1his strategy involves introd ucing policies, practices, and procedures to reduce the probability of an event happening. For example, Northland cannot d o businessffithout extending credit to customers. The provision of credit inevitably involves the risk that some customers will not pay their accounts. To 1u.inimi ze that risk, Northland should have procedures in place (such as regular credit checks and taking collateral) for evaluating and periodically reassessing the creditworthi- ness of customers.

As another example, Nor thland can red uce potential liability under envi- ronmental legislation by improving its environmental perfo rmance. It can improve air q uality by installing and upgrading equipment to voluntarily red uce em issions. It can construct faci lities to treat all 1u.ine water to reduce the risk o f contamination. It can also monitor and ma nage the tailings pon d to ensure that waterfowl and other birds that nest in the grasses on the shores are protected .

To address the health and safety of employees, Northland could introd uce a system that includes the reporting and auditing of workplace accidents as well as encouraging a culture of safety. A tracking system provides the information needed to determine the mot cause of accidents and the appropriate corrective measures. The company may also provid e personal protection equipment such as custom-moulded hearing d evices, and provid e education on hygiene practices and their importance in reducing exposure to harmfu l chemicals.

To minimize the ch ance that members of the public will injure themselves by falling, Northland can pay extra attention to keeping its grounds clea r of possible hazards. It can also li1u.it access to its property through fencing and other barriers.

Risk Transference This approach complements risk red uction by transferring the remaining r isk to another by contract. Insurance, which is an integral part of most r isk management plans, is d iscussed in d etail in Chapter 28. Insurance is likely the best response to many of the risks faced by Northland. Injuries to members of the public will be covered by a commercial general liability policy. Motor vehicles owned by North- land will be covered by vehicle insurance. Damage to plant and equipment through events such as fires ffill be covered by property insurance. Northland may also consider en vironmental insurance policies to cover clean-up costs and impairment o f the environment and cyber insurance to cover the costs associated w ith tech- nology failures. However, insurance can be costly, some risks (sucl1 as potential environmental liability) are diffi cult to insure against, and insurance provid es cov- erage only to the extent andin the an1ount actually purchased. As well, insurance d oes not prevent loss or the adverse publicity resulting from a high-profile case, even if the insurance company honours the policy.

Although r isk transference is usually thought of in terms o f insurance, it can also involve protection such as limited or excluded responsibility that can be pro- vid ed by contract (see Chapter 7).

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Risk reduction

Implementing practices 1n a bus1n ess to lower rhe probability of loss and its sevemy

Risk transference

Sl1ifting he ris~ to someone else tl1rougl1 a contract

Risk retention

Absorbing the loss 11 a legal risk materializes

Northland prod uces a prod uct and d elivers it by truck to the railway. Many thlngs can go wrong that may cause loss to the customer, resulting in a claim against the business. The product may be d elivered late, it may fail to meet the cus- tomer's expectations, or it may be d efective. One common approach to such risks is to negotiate for terms in the contract that limit the liability of the business for such claims. For example, Northland might negotiate for a clause in its customer contracts providing that, in the event of a defect , Nor thland is only liable to pay the customer a specifie d portion of the purchase price in d amages.

The challenge in such a contract is to create terms and conditions that achieve the business objective of risk transference that are acceptable to customers, dearly written, and legally enforceable if a dispute arises.

Risk Retention Keeping or absorbing all or part o f tl1e r isk witlun tl1e organization is known as risk retention. This approach is appropriate when the cost o f avoiding or trans- ferring a risk is greater than the impact on the business if the risk materializes. In effect, the organization pays losses out of its own resources. The organization can do this in several ways:

Self-insurance. The organization can establish a fund ed reserve.

Insurance policy deductibles. The organization can retain risks to a certain dollar amount.

Noninsurance . The organization can charge losses as an expense item.

Risk retention is generally most effective for small risks that do not pose signif- icant financial loss. It is also utilized when there have been significant increases in insurance prenuums or when insurance companies have refused to cover certain risks such as terrorism or sexual abuse in volunteer organizations. There are also some risks that cannot be avoided or red uced to zero; these risks must be absorbed by the business. For example, Northland cannot avoid regulations relating to its operations. If occupational health and safety or waste disposal rules change, Nortllland may fa ce significant expense, despite its best efforts to anticipate and ad apt to ilie changes.

Another example concerns equipment; despite training and instruction, a cci- dents involving Northland'svehides occur. Rather than fully insuring the vellides, Northland may insure subject to a ded uctible of $2 000 per vehicle. This means iliat Nortllland has accepted the first $2000 in risk of damage to vehicles and has transferred the remainder to the insurance company. TI1e same concept applies to injuries on its property. Claims to the insurance company for injuries suffered by members of the public are subject to a ded uctible, meaning Northland is absorbing part of the r isk.

Any plan devised in Step Three must be reasonable in terms of its cost and com- plexity; no plan can eliminate all risk. The goal is to be aware of risks and to make conscious d ecisions about dealing with them. To assist in this process, managers may turn to legal professionals for balanced advice, ei ther on a lawyer- client basis or through in -house counsel. However, the lawyer must know the business and the industry in which it fu nctions in order to provide useful input.

NEL 75

NEL

ETHICAL CONSIDERATIONS

VOLKSWAGEN'S DIESEL EMISSIONS SCANDAL

In 2008, Volkswagen (VW) launched its "Clean Diesel" advertisement campaign seeking to con- vince environmentally conscious consumers of the merits of diesel vehicles as an alternative to hybrid and electric vehicles. For the next seven years, VW used a combination of Super Bowl commercials, social media messages, and print advertising costing tens of millions of dollars to promote its Jettas, Passats, Golfs, Auclis, and other diesel vehicles. It even engaged in strate- gic placement advertising by arranging to have Gwyneth Paltrow arrive at the Hollywood pre- miere of Iron Man 3 in a diesel Audi. One series of ads, titled "Diesel Old Wives' Tales", purported to dismiss common myths about diesel engines. They featured a young man driving around old er women while they all argued about the merits o f diesel-fuelled engines.

The ad campaign- which claimed that die- sel cars were "dean, had better mileage than gasoline-powered cars and were fun to drive"- was very successful. VW sold more than 500 000 vehicles in North America over the seven-year period even though consumers generally paid a premium for the vehicles because diesel engines cost more than the standard gasoline engine. VW appeared to be well on its way to achieving its goal of increasing the sale of environmentally friendly diesel vehicles in North America, except the reality was that VW's Jettas, Passats, Golfs, and other diesel vehicles were not environmen- tally friendly. They just appeared to be environ- mentally friendly.

This appearance was created by the fraudulent manipulation of pollution control software. Emis- sion standards required diesel vehicles to have pollution control software installed to trigger the deaning of the diesel exhaust. VW's software was designed to enable cheating on emissions tests. The software was designed to sense when the car was being tested and to activate equipment that reduced emissions of nitrogen oxide (a pollut- ant that can cause emphysema, bronchitis, and other respiratory djseases). Th e car passed the

emissions test with flying colours! Under nor- mal driving conditions, the equipment switched out of test mode. The result was improved fuel efficiency (more than 40 miles to the gallon) and performance, and emissions of nitrogen oxide almost 40 times the legal limit.

The discovery of the fraudulent software was made in 2014. Researchers, curious as to why diesel technologies seemed to be cleaner in the United States than in Europe, stumbled across the software and tipped off the U.S. Envi- ronmental Protection Agency, which began an investigation.

The consequences of the device being discovered have been far reaching and catastrophic. VW ad mitted that about 11 million cars worldwide were equipped with the software. [n North America, nearly 600 000 vehicles were affected. [t is estimated that the scandal will cost more than US$2 0 billion in tl1e United States alone. This is because VW has been ordered to pay US$4.3 billion in criminal and civil penalties, has agreed to a US$15 billion settlement to compensate affected ownersand dealers and to fund emissions-related programs, and other claims are outstanding. Also, a former Volkswagen manager in Michigan was sentenced to seven years in prison and a fine of $400000 and a company engineer rece.ived a 40-month term for their roles in the scheme. ln Canada, the settlement with some consumers to fund a buy-back program will cost the equivalent of Cdn$ 2.1 billion. Other claims have not yet been settled. furthermore, these consequences do not account for potential penalties and settlements in other countries, loss in VW share value and market share, and the damage to VW's once sterling reputation.

Martin Winterkorn, the company's chief executive officer, resigned and accepted respon- sibility for the scandal but denied any personal wrongd oing. At the time of his resignation he stated , "I am shocked by the events of the past few days.Above all, [am stunned that misconduct on such a scale was possible in the Volkswagen Group. The process o f clar ification and trans- parency must continue. Th is is the only way

to w in back trust. [ am convinced that the Volkswagen Group and its team will overcome thi s grave crisis."7

Critical Analysis: What factors d o you think led to the decision to cheat? How can Volkswagen wjn back consumers' trust?

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Marr.in Winterlrorn, former CEO ofVolkswagen

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Implement the Plan Once a business has d evised a risk management plan, it must put the plan into action and assess its effectiveness on an ongoing basis.

Step Four: Implement the Plan

.,/Carry out the plan .

.,/Monitor and revise the plan.

Responsibility for implementing the risk management plan must be dearly assigned. Much of this allocation may be obvious. For example, if the analysis has suggested a quality-control problem, the plan must identify those responsible for both monitoring quality and delivering the service or producing t11e product. [twill not be enough, however, to simply advise the appropriate personnel of the problem. TI1e employees must be educated as to why the problem requires correction and what techniques should be adopted to ensure that the problem is corrected. In addition, guidelines for carrying out the procedures should be collected ina manual for immediate reference. The document should includ e, as appropriate, a schedule of inspections of facilities, a formal system of ensuring that those inspections take place as scheduled, an accident-reporting system, and information on any insurance coverage in place. Such a manual can be a two-edged sword, however. If Northland is sued for injury or loss and it is shown that Northland neglected to follow its own policy on the matter, the claimant may have grounds for establishing liability.

The plan must be continually monitored and revised as necessary. Management should have a regular review process in place to determine whether the plan is working, and, if not, why. The frequency and severity of events anticipated in the plan will provide feedback on the plan's effectiveness.

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77 NEL

FIGURE 3.2 Summary of the Legal Risk Management Model

Step One: Identify the legal risks. ~ Assess the organizdtion's functional areas. ~ Review the organization's business decisions. ~ Examine the organization's business relationships. ~ Analyze the organization's operations and transactions.

Step Two: Evaluate the risks. ~ Assess the probability ofloss. ~ Assess the severity of loss. Step Three: Devise a risk management plan. ~ Avoid or eliminate the risk. ~ Reduce the risk. ~ Tran sf er the risk. ~ Retain the risk.

Step Four: Implement the plan. ~ Carry out the plan. ~ ~lonitor and revise- the plan.

The nature of the business cond ucted by a firm may change, requiring major reconsideration of the plan. For example, a meat packing company m ight d ecide on a major strategjc shift from fresh meat and poultry prod ucts to a broader range of processed and packaged meat products. The latter involve greater value added and higher profit margjns. 1h e company would need to determine that its previ- ously sound r isk management approach is appropriate for the changed business or ensure that it was ad equately ad apted and altered. Risks may frequently change and practices will need to be ad apted, but a routine review process can help to ensure that the requisite adjustments are made.

The legal risk management model is summarized in Fi gure 3.2. A risk management plan need not be a lengthy or complicated document. The

key is for managers like Marie to identify and evaluate legal risks and then rely on a cost- benefit analysis to devise an action plan in response. For example, the cost of installing fencing around Northland's m ine site may outweigh the possible cost of members of the public falling and injuring themselves there. 1h e cost of prevention is a certainty, while risks and the resulting losses may never material- ize. Proper signage tl1roughout tl1e property may be a legally effective response, ind uding "No Trespassing" signs and signs warning o f d angers such as open pits. Figure 3.3 outlines a summary of a possible plan for Northland that Marie might d evelop with the management team by applying the r isk management mod el. It addresses the risks identified in Figure 3.1.

To create this kind of plan, management needs to analyze business activities, d evelop practices to minimize r isks, and know when to seek assistance outside tile business, whether by securing insurance or retaining professionals for ad vice. All risks are generally d ealt witll through some combination of risk avoidance, reduction, transference, and retention.

Interacting with the Legal Environment Reacting When Prevention Fails Prevention ofloss is the primary goal of a r isk management plan, but some r isks cannot be avoided. Disputes inevitably arise; products and services sometimes fail; the business climate, the attitude of government toward business, or tile

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FIGURE 3.3 Summary of Northland's Risk Management Plan

Environmental risks: Reduce: introduce practices to minimize impact of operations on the environment; inst.all a new scrubber (a piece of equipment that captures and removes large particles like heavy metals from exhaust) ro prevent pollutants from entering the atmosphere; upgrade waste water filtration system for tailings pond; ensure the day liner in tailings pond remains intact. Avoid: decide not to expand operations into environmentally sensitive areas; decide not tooperat.e in a foreign country. Transfer: secure commercial general liability insurance that includes coverage for damage to third parties; purchase an all risks8

property insurance policy with environmental coverage for mine site. Retain: agree toa deducti ble on all insurance policies based on cost of insurance, frequency of events, and ability co absorb losses. Human resources risks: Reduce: work toward establishing a culture of safety; establish a workplace health and safety management system including a safety committee; establish a reporting and audit system for workplace injuries; ensure that the mine safe room is equipped with first aid materials and warer; review human resource policie-s relating to termination and harassment. Tran sfer. ensure registration under provincial workers' compensation program; mainr.ain the company in good standing under the program. Operational risks: Reduce: train operators on equipment~ introduce enhanced product control measures; permit visitors on property only under supervision; install fendngand other barriers to prevent access to dangerous areas. Trans fer. purchase commercialgene.ral liability insurance for injuries to third parties, all risks property insurance for equipment and machinery breakdown and loss of inventory, business interruption insurance for losses from a temporary shutdown, and auto insurance to cover injuries and damage to vehkles. Retain: agree to a deductible on all insurance policies based on cost of insurance, frequency of events, and ability co absorb losses. Regulatory risks: RJ!duce: monitor political environment for potential changes to regulations; lobby and provide input to potential changes. Retain: ensure that Northland adheres to Canadian regulatory, legislative, and compliance regimes. Avoid: decide against operating in a foreign country. Financial risks: Reduce: institute quality control measures to ensure full and complete performance of contracts; ensure compliance with accounting and reporting requirements through internal and exte.mal audit functions; conduct credit checks of rustome.rs prior to issuing credit. Tnmsfe r. negotiate for contractual provisions in contracts with customers reducing potential liability. Technological risks: Reduce: hire an information technology firm specializing in security to install firewalls (software that protects against unautho- rized access to computers and networks); store data off· site on a daily basis. Transfer. purcha.i;e all risks property insurance to cover dan)age to computers and cost of data recovery.

marketplace can change. The value of a risk management plan is that when a risk d oes materialize, the business alread y has in place an effective way o f addressing it and can more readily assess when legal ad vice may be necessary.

In the case of Northland, despite measures to protect workers, an employee may be injured on the job site. In such a situation, the d etails of the r isk management plan should include guid elines as to how the employee is to be treated; what kind of investigation should take place; what kind of record is to be made of the incident; what follow -up is to be done to ensure that this type of incid ent does not reoccur; and the process for accessing income from the workers' compensation plan.

In other situations, however, an event may occur that is not contemplated by the r isk management plan, or the consequences of an event are much greater than anticipated. For example, despite its best efforts, one of Northland 's m ines could cave in and result in the loss of life. In thls situation, the company would be in crisis management.

B Al rislcS ,f\Suran~ isa type_ o f !f\Su1anc<.'! cover<YJe w!"'..ere any ri$k 001 spe<: i~attyexduded i s covered. For examp4e, r a odicydces 001 e:x.cl.ioe fl.cod cov<nage. t hen t he p1o~tty 1sccrvered ,n 1he evenl ot a IJ.ood.

79 NEL

NEL

J HE LAW

THE MANAGEMENT OF A CRISIS

A crisis can come in many forms. Sometimes it is a minor or expected event that spirals out of con- trol, or sometimes it is an unforeseen and unex- pected event that an organization is ill-prepared to handle. One of the more famous crises affecting a company occurred in 1982 when seven people died after taking extra-strength Tylenol that was laced with cyanide. The manufacturer of Tylenol, Johnson & Johnson, responded quickly by pull- ing 31 million bottles of Tylenol off the shelves and stopping all production and advertising. The culprit was never found. Other more recent examples of the management of a crisis are British Petroleum dealing with the spilling of roughly 4.9 million barrels of oil from a blown-out well into the Gulf of Mexico, Maple Leaf Foods responding to a widespread outbreak of listeriosis linked to the company's plant in Toronto, which resulted in 22 deaths, and Toyota Motor Corp. recalling 8.8 million cars because of unintended accelera- tion problems. The recall was precipitated by a sin- gle horrific car crash in California. The improper installation of all-weather floor mats from a sport utility vehicle into a loaner Lexus sedan by a dealer led to the vehicle's accelerator getting stuck. An off-duty highway patrol officer and three members of his family were killed in the ensuing crash.

Although these events are very different, all of the companies involved were able to effectively manage the crisis and restore the.ir reputations. They were able to do so because of the.ir reaction to the event and the.ir communication strategy. The latter is particularly important for public compa· nies in that statements made by company repre- sentatives have an impact on the market for the.ir shares. The lessons from these events include:

react quickly and in a positive fashion: Toyota, Maple Leaf Foods, and Johnson & Johnson immediately recalled products .

use a prominent spokesperson to tell the company's side of the story and, as appro- priate, publicly apologize for the tragic event:• both Toyota's and Maple Leaf

Foods' presidents publicly apologized for the situation.

explain how the problem occurred and what the company is doing to fix it Johnson & Johnson introduced tamper-resistant bot- tles; Maple Leaf Foods improved its dean- ing processes and inspection systems.

use appropriate messages in different media: the companies expressed concern for the victims and did not argue whether the companies were responsible; they used both traditional media such as television, radio, and newspaper advertisements, and social media.

be open and consistent in acknowledging the problem and the company's role in the problem: the companies did not remain quiet or complacent, nor did they offer vague, content-free, public statements.

Akio To)IOdao{ToyocaMocors Carp.: 1 am dttply sany."

C'rn.icG rt.di,.._.. How can the lessons learned from a crisis be incorporated into an organiza- tion's risk management plan?

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lawyer

A person who 1 s legally qualified rn practise law

law firm A partnership orrned by lalo'JYers

Managing Legal Services The development of a r isk management plan, the operationalization of the plan, and crisis management can involve a ccessing legal services. Lawyers may be part of the risk management team or consulted by the team at various stages of the pro- cess. They can help in identifying and assessing legal r isks, suggesting options for the risk management plan, and managing a crisis (see Business Application of the Law: 1h e Role of Lawyers in Legal Risk Management, on page 73). Legal services may be provided in-house, as when the organization employs a lawyer or lawyers on a full-ti me basis, or they can be provided by outsid e legal counsel. The following sections provid e an account of the issues involved in hiring outside legal counsel.

When to Seek Legal Advice Knowing when to seek legal advice is central to successful management of legal services. Consulting lawyers too soon and too often is expensive and cu mbersome. Consulting them infrequently to save money may be more expensive in the long run. Seeking advice at the appropriate time is p referable to waiting for problems to develop.

In Northland 's case, legal advice is necessary to assess tl1e legal risks associated with operating in a foreign jurisdiction. Such advice may also be necessary to understand regulator y matters. It may also be more efficient fo r a lawyer to assess environmental requirements, waste rusposal guid elines, occupational health and safety rules, and the like than for a business to explore such issues on its own. Beyond this, even if a ruspute is unlikely to go to court or a crisis is unlikely to materialize, legal advice is important in negotiations and exploring options.

It is important to clarify within the organization who should d ecide when a matter requires legal advice. If there is an internal law d epartment, it is likely that those in that d epartment will make the d ecision, otherwise there must be clear guidelines as to who has the authority to seek outside counsel and when.

How to Choose a Lawyer A lawyer provides legal services, and the business should manage this service in the same way as any other service. The first step is to find the lawyer or law firm appropriate to the business's needs in ter ms of expertise, approach to dealing with clients, and cost.

There are many sources available for identifying lawyers such as fri end s, rela- tives, and business associates. Local and provincial bar associations m aintain lists of members by geographical area and preferred type of practice. The Canadian Law List10 is a publication available in libraries and online that includ es basic biograph- ical information about most lawyers in private practice.

Some advice follows for choosing from among a group of lawyers or firms:

consult with business associates with similar legal problems and need s about the service they have received from any of the prospects.

consider meeting with each lawyer or with a representative o f each firm to dis rnss the need s of the business fo r legal advice in general or in relation to a particular legal problem. Lawyers have a strict professional d uty to maintain the confidentiality o f clien t affairs.

NEL 81

discuss alternatjve fee structures with the prospects. Lawyers are increasingly willing to provid e a fee structure that suits the client, such as billing at an hourly rate, setting a stand ard fee for routine work, working on an annual retainer, or accepting a percentage fee. The client should expect itemized billing on a sched ule that suits the business's financial cycle.

evaluate the prospects according to a predetermined list of criteria such as expertise, availability, willingness to understand the business, and willingness to commun icate .

The object of the exercise is to d evelop a productive, long-term relationship between the business and the legal advisor. For this reason, there is also a need to continually monitor and evaluate the relationship, primarily to ensure that the business is recejving the ad vice and assistance it needs at a cost it can afford.

BUSINESS APPLICATION

THE ROLE OF LAWYERS IN LEGAL RISK MANAGEMENT

Legal r isk management is the identification and management of risks that have or could have legal consequences for an organization. Lawyers can play a huge role in this fun ction by offering:

an understanding of the organization derived from providing advice on various aspects of the organization's functions.

an expertise in law and legal analysis.

an ind ependence that comes from mem- bership in a professional body. u

The specific role a lawyer plays d epends, to a large extent, on whether the lawyer is outside or in-house legal counsel. Tradjtionally, outsid e counsel's role is more limited as she is often only called when an event has occurred . In this situa- tion, the outside counsel's role is reactive as she is providing ad vice on a known event or transac- tion. The narrow, reactive role for outside coun- sel, however, is changing and increasingly outside counsel is moving into a preventative role in managing legal risk. For example, Simon A. Fish, general counsel o f BMO Financial Group, states that managing risk is no longer an internal exer- cise; BMO is now bringing in outside counsel as

part of the process. Acco rding to Fish: "In repre- senting BMO, the firms are required to be mind - fu l of the legal, regulatory, and reputational risks involved in any transaction or matter, and involve the senior members of the legal group in the assessment and management of such risks." 12

The role of in-house legal counsel in legal risk management has always been broad because an awareness of risks has always been central to the job. But this role too is changing as in-house legal counsel is increasingly seen as an integral part of the management team. Rather than simply being responsible for keeping an eye on legal matters and supervising the work of outside counsel, in-house counsel is often taking part in corporate strategic d e cision making. Sanjeeve Dhawan, senior counsel at Hyd ro One, states that • ... companies are discovering that in-house counsel can transcend thej r traditional legal roles. "13 By being part of the team that makes the organiza- tion's strategic de cisions, in-house counsel is in an excellent position to ensure that legal r isks are recognized and managed as part of the organiza- tion's overall strategy.

CriticalA11llI,llis: What skills and techniques do lawyers need to contribute effectively to the risk management process?

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12 Jeremy Ha1nsvA">!lh, "A NoveC Risk.·Mtinagem~nl Pian· Canadian Ur .. 1yer M;>g11Zlne tOctooar 2012), Orltine < hll p //wv1w .canadiant.w.ye r ~.com! A •OOVl'.':t:·r IS k. ·ma!\age rtH'.!rlL ·pt an. hlrri >

13 Chrsline Ooboy, "A Ca11e of Rt:sk' The t!inattt!~I Po.u 128 May 20.UJ FP1

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BUSINESS LAW IN PRACTICE REVISITED

1. What is a legal risk management plan and how is it developed?

A legal risk management plan is a plan that identifies the major legal risks of an orgaruzation; evaluates the probability of the risk materializing and the impact of the risks; develops strategies for managing the risks; and implements and moru- tors the strategies. The plan is developed by the appropriate executive or manager in consultation with internal and external personnel familiar with the legal risks of the organization.

2. What are Northland's major legal risks from its Canadian operations? How should Northland manage these risks?

Northland's major legal risks from its Canadian operations are identified in Figure 3.1 on page 61. Once the major legal risks are identified, Marie and her team need to evaluate them by assessing the probability and the severity of each potential loss. They must then d evelop a risk management plan by deciding how to address each risk- by avoiding, reducing, transferring, retain- ing, or through some combination of those options. Figure 3. 3 on page 70 presents the outline of a plan that Marie might produce. Risk management is a continuous process, so Marie or others must monitor the plan to measure its effectiveness in dealing with risks and be prepared to recommend any nec- essary adjustments.

3. What are Northland's major legal risks should it decide to operate in a foreign jurisdiction such as Peru? How should it manage these risks?

The major legal risks to going global are identified in Figure 3.1 and are also dis- cussed in the International Perspective box on page 63. Risks include the possi- bility that Northland will commit environmental transgressions in Peru. Should this risk ensue, Northland will face adverse publicity, prosecution under environ- mental legislation, and civil suits by environmental activists and local residents affected by the breach. Also, there is a possibility that the Peruvian government will prohibitively tighten, legal rules, thereby affecting the viability of Northland's operation. As noted in the risk management plan in Figure 3.3, Marie recom- mended that Northland not expand operations to outside of Canada because the current risks are simply too great.

CHAPTER SUMMARY

A business can manage its legal environment by assessing that environment, developing a risk management plan, reacting to changes in the legal environment, and managing its legal services.

It is crucial for a business to actively manage the legal risks arising from its activities in order to avoid and minimize legal claims and expenses. Legal risk management involves a four- step process: identifying legal risks, assessing those risks, d evising a risk management plan, and implementing the plan. Risks can be identified through assessment of the functional areas of the business, the decisions made within the organization, the internal and external relationships maintained by the business, and its operations and transactions. However, it is important to also identify risks that might cross categories and maintain a flexible

NEL 83

approach. The risks are then assessed in terms of how likely they are to occur and how severe the losses might be. There must be an action plan for d ealingwjth each r isk. Should the risk be avoided? If not, how can it be reduced or transferred to someone else? To what extent must the risk be retained? These strategies are not usually mutually exclusive, and the management of most risks wjlJ involve some combination o f them.

Management must assemble a knowledgeable team of employees and experts in order to make the plan work. A business must also monitor and revise its plan to ensure that it is current and effective. No r isk management plan can anticipate and deal wjth all possible d evelopments. A business must, therefore, be prepared to react in a coordinated and timely fashion to a crisis.

A business also needs to actively manage its legal services, whether it is employ· ing outside lawyers or in-house counsel. This management involves identifying the legal services that are need ed, carefully searching out an appropriate lawyer or law firm, and maintaining a stable relationship with legal advisors.

CHAPTER STUDY

Key Terms and Concepts e nterprise risk management (p. 57)

l aw firm (p. 72)

l awyer (p. 72)

legal risk (p. 57 )

risk avoidance (p. 64)

risk reduction (p. 65)

risk retention (p. 66)

risk transference (p. 65)

Questions for Review 1 . What is meant by the preventive and reactive

approaches to legal issues in a business?

2 . What is the primary goal of a legal risk manage· mentplan?

3. How d oes a legal risk management plan relate to enterprise risk management?

4. What is the value of a legal r isk management plan?

S. What steps are involved in the legal r isk man- agement model?

6. How can a business identify its legal risks?

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7. What legal risks are posed by technology?

8. How is breach of privacy a legal r isk? What are the costs associated wjth a privacy breach?

9. How can a business evaluate its legal r isks? What is the purpose of evaluating legal risks?

10. What is the best strategy for managing legal r isks?

11. What is an example of risk retention? When is this strategy most appropriate?

12. What is an example of risk avoidance? When is this strategy most appropriate?

13. What proced ures are necessary to implement a r isk management plan?

14. How can a business keep its risk management plan current and relevant?

15. What are some of the legal risks in d oing busi· ness internationally? How can these risks be managed?

16. How does the management of a legal crisis dif- fer from managing legal risks?

17. When should a business seek legal advice?

18. What is the role of lawyers in legal risk management?

Questions for Critical Thinking 1. The International Perspective box on page 63

illustrates some of the risks of doing business abroad. How should the legal risk management model be adapted for conducting international business? Which of the four steps of the model are the most important?

2. Risk reduction is a strategy for managing risk. When is it the most appropriate strategy for managing a risk? What are some examples of risk reduction?

3. A major legal risk for business is a cybersecurity breach (see the Technology and the Law bax on page 59) that results in the disclosure of custom- ers' and/or employees' pezsonal information. The loss in sensitive health, personal identification, financial, and other information can result in great financial and reputational damage to the business. How can business use risk avoidance, risk reduc- tion, risk transference, and risk retention in man- aging the risk of a cybersecurity breach?

4. A legal risk management plan is a tool for busi- ness to manage its interactions with the law and legal issues. Its purpose is to minimize the impact of legal risks on the business by identi- fying and managing threats that could generate negative legal consequences such as fines, penal- ties, compliance orders, licence suspensions, and liability for the payment of money. Although it is very advantageous for a business to have a risk management plan, not every business does. What a re the difficulties in developing a legal risk management plan? Are there any disadvan- tages to having a legal risk management plan?

5. A common method of controlling the cost of legal services is to refrain from consulting a lawyer until a serious legal problem absolutely requires it. Another approach is to hire or retain lawyers on an ongoing basis to provide advice as business decisions are made. Which approach is the most expensive? What should a business consider in making that choice?

6. An article in The Lawyers Weekly, a leading legal publication, is entitled "Corporate Counsel Key to Risk Management."" Do you agree with that

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statement? How can lawyers contribute to risk management? Do you see any problems with outside or in-house lawyer involvement in risk management?

Situations for Discussion 1. Ransomware is malware (malicious soft-

ware) that locks a user's computer or files and demands a ransom to lift the restriction. Typi- cally the ransom demand is in bitcoin, a virtu- ally untraceable digital currency. Ransomware often gains access to a computer system when users click on links or attachments usually disguised as authentic communications. Once clicked or accessed, the ransomware encrypts files and blocks access until the ransom is paid.

While ransomware attacks initially tar- geted in dividuals for relatively small sums of money, hackers are increasingly targeting businesses (particularly small and medium - sized businesses because they do not have the sophisticated cybersecurity that large busi- nesses usually have). An anonymous survey of 125 Canadian organizations reported that 72% had been subject to a cyberattack and 353 of the attacks were identified as ran- somware attacks.15 How is a ransomware attack a legal risk for business? Which of the four risk management strategies are appropri - ate for dealing with the risk of a ransom ware attack? Should a business pay the ransom demand? Why or why not?

2. Northdiffe Resources Ltd of Vancouver and Todd Minerals Ltd of New Zealand have entered into a partnership to build in New Brunswick one of the worlcl's largest mines for tungsten and molybdenum (minerals used in the manufacture of steel for a broad range of products such as X-ray tubes and smartphone screens). The proposed location is near three small communities on 12.5 square kilometres of Crown land in traditional Maliseet First Nations terrjtory and within the Nashwaak River watershed, wlllch supports several fish species includingAtlantic salmon and brook trout. The

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85 NEL

$579 million project16 will consist of an open pit, a minerals processing facility, water treatment plant, tailings pond, and ancillary buildings (offices, laboratory, and warehouse). The product will be shipped to market by rail and road. 17 What are the legal risks associated with this project?

3. A customer of Fido, a subsidiary of Rogers Media, gave his cellphone to his 11-year-old son during a family holiday in Mexico. The father put the phone on airplane mode so his son would not incur roaming charges but apparently the son turned off the airplane mode and downloaded videos and movies. He had downloaded 758 megabytes of data(about12 hours ofYouTubestreammg) and incurred $22 000 in data charges when Fido texted the father indicating that the phone was being shut down for security reasons and excessively high data charges. 1he father had not purchased an international roaming package a~ he had not planned to use any data while on vacation.

The media picked up on the story and it led to a debatein Vancouver and across Canada about international roaming fees and whether Canadians are charged too much by their cell phone provid ers. The story started to spin out of control and Rogers was accused of price gouging. Rogers offered to cut the charges to $2200 then $500 and settled for $200. LS Why would a com- pany that may have been within its rights to enforce its legal contract with the customer set- tle tl1e matter for very little money? What is the risk for Rogers in not settling this matter?

4. Vancouver-based retailer Lululemon experienced a problem with its $100 black luon yoga pants. They were too sheer, they pilled ea~ily. and customers were returning them. Chip Wilson, founder of the company, in an interview with Bloomberg TV stated, "Quite frankly, some women's bodies just actually don't work. It's really about the rubbing tlrrough the thighs, how much pressure there is

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over a period of time: Numerous media ou tie ts picked up the story and a firestorm of negative comments on social media ensued. Four days later, Wilson apologized on Lululemon's Facebook page, stating, "rm sad for the repercussions of my actions. rm sad for the people of Lululemon who I care so much about, who have really had to face the brunt of my actions .. . rm sorry to have put you all through this.'' "' What mistakes did Lulu- lemon make in handling this situation? What les- sons can be learned?

5. Drake International, a Canadian job placement firm, has been a victim of a hacking scheme. The hackers stole a database containing the names, email addresses, phone numbers, and passwords of over 300000 clients in Canada, Australia, the United Kingdom, and New Zealand. They d emanded $50 000 to keep the stolen informa- tion private and not publish it on the Internet. The database that was compromised was an old database built nnder outdated security practices that includ ed unencrypted passwords.20 What is the risk to Drake of tlrreats from a group of hack- ers after a security breach? How could Drake have identified and addressed this risk in advance? How should Drake respond to the hackers?

6. Siena Foods Ltd, located in Toronto, Ontario, is a manufacturer and distributor of prepared meat products. In 2010, the Canadian Food Inspection Agency (CFIA) and Siena Food s issued a healtl1 hazard alert warning tl1e public not to conslllUe certain Siena brand ham as it may be contaminated with Listeria monocyto- genes.11 Food contamination is a major risk in the food processing business with potentially disastrous consequences for the company and its customers. How should Siena manage this risk? What preventive and reactive action plans should be in place?To what extent can Siena rely on the CFIA to manage the risk?

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7. Anna, a customer in a Wend y's restaurant, claimed that she bit into a piece of a human finger while eating a bowl of duli. Anna filed a claim for damages. The event attracted wide media attention. Anna gave several interviews in whld1 she graphlcally described the trauma that she experienced . The volume of business at all Wendy's outlets in the region plummeted . After several weeks, Wendy's accused the customer of deliberately placing fue finger fragment in the chili . When fue finger was exanlined, it proved to be uncooked . Anna and her husband were eventually charged and convicted of several crinlinal offences. The finger came from a co-worker of Anna's husband, who had lost it in a workplace accident. Apparently Anna and her husband have a history of filing false injury claims.22

Apply ilie legal r isk management model to tills

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situation. What plan should businesses such as Wendy's have in place to deal with fui s risk?

8. JetBlue is an American low-fare airline. In 2007, its operations collapsed after an ice storm rut ilie East Coast of ilie United States. The storm led to ilie cancellation of over 1000 Bights in five days. Ofuer airlines were affected by the storm but were able to rebound wit!Un a day or two. Jet- Blue's problems dragged on for days. The main problem wasJetBlue's communication system. A large portion of its pilots and Bight attendants were not where they were needed and JetBlue lacked ilie means to locate them and direct iliem to where they were needed.13 How could a risk management plan have addressed JetBlue's problems? How should JetBlue's crisis have been handled? Are there opportunities for an organi- zation in responding to a crisis?

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NEL 87

BUSINESS LAW IN PRACTICE

Marie Gagnon, referred to throughout Chapter 3, is the director of insurance and security of Northland Mining Inc., a nickel mining company located in northern Manitoba . She has just returned from a well-deserved holiday in Mexico. For several weeks prior to her holiday, Marie was involved in revising Northland's legal risk man- agement plan using the approach outlined in Chapter 3. The basic elements of the plan are presented in Figure 3.3 on page 70. During Marie's absence, several events occurred that related to Northland's plan. Marie is reviewing the following incident reports:

The delinquent customer. A customer fai led to pay its account within the usual 30 days. Northland investigated and discovered that the customer was in serious financial difficulty.

The hacking attempt. An environmental activist group opposed to m ining attempted to hack into Northland's computer system. Although there was no loss of data, there was some minor damage to Northland's network and it had to be shut down for several hours.

The pollution incident. A small amount of ash-laden dust from Northland's processing mill was blown onto a neighbouring farmer's land, causing some damage to his crops and buildings. The farm er is irate and is threatening to bring legal action. He has told Northland that he intends to contact the media and environmental protection groups to let them know about what has happened to him.

The machine breakdown. The conveyor belt on the continuous mining machine that cuts ore from the mine walls caught fire. It will take at least three weeks for it to be fix ed. Although Northland has insurance covering its losses, the insurance company is denying coverage.

As Marie was about to leave for the day, she received the following email from the VP of Operations, "We are applying for a series of permits and approvals to potentially operate a mine on Crown land where Indigenous people carry on hunting, fishing, and gathering activities. What are the risks with such an operation and how can we best mitigate tl1ese risks?"

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OBJECTIVES After studying this chapter. you should have an under- standing of

• how business activities m ay lead to legal disputes

• the options tor resolving a leg al dispute

• alternative dispute resolution methods

• the litigation process

1. How well d oes Northland's risk management plan d eal Mth the delinquent customer, the hacking attempt, the pollution incident, and the madune breakd own, and how could its performance have improved?

2. How well does Northland deploy the various methods of dispute resolution in relation to the legal risks that materialized?

3. What risks might be associated wjth operating a mine on Crown land where Indigenous people carry on traditional activities?

Introduction As emphasized in Chapter 3, business organizations require a risk manage- ment plan to minimize the potentially adverse impact of the legal environ- ment through prevention and a planned reaction to adverse events when they arise. Legal problems cannot always be avoided even when sound manage- ment practices are in place. This chapter focu ses on the reactive aspect of risk management.

It is not in the best interest of a business to avoid all legal conflict at all costs. For example, if Northland is not being p rud on a large account, it must risk a legal dispute or face the unpalatable alternative of a substantial writeoff. It could spell the end of Northland if management were simply to concede defeat any time a legal problem seemed to be developing. Businesses like Northland should seek instead to manage such disputes Mth the express goals of

avoiding time-consuming and expensive litigation.

• preserving desirable long-term commercial relationships.

Business Activities and Legal Disputes Business operations- both internal and external- involve numerous interactions that have potential legal consequences. Consider the following analysis of how the legal risk management plan anticipated and dealt wjth the events in the Business Law in Practice scenario.

The Delinquent Customer The customer's refusal to pay its account may indicate that Northland has failed in its procedures for extending credit. Management should explore this possibility to prevent recurrences. In the meantime, Northland must d ecide if it should: give the customer an opportmuty to recover financially befo re demanding payment; offer to accept less than the full amount; write off the debt altogether; or take steps to be p rud on its account, such as selling the debt to a collection agency at a discount, suing for the debt, o r filing a drum if the customer is involved in bank- ruptcy proceedings.

Setting guidelines for granting credit to customers does not guarantee that every debt will be collectable. If this debt is notlatge and the customer is in serious financial difficulty, coming up with a negotiated repayment plan or writing it off may be more practical than spending money to try to collect it. The d ebtor is certrun to welcome such a compromise, and therefore no legal dispute wjll arise from this event.

NEL 89

The Hacking Attempt The hacking attempt by an outside party- an environmental activist group- was anticipated by the plan. Northland, as part of its r isk reduction strategy, had engaged the services of an information technology security firm to install fi re- walls. As a result, the d amage to Northland's computer systems was m inimal a nd there was no loss of data. The incident d oes highlight that hacking incidents can potentially be quite costly. If future hackers are able to breach the firewalls, North- land could incur extra expense associated with the recovery of data, liability for the loss of sensitive customer and employee data, and a loss of revenue resulting from an interruption of the computer system. Northland's investigation of the incident reveals that while it has an insurance policy in place, it does not cover all of the possible costs associated with a breach of its computer system. Northland will analyze the costs of obtain ing additional, specialized insurance coverage and, if it is warranted, revise its risk management plan accordingly.

The hacking attempt by the environmental activist group is unlikely to result in a legal dispute. Although Northland could potentially sue the group for trespass to its property, this course of action is premature in that Northland does not know the identity of any of the group members. Even if their iden titywere known, it is still unlikely that Northland would pursue a lawsuit as the damage to its system was m inimal and the publicity associated with such an action may be unwelcome.

The Pollution Incident Nor thland 's operations have resulted in the discharge of a small quantity of pollutants into the environment. Northland must report the pollution incident to the relevant environmental regulatory agency. The agency may impose a fine, a clean-up o rder, or some other adm inistrative penalty depending on the nature, cause, and severity of the incident. This possibility was anticipated by the risk management plan and is unlikely to result in a legal dispute, providing the pen- alty is in accordance with the applicable environmental protection legislation. Northla nd has no viable option but to comply with properly enacted legislation.

Northland must also report the incident to its insurer. The insurance policy covering this event will require reporting w ithin a shor t period of time- usually 5- 1 0 d ays- otherwise the insurance coverage fo r the event is invalid ated. An investigation by Northlan d reveals that the discharge of pollutants was d ue to a malfu nction in the scrubber (a piece of equipment that captures and removes large particles like heavy metals from exhaust). When a new scrubber was being installed, the exhaust fan controlling the intake and discharge of exhaust stopped working. This, in turn, caused a build-up of ash and d ust particles. The build-up was not noticed by the operator so when the scrubber was re-started, a huge dust cloud was released into the atmosphere. Luckily, the wind was blowing away from the adjacent town, but it blew the ash and dust particles onto a fa rmer's land. Although the pollution incident was anticipated by the risk management plan and Northland has insurance in place to cover the damage to the farmer, thi s inci- dent may result in a legal dispute. The insurance co mpany has indicated that the d amage to the fa rmer- including the cost of washing his buildings and replacing a barn roof, as well as a red uced crop yield- comes i n at less than $50 000. The farmer, however, insists that his damages amount to over $1 00 000. This matter is a legal dispute, since the farmer is refusing to accept compensation and is threat- ening to contact the media and environmental protection groups. The dispute

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with the farmer goes beyond the payment of money as Northland's relationship with a nejghbour and its reputation in the community are also in jeopard y.

The pollution discharge incident highlights to Northland that any pollution into the environment can be problematic. In this particular incident, Northland was "lucky" in that the wind was not blowing towards the nearby town. Even though insurance coverage may cover all of the claims, Northland is likely to suffer the loss of good will and damage to its reputation. Northland's risk management plan may need revision to fu rther reduce the possibility of a future discharge. For example, Northland may need to purchase a back-up fan or it may need enhanced operator training and restart proced ures.

The Machine Breakdown An investigation into the machine breakdown reveals thata bearing in the machine failed, causing the ore conveyor belt to catch fi re. ! twill take at least threeweeksto get and install a replacement belt. Northland's chief financial offker estimates that the breakd own will result in lost profits of $3 million. The insurer has been noti- fi ed of the event, but it is denying coverage. It is arguing that the bearing fai lure and the resultant losses were not due to a sudden and accidental event covered by the insurance policy, but were d ue to Northland's fa ilure to properly maintain the equipment. Ordinary wear and tear and failure to maintain the equipment are not covered by the insurance policy. Beyond this, the insurance policy contained a pro- vision requiring Northland to keep complete maintenance records on the machine's bearing or else coverage would be voided . The insurer is d emanding those reco rds. For its part, Northland argues that it properly maintained the equipment in accor- dance with the manufacturer's original specifications.

Although machine breakd own and resulting loss of profit was anticipated and ma naged by the purchase o f insurance, this incident will result in a legal dispute. The amount of money involved is simply too large for Northland to write off.

Relations with Ind igenous Communities* A major risk for Northland in d eveloping the mine project on Crown land where Indigenous people carry on traditional activities is failing to ad equately consider and mitigate the impact of the project on the Indigenous community. As discussed in Business Application of the Law: The Duty to Consult and Accommodate Aboriginal Peoples (below), private business, unlike the Crown, d oes not have a legal duty to consult and accommod ate Indigenous communities when it is car- rying on activities that may affect their rights. That said, it is in the best interests of business to work with Indigenous people and the Crown most often d elegates consultation proced ures to business. Consultation an d accommodation help to establish good relationships that benefit both Northland and the Indigenous com- munity. Northland may be able to access business partners, a local workforce, reliable suppliers, and traditional knowledge o f the environment. Also, consulta- tion and accommodation help reduce the r isk of future challenges because of the relationships and understandings forged. The Indigenous community benefits by having tl1eir concerns with a potential project's impact on thejr land and way of life taken seriously and mitigated, as well as having access to opportunities such

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NEL 91

as ownership participation, employment and skills training, business develop- ment, and economk growth opportunities.'

An important means of achieving these benefits is an Impact and Benefit Agreement2 between the affected Indigenous community and Northland. This is a formal agreement that addresses the adverse effect of the mining activity on the local community and their environment and ensures thatthe Indigenous commu· nity benefits from the project.• These agreements have become increasingly prev· alent and are considered standard business practice by many project proponents• as they can help ensure the success of the project.

THE DUTY TO CONSULT AND ACCOMMODATE ABORIGINAL PEOPLES

Section 35(1) of Canada's Constirution Act, 1982 recognizes and affirms the existing aboriginal and treaty rights of the aboriginal peoples of Canada! Section 35(2) defines aboriginal peo- ples as including lndian (First Nations), Inuit, and Metis. Aborigi11al rights are not defined but have been interpreted to i11clude practices, cus- toms, and traditions that are integral to aborig- inal culture, as well as aboriginal title, which is the right to the land itself.6 Treaty rights are rights that arise as a result of treaties entered into between Canada and aboriginal peoples.

In a series of decisions,7 the Supreme Court of Canada has been clarifying the meaning and scope of section 35.8 It has confirmed that both the fed- eral and the provincial Crowns {but not private

industry) have a duty to consult aboriginal people and, where appropriate, accommodate their inter- ests whenever a Crown decision or action may adversely affect aboriginal or treaty rights.' The Crown must consider the impact of its actions on aboriginal rights, even where the rights have not yet been proven in court or by agreement.

In Haida Nation v British Columbia (Minister of Forests), the Supreme Court of Canada held that the d uty to consult and accommodate is triggered when "the Crown has knowledge, real or con- structive, of the potential existence of an aborig- inal right or title;'" and contemplates conduct that might adversely affect it" To trigger the duty to consult, there must be a connection between the proposed conduct and an adverse impact on the proven or potential right. Examples of Crown decisions that may trigger the duty are the

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5 Soo CN!>l{"t 2101 lun~ ddeo\SOnof aoo1q '\~a!'\d 11.:::aty "'~r1ts o S<» Rv ~-ow rno I SCR 107~ l"~X> SCJ No 9.D~lg•muuk;,vCok.rrb<> )997, 3SCR1010. 1997, SCJ

No 108. Ts~•hqo11n N.11,on vB11t11h Cok.imbia 2014 SCC 44 .2014J 2 SCR2S6. 1 S«" ~lax:ia Na110n v Br!flSh Co.k.i1'l"'lb>.J (M.'f1tSIC1off01c~1s) 2004 SCC 73, !2004 ] 3 SCR SU Taku Rrve1 nN'tg1l

fu~I Nt1UOl"I v 8'!l1£h Cok.11110.U (Prot«t A.ucsV1"1en1 D11t!etori. 2004 SCC ?4 '.2'004J 3 $CR 550. M~1sev1 Cree fust Na11on v Cnn,Jdt1 (ft.iN'llil<'r or CiNl1>d1.J11 Hcnti)QC) 2005 SCC 69 :2005- 3 $CR 388

S Soo John !ki11ow• U Leoni.id llotfl'\lrt AbongndJ Lcg11I Is.~ut:s Cases, Matenals h Cotnrr-.:u'ttill}' :41hJ !Mclikl\am Lc1t.r),NCt1J.Caroda Inc. 20121->I Sl b. where lheauth01s !lOt~. ihec•eat :Or\Of all ,oocpc!Xlt!nl Crown duty tocon~ll will\ <tnd 1nhpp1op110\h.'.! c11ctJmstanccs. tooccommodat~ AbOrig.Mt peo~s :sa 1cccn1 dC~k>p1NOnl 1n(.aMd1an 1u1 ~prud('IOC<!

9 T"9 duty o l COllS\lltOhOll ~00 N:comrnodat<On 4lli~s Oul o l I t'K'! pr inc ii*! Of t he "MOCIUr o f l OO C101.'ln• IM I i!.. th<! C.fOWn s to ac t nonou1abty'ol'KI 1ngood fa1 tl\ in 11~ 1c\aton-st)ips w·th l f'"ICl~:') eoou-s peoP1.es

10 Soo TSllhQOllrt Nt1llafl 11 &msh C:oit.trr"lbU> 2014 SCC. 44 f20 14J 2 SCn 256101 a d:SCtlS-SIOI\ of est.'Jbti!ih1ng c'>00119•1\ill 1ilt"

Nll

issuance of licences, perm.its, and approvals, and the grant o f rights to Crown land and resources. u If there is no connection between the proposed cond uct a nd a n a d verse impact on the r ight, there is no duty to consult. Past wrongs, specula- tive impacts, or ad verse effects on fu ture negoti- ations have been foun d not to t rigger consultation. [n Blueberry River First Nations v British Columbia (Natural Gas Development), 12 the Br itish Columbia Supreme Court held that a long-term royalty agreement that set royalty rates but clid not approve development practices on traditional territories of the Blueberry River First Nations clid not trigger the duty to consult.

The scope of the Crown's d uty to consult and a ccommod ate can be vjewed as a spectrum. ft d epends on the nature of right, the strength of the case supporting the existence of the aboriginal or treaty right, and the seriousness of the potentially adverse effect on the r ight. The nature of the aboriginal or treaty r ight matters. Aboriginal tide is a right on the highest end o f the spectrum. Where there isa weak case for a potential rightand the potential for impairment is minimal, then the d uty to consult and accommod ate is minimal. In these circumstances, the duty of the Crown may be discharged by giving notice, disclosing in forma- tion, and cliscussing issues raised in response to the notice. ff there is a strong case for a right and there is potential for signific ant impairment of the right, then there is a higher requirement for exten- sive consultation and accommodation. In such circumstances, consultation may include givjng aboriginal people the opportunity to make sub- missions for consideration, allowing participation

in the decision-making, and provjcling written rea- sons.13 [f accommod ation is required, the project may be adjusted (e.g., changing the route o f a roadway, protecting burial sites), mitigating means may be developed (e.g., minimizing disruption to hunting and trapping lines, restoring the habitat o f a harvested species), and fi nancial arrange- ments maybe made (e.g., profit sharing a nd com- pensation arrangements, agreements to hire and provide skills training). On the highest end of the spectrum, prior consent may be required if a pro- posed project is on reserve land, or on land where an In cligenous community has a proven claim to aboriginal title. With the exception of aboriginal title, the duty to consult and a ccommodate d oes not give aboriginal people a veto over projects, 14

even where there are proven aboriginal a nd treaty rights. 15 Rather the duty is "to balance aboriginal concerns with the potential impact of the decision on the asserted right of title with other societal interest."16

The Crown's d uty to consult and a ccommo- d ate cannot be d elegated. Proced ural aspects of the d uty, however, are often delegated to industry proponents of a project who may gather informa- tion on the potential impacts o f the project , par- ticipate in the consultation process, and fin d solutions for accommod ation . Legally, the Crown must be integrally involved; mere oversight of the delegated process will not s uffice to discharge their d uty. Despite this, in most cases ind ustry proponents find themselves cond ucting the con- sultation and accommod ation efforts, o ften through the process of d eveloping impact benefit agreements with affected communities. 17

ll Crown resources and !and ar(! net usua.~y a-:cepted by lnaigenous c-coptes. 11 lha duly 10 COM!Jtl is be1n-;, t1ig9e1a:i , the -::;uesbon ot v1oose ~00 aoo v1h0se resources a1e tik~y conlento~ and det:>ata:t

12 2017 BCSC 540, !2017] BCJ No 640. Soo atso Bufla!o RNer Oe11e Nation v Stl!J<a:chew<Nt (En«gy ;)(t(J Resources), 2015 SKCA 3t !20151 7'WV'/R82. v .. !'K?re the court hekl IJ'lat 11¥! 91an11ng of anexpl")rato•y pc1m11 with no ngru cl su1l21~ a:cess or ng hl to e>Ctroct ol 01 rniOO!ats aid nol trigger 1~ duty to 001\sutl

13 See Ctuppey1as of Ure Thames .(;1st NtJJ.iOn v tftbndge P~lines .Inc., 2017 SCC 4l !2017! $CJ No 41, aM Oyde River (Htlffl.'e!) v Pettoleum Geo·SetWces Vk". 2017 SCC 40, 12017] SC.) No 40. 101 dir.c:ussiOn ol toe 1equ11emen1sof l~C1ov1rfs duly toco!\SuU.

14 In KtLJr'ii)XIJ Nalkx't v Britt sh Columbia (fore-.~s. Lands and NtJJ.ut/11 Resource(JpesfionsJ, 2011 SCC 54. 12017] SCJ No 54, the Sup1~me Court,, in toe cont~xt of anuop1oven ab01191n.at cta1rn.. conf1rrr'led li'\at the duly to conS\lh and ~commodale does no19ua«lnlee a l)t)!ICu'<'.11 resutl 01 a veto 101 an u~a1is led cia1mt)n1, ratMr 1L onty gi;arantees a 01ocess of co!\$1Jtlati0n.

JS Supt a n01~ JO. J6 Hd:da, SLJ()ta note 1 at p.lra SO J1 See ·Sei2:i~ Six Opoortun;ties fo1 Mc1Q ~rily in too Duty to Consult ano Accommo.1ate Piocess·, The

Can<Klran Ch11tr:be1 of Cotrvne1ce lSepternbe1 2016). 0!'\1100· <h1tp //v1v1N.C hambc1r.a/med1.ai'Ob9/J60914• s~H2:iog.-six·opoortun1es~fo1~m:'>re-ct.l1ity~ln-t~duly to •consulL·anchaccommo::late-p10cess. ror adiscusson of thE! ~o\e of ;r\dus1ry in 1he consuUatiol\ p1ocess>.

NEL 93

What fa<tors are helpful in determining whedter dte rnnsultation between dte Cro wn and lndigeno11s people is adeql/Qte?

If the Crown fails to engage in meaningful con- sultations, a court may remedy the situation by issuing an injunction halting a project, by requiring the Crown to reconsid er a decision, or by granting orders requiring the amendment of legislation and regulations to properly allow for consultation.18 In West Moberly First Nations v British Columbia (Ministry of Energy, Mines, and Petroleum Resources),"' the Court of Appeal ordered the sus- pension of mining operations because of the prov- ince's consultation process. There was a lack of meaningfu l dialogue on the potentially ad verse impact on a caribou herd and the ability of First Nations to hunt the herd on its feeding grounds.

The duty of consultation and a ccommodation rests with the Crown, but the failure to fulfi ll this duty adequately may end up being borne by busi- ness and aboriginal commuruties. Business may

suffer because of delays, suspensions, and cancel- lations of projects and the aboriginal community may suffer because of the destruction or alteration of land or water it relies on, the loss of ability to realistically engage in integral cultural and societal practices, and the reduction or loss o f economic benefits from delayed or cancelled projects.'°

CriticnlA•111if,-i5: How can business manage the risk associated with the Crown's duty to consult and accommod ate?

So urce s: ihe D u ty to CoMUH and AccommOd<"Jte Aoo1q1MI Groups ;nCaMd<l, Ivey Sus!~ss Sc~O! t~otember 2014J, ontine· <https .// v1ww. Ney .uv10 ca/cmsmed ial136635Sf1vey-ene rgycen t r\.?-"brie r ·ab0•.gina!·v4+1ina!.pclf>. Kris1a Rob<.'Htson. ·ou1y to Consutt Case Overv~w 2014. JFK L.-'lw Corpo1al!Oll l20 reb1uaiy 20J5J, onl100 <hllp//)h.taw.C.')/<Juty•CO~ll·~se·OVt'!IVie'w•20!4/>, 'How the Duty to Consutl Alrects Gove1omen1S IOOu stry and AbOrig iMl Peoples·. taslen MclrUnoou tOecernter 20U J, oi'\f1ne· chup"//w......,..,.fask.en.com/ duly•to<:onsull.oab0119i~/>

18 "Leqa! Update The Duly to Consuu-1mpcnlan 1 l essons ~1om Ca'l.)ja·s Min1!')Q S<.'!Clor". Mcinnes Cooper llS r ... 1a1c:h: 2013), onc1~ <l"lllP //ww"' mcinl'K?SCOOpE'!r c:orn/~bh::attons/ legt.lt·u~ate the-dulY•IOACONAJ\l•!l'l"lpo~nl·~SSO!\S·f1orn·~nOO<iis•m1ni1'\9"!iECIOfl>.

19 20U BCCA 247. 333 DLR 14th) 31. 20 SuprtJ no1e 10 al 528, 8urtoY1S & Rotmbn cite Dr D~n Jacot-s. Ch"EI of V'ltiPo\e ls"fKI in BKe1wanong

1er11tory, on tne many ~fits or industry col\Suttatoo Willi abOfigil\M ~op4es !oclJding 1nec1~ti0n of pos11111e 1da1.onsh:ps, l he avoidanc€ of t1tt9at10 n and dctays, the ;f)C01porat ·on of t1a<Ht10!\al ecdogca1 knov/ieog e- into projects, 1~ enhancement or a!X:in9inal empt...-r;ment a'ld busi~ss oppo1tun t ies, ano tne de~opment of c\ear commuoca1on ave nu~ a"\d par1oorSh,p appre&::hes to resotvinq p:ob&'?ms.

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Alternative dispute resolution (AOR)

A range 01 opttons •or resolving d1spu.es as an alternative to l1t1gat1on

Negotiation

A process of dehbera:1on and discussion 1mended to reach a mu:ually acceptable resolution to a dispute

As the foregoing analysis suggests, Northland's r isk management plan pre- dicted and planned for several events that did in fact occur. For various reasons, a legal dispute is unlikely to arise from them. Some eventswHI not d evelop into legal disputes because the company has no other viable option but to live with what has happened. That is, Northland wHI likely write off the delinquent customer's bad d ebt as an anticipated cost of d oing business; Northland will not throw away its resources on a lost cause. Similarly, Northland cannot launch a legal action over the hacking attempt because it does not know the identity of the hackers and, besides, there is little point in launching an action where the damage is minor and the resulting publicity is unwelcome. However, other events may result in legal conilict, including the problems with the disgruntled farmer and the intransigent insurance company.

Northland's challenge with these latter issues is to actively and effectively manage them- just as it would any other aspect of the business's environment. Managing disputes d oes not mean simply proceeding to court. There are many ways to resolve a dispute that d o not involve litigation. See Figure 4.2 on page 1 04 for a summary of alternative dispute resolution (ADR) methods. The most common are negotiation, mediation, and arbitration ."

Alternative Dispute Resolution Negotiation Negotiation is a problem-solving process in which parties discuss their differ- ences and attempt to reach a mutually agreeable resolution. !tis the most common alternative dispute resolution method because it is cost effective, is usually quick, and allows parties to craft a solution tl1at is suitable for their particular situation as opposed to having another party, such as a judge, impose a resolution . It also helps to p reserve the relationship between the parties because it does not tend to be as confrontational as more formal methods of dispute resolution.

When to Negotiate Negotiation can be used to resolve virtually any type o f dispute. ft can, for example, be used to resolve Northland's dispute with the farmer and the insurance company, provided they are willing to negotiate. In addition to situations where the parties agree to negotiate once a dispute arises, a provision in a contract may require the parties to attempt negotiation. ft is increasingly common for parties to includ e in their contract a clause whereby they agree that d uring and after the conclusion of the contract, they will make efforts to resolve any disputes by nego- tiation. When negotiation is used, it can be employed at any stage of a dispute, including on the eve of or midway through a trial.

Even though negotiation may be used to resolve most types o f disputes, there are some situations where negotiation is not the proper way to proceed, even as a first step, such as when insurance covers the risk that is the subject of the dis- pute. In such circumstances, the business is required to allow the insurer to con- duct settlement negotiations. Any attempt by the business to negotiate privately may jeopardize the coverage. fn Northland's dispute with the farmer, insurance

21 Aootf\er methO·:j L'> mediahon/a1b11ration l~d/<>tbJ This iSa hyb1.d diSPtHe reso~tion process tMt beginswilh tnedi;ltk>n.us 1ng a neutral person as medi;ltor. U necessa1y, the par1es Drocced lOarb1t1at onv11 th t~ same n.2tJ t1at perSon .xling as arblr()I01

NEL 95

potentially covers the far m er's d amage and the insurance company would nor- mally negotiate a settlement. However, in this situation, the insurance company agreed to allow Nor thland to attempt to resolve the dispute because of its sensi- tive nature and its potential impact on Nor thland 's reputation.

How to Negotiate Negotiations are most often carried out by the parties to the dispute. However, in some cases it may be preferable to hire a lawyer, advocate, or counselor who has the expertise to help in the negotiations or who can negotiate on behalf o f the parties. In Northland's case, because both disputes involve insurance issues, negotiations will most likely be carried out by the person responsible for acquiring the insurance, that is, Marie Gagnon, director of insurance and security.

Regard less o f who does the actual negotiating, the first step is to investigate the situation to d etermine the nature and extent of the dispute. The person responsible should contact the individ uals involved in her own organization and the appropriate people on the other side of the dispute to clarify the situation. The process of negotiation is not governed by technical rules; it can operate in whatever way the parties wish to solve their problem.22 It is important to get the negotiations off on tl1e right foot, however. For example, Northland- in negoti- ating with the disgruntled farmer- should contact him immediately and assure him that it is concerned with his situation and will make every effort to remedy hi s loss. Northland may also d ecide to apologize to h im for the d amage. As the box below explains in more detail, most provinces including Manitoba23 have passed "apology legislation" to permi t an in divid ual to show remorse without triggering adverse legal conseq uences.

BUSINESS AND LEGISLATION

SAYING SORRY

Researdl in the area of apologies suggests iliat they facilitate personal reconciliation and can assist in resolving legal disputes. 24 According to tl1e Uniform Law Conference of Canada (ULCC), however, the traditional concern was that an apology in a legal context could prove d an- gerous. An apology might amount to an ad mis- sion of liability that "could void an insurance policy, en courage a lawsuit, or result in a court

holding the apologizer liable."25 In response, most16 jurisdictions in Canad a have passed broad apology legislation. As summarized by the ULCC, the apology legislation in British Columbia- which covers statements admitting or implying wrongd oing as well as expressions of regret or sympathy- provid es that an apology:

is not an admission ofliability.

is not relevant when a judge makes a d etermination of liability.

22 ro1 pri!'ICi~s of eftec11Ve ne.gotiatiol\ see: Roge• r:sher, Wlram Ury & Bruce P()lfton, Cettttlg to Yes Negotthling A9'€Wr'lent Wi:hOur Gntng Jn tNew Yori(. Penguin Books, 19'91)

23 Apology Acl,$M 2007. c 25 24 RiJSs~I J Gerz, ·un:lo1rn Apdogy Acl·, P1c~nted ()I tne Unifo1m Law Confareoci'! of <:.an.¥!a, Ovit Ltn'I Sec110~.

Cha1btte1<>v11\ P• 1nce (dward lsJAOO (g...13 ~01embe1 2007J at 2 25 lb.d ., 3-4 26 Onty Ni'!v1 Brul\SWick,. Quebec., and 11'\E! YtJkO!\ Terr•1orydo 001 h ave.aPdQgy\egiStaliO'\. WM\ theex~pt+O:l

of P£l wh~h:omyi:noteclS apotog.es 1n the ~althcare sec1or.1~ va•ous p1ovincat!<lv .. s nrovde broa:J p101ec10n

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cannot be used as evid ence establishing liability.

Businesses, however, should be carefu l in issuing apologies. As noted, some jurisdictions still do not have apology legislation and, even in jurisdictions that d o have legislation, it may not provid e the protec tion expected . For exa mple, Alberta's Court of Queen's Bench has held that fac tual statements that accompany an apology are not part of the apology and are ad m issible in cour t. 28 As Mary Paterson o f

cannot be used to void an insurance policy.17

j Osler, Hoskin & Harcourt observes: "In short,

] you can say you are sorry, but you cannot say what you a re sorry for without r isking making

~ an ad mjssion."29 ~ Critical Analysis: What are the pros an d cons ~ of an apology in the fac e of a legal dispute? What

•"""--------------.-.... .._....,.. ~ should an apology contain? Why da apologies tfe.eS<alate legal disputes?

Release An agreement where a party agrees to rel1nqu1sh past. present. and tuture cl aims a ris1n g from a certain event

With negotiation, the goalis to reach a resolution that is agreeable to all parties. That said, there is no guarantee that a settlement will be reached. Whether nego- tiations d o succeed will d epend on a number of factors, including the following:

the willingness o f the parties to compromise and negotiate in good fai th.

the nature and signific ance of the dispute.

the priority the parties give to its resolution.

the effectiveness of those involved in the negotiations.

If negotiations are successfu l a nd the parties reach a settlement, it is usual for them to enter into a settlement agreement or release30 so that the dispute is unlikely to be resurrected or litigated in the future. It is also common to have a confide n tiality clause as a part of the settlement o r release. Thls prohlbits the parties from revealing the terms of the settlement and prevents other persons fro m using the settlement to advance d rums against the pa rties.

Northland en tered into negotiations with the disgruntled fa rmer, who was willing to talk once he und erstood that Northland was con cerned about hls situ- ation. He agreed not to call the media or environmentalists pending a resolution of the dispute. As part of the negotiations, Nor thland explained how and why the pollution occurred and what it was doing to prevent a fu ture in cident. The farmer was ad amant that his d amage was over $100000. However, included in h is esti- mate was structural improvement to hls fac ilities (he wanted new siding on all buildings as opposed to having the s iding cleaned) as well as d epreciation on the

27 Supra no1e 24 a113. 28 Rob.nson v Cragg. 2010 ABOB 743. 41 Alla LR (Slh) 214 29 M~iy Paterson, ·Apobges as Dispute Resotut:o~-, Os.lei, 1-losJ<lt't !J HMcou1t. UP U7 Ma-y 2012), o()l tne

Lexdiegy· <http //w..v,,y .texotogy.com/11b1a•y/dc.~laspx?9 =17badccb· lai:\6-42oo-939.)>4483722flee4> 30 ~~as~s in an. empkryrnen1 con1e.x1 a1e dlScussa'i il'\ Chapter 21.

97 NEL

barn's roof. After further discussion, the farmer agreed to abandon his claim for new siding when Northland agreed to pay for a new roof w ithout consideration o f d epreciation. The parties settled for $75 000 and the farmer signed a release with a confidentiality clause. A release is binding on the parties unless it is grossly unfair or unconscionable.31

When Negotiations End In the majority of cases, such as the dispute with the farmer, parties reach set- tlement. Other times, an impasse is reached where neither party is prepared to compromise further.

Northland also negotiated witl1 its insurance company, but the results were disappointing. The insurance company was not willing to compensate Northlan d for any losses. It continued to argue that the losses were d ue to poor maintenance, which was an exclusion (a provision that elimi nates coverage for certain events or named perils) under the insurance policy.

When an impasse sudl as this occurs, the business is face d with a difficult choice: concede and cut its losses or risk the expenditure of more time and money. Whether Northland should continue or abandon the legal conflict depends on its analysis of what is in the best interests of the organization in the long term (see Figure 4 .1).

If Northland decides to continue its dispute with the insurance company, it may end up having to sue. Alternatively, the parties may agree to either mediation or arbitration as a method to resolve tile dispute.

FIGURE 4.1 In Deciding Whether to Proceed or Not to Proceed With a Legal Dispute, Consider the Following Questions

What further steps are available and how long will they take?

Can the business devote the resources necessary to proceed with the dispute, in terms of both the commitment and the time of business personnel?

Will a lengtl1y dispute affect the public profile and reputation of tl1e business?

Is the relationship with the otl1er side valuable?

Will that relationship be harmed, whatever tile outcome?

What is the likely cost in terms oflegal fees and company time?

Are there wortllwhile principles at stake that go beyond the particular dispute?

If the dispute goes to court, what are the chances of winning? If the court d ecides in favour of the business, d oes the other sid e have the assets to pay the claim?

31 See Oa.W?et vPUch&'. 2011 NLCA13, 120171NJ64, 101 the app(JC"ote punc1P4e-.s 1nac&a1m to have a rc&:at,e sel aside Ofl l~ baSis ol unc0"5cionao1tt1y. Se.e atso Cnaot~1 8 foi a OiScusslOn 01 uoconsci0oob1:1y

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Mediator

A person who helps the pames resolve their dispute

Mediation Mediation is an ADR process whereby a neutral person, called a mediator, assists the parties in reaching a settlement of their dispute. ft is a popular method fo r resolving disputes because, like negotiation, it:

is less expensive and qlricker than more formal dispute resolution method s.

is private and co nfidential if the parties choose.32

helps to preserve the relationship between the parties.

can result in a resolution t ailored to the needs o f the parties.

When Mediation Is Used Mediation, like negotiation, can be used to resolve most disputes. Whereas, rus- torically, mediation was mainly used in famHy disputes and divorce issues, it is now commonly used to settle commercial disputes. ft has been successfully used to resolve a w de range o f business conflic ts involving contract ma tters, per sonal injuries, employment matters, environmental protection, and the like. That said, some disputes are more amenable to mediation than others. Success is more likely if the parties are interested in consid ering each other's position with the goal of compromising and settling the dispute, and if they value the advantages of medi- ation. Northland and its insurer could agree to mediation to resolve their dispute over insurance coverage.

In addition to situations where the parties voluntarily agree to mediation, or where it is required pursuant to a clause in a contract, there are cases where it is imposed. For example, Ontario has a mand atory mediation program that requires many civil (non-criminal) cases'-' to be referred to mediation before a trial can be sched uled.

How Mediation Works Once the parties have agreed to mediation, they choose a neutral third party to act as mediator. There are no mand atory qualifications for ADR practitioner s, but there are m any trai ning programs available through un iversities and the p rivate sector. Mediators are often lawyers or retired jud ges, but anyone is eli- gible to become a full-tim e or part-t ime practitioner. The ADR Institute o f Canad a, a self-regulatory body for ADR professionals, maintains a national roster of mediators. Usually, the mediation wll happen wth the parties meeting face to fac e, but it can also be conducted through videoconferencing and online"" if it is appropriate for the parties and the type of dispute. Once the mediator has been chosen, she helps the parties clarify their interests and overcome obstacles to communication. The mediator d oes not work for either party and instead man- ages the process, organizes the discussion, clears up misund erstandings, and helps red uce tensions between the parties. The mediator does not, however, make or impose a solution on the parties- it is the parties that must reach a resolution voluntarily.

32 Togn.~1econlldentiahly in ..ti.Df< proceeding~ the parties shOuki 1nctudeac&au~ lO 11\Al e llec1. Panes shou\O OOl automa11c.-ily assume th.al their de{11X?1ato~ anc seutem<?nl a1e conlid~nticlt ~e AnlMr"i'f Da+msi!., ·confdent!.al1ly !ll ADR", The L<1">'¥'tS V/ecko/ Ul rehru:uy 2011) 9.

33 Tn.a mandated 1nedi<>t1on progr<;')m ap;:i«:es in To1on10, Otiav1a. a!'Y.I WindSO! to most oon-ramly civil a-: tons wne1e 11\e da:m exceeds $50000 See Ontario, ~les of Civl Procedure, RRO 1990, Reg 194 1 24.l

34 S-00• Lu;g1 Beoonoo, ihe Be:')ef tsof Vid~o MOdi.a.1 O:l", The L.av..yets lt\>~k.Y UO December 2010) 9; Ga1ry Oilkes. -Your V11tutll Day in Courl. Hovi Online OiSpute ResokJt1on Is T1anslorm 1ng t~ Pra:'.:llCE! ol AOl'r, The Lawy<>r s Week!¥ [15 Augusi 2008) 23

NEL 99

In the case o f mand ated mediation programs, the parties may choose a medi- ator, but if they are unable to agree, a mediator will be assigned to them from a roster o f mediators. In mand ated media ti on, like voluntary mediation, the medi- ator d oes not impose a solution but merely assists the parties.

When Mediation Ends Mediation, like negotiation, has a very high success rate. For example, in Ontario approximately 90% of cases are settled prior to trial.35 At the end of a successful mediation, the parties normally enter into a settlement agreement setting out the essential terms of their agreement. This will bring closure to the dispute and help prevent future litigation concerning the same matter. The settlement agreement is a contract and can be enforced in the same manner as any other contract. Ontario'° and Nova Scotia37 have also enacted legislation that allows parties who have settled a commercial dispute through mediation to register their agreement and have it enforced like a court judgment.

Mediation, however, is not uniformly successful. It d oes not always produce a resolution, so time and money may be invested only to have the matter proceed to litigation. Northland and its insurer initially agreed to mediation, but quickly realized that their dispute was not amenable to this resolution approach. This was because both parties were unwilling to compromise and both wanted a defi nitive d ecision on whether the insurance covered Northland 's losses.

Arbitration Arbitration is a method for resolving a dispute whereby a third person (or per- sons), called an arbitrator, appointed by the parties makes a decision. It is similar to litigation in that it usually involves a hearing where the parties or their repre- sentatives make submissions, and the resolution is outside the control of the parties. Arbitration has ad vantages in comparison to litigation. The parties con- trol the process in that they choose the rules for cond ucting the arbitration, including the d egree of formality, privacy, and finality of the d ecision, the timing, and the d ecision-maker or arbitrator. Arbitration is ad vantageous because the parties have an opportunity to review the arbitrator's background prior to ceding d ecision-making power and can choose an arbitrator who has knowledge an d expertise in their particular dispute. This option is not available in a court action. Arbitration is usually cheaper and faster than litigation and can lead to an overall sense of satisfaction. However, if the parties choose a process that has the same d egree of formality as the litigation process, or if a party uses an absence of rules to engage in delay tactics, the arbitration can lead to costs and time period s similar to, or greater than, those experienced in a court action.

When Arbitration Is Used Arbitration, like other forms of ADR, is theoretically capable o f resolving any dispute. It works particularly well for most commercial and business disputes"'

35 Van l<rk.Y.:hevslci b rrank N O~GiudCe, "Navigat ing Tt·uoughCt\aUang ng Mediallons Creat ing V<ltue int~ Mesi of Obstac$es·, lkC;)Que fk:v}ad< LLP 125 October 201n, o~·OO'. Mo!'ldaq <http//w,v-".rrorx1~c.om/ car~da/x/640296/Aib .t rat iOI\+ Dispute+ Ros~.a.o!l/Na., ·g.ll 'fV::J + Th1ou9h +Chatk'!og1ng + r~c...,1ons>

30 Commetcml f.4edt1"ion Act, 2()10, SO 2010, c: 16, Schedule 3 37 Comme1Ch)I MedttlJ.IOf'I Act, SNS 2005, c 36. 38 ro1 examP4e, Lile CanOOo.an tvblOt V<!hx:\e A1bi11a1onPlan (CAMVAPJ tundco by th2auto 1ndus11y resotv<os

somedisput~s oetv~n:OJston-ers and au10 rnanuf.x:1u1e1s See <W>Yw.c~mvapca>.

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Arb itrat o r A person who lis,ens to he parties to a dispute

and makes a ruling that 1s u sually bindin g on the parties.

because the parties can select an arbitrator Mth relevant experience and keep commercially sensitive information private.

Arbitration is often chosen by the parties before a dispute arises through a term in a contract providing that msagreements arising from the contract are to proceed to a rbitration. Most signific ant commercial contracts, whether domestic or international, have an a rbitration clause. Increasingly, many contracts between providers (particularly online providers of good s) and consumers contain arbitra- tion clauses.

BUSINESS APPLICATION OF THE LAW

ARBITRATION CLAUSES IN CONSUMER CONTRACTS

Dell Computer published the wrong prices on its online order pages. Two models of handheld com- puters in mcated prices o f $89 and $118 rather than $379 and $549, respectively. Several hund red consumers attempted to buy computer s at the erroneous prices but were unable to so. The con- sumers attempted a class action to force Dell to sell them the computers at the lower advertised prices. Dell argued that the consumers were not able to take the matter to court because of a clause in the online contract requiring all msputes to proceed to arbitration. The Supreme Court of Canada upheld Dell's a rgument. The consumers were left Mth their in mvidual remedy of going to arbitration- presumably a very much inferior option. Since then, Alberta,'"' Quebec, a nd Ontario have passed legislation explicitly prohibiting arbit ration clauses in consumer contracts. In other provinces Mthout such legislation, arbitration clauses are likely enforceable wjth a few exceptions.40

What an? the advantages a nd disadvantages of arbitrotfun clauses in consumer mntracts?

Criticnl Annl,_i•: Should arbitration clauses be prohlbited in consumer contracts? Why or why not?

Source s: Lt.HS Milan. ·ci;stomers C.a"\ Sue De.spite AORCtJuse· The L~G'S W~ekly U Aput 2011) 1. Dell Computer C<Xp v Un.'Otr des consommateu1s 2007 $CC 34. !200?] 2 sen SOI.

In the absence o f a clause, arbitration can be ad opted at any point in a dispute if the parties agree. Northland and its insurer did not have an arbitration clause in their contract. They initially considered arbitration as a method of resolving their dispute but could not agree on an arbitrator. But more importantly, the insurance company wanted to establish a legal precedent. It wanted a judge's interpretation of the scope o f the exclusion clauses in its insurance policy, a result not available with arbitration.

39 In At~ri.a, an agre~ment requin!'\Q a CO:'k$u~1 to ~bmit a diSptJte to arbttratcn is void aoo onE!nloiceab&'! unless the WJrE!e!TY.! nl \Yas entereo into aller the dispute a1ose or tile agre<:ment c1ovded the cO!'\.<;t.11'r1e1 v11th U'lie rig h i 10 dec<oe a her a oiSpute has arisan v1helhe1 10 arbil!ate or tak<! tl'I(! matt~r to cou11. See Consurrer Protect ton Act, RSA 2000, c C·26.3, .s 16.

40 SGe Seidel v Teius COn'lfl'Junic;)tfons inc, 2011 $CC 15.. f20!1J 1 SCR 53.1 w~1G l~ So;:nema Courl of C.aMda Mld 1M1 in some ca~s. co~mei ::notecuon teg1$Aa hO!\ provi.siOrtS may override an a10 lralion ctause

NEL 101

How Arbitration Is Used Agreements to settle a dispute by arbitration are subject to arbitration legisla- tion41 in the relevant jurisdictions. These statutes oust the jurisdiction of the courts and provid e general guidelines for the cond uct o f the arbitration. The agreement between tl1e parties to submit their dispute to arbitration will normally specify the process for choosing an arbitrator and the rules of proced ure.

The parties may agree on an arbitrator or they may have a third party choose an arbitrator. As mentioned above, there are no mand atory q ualifi cations for ADR practitioners. Many of the same people who provid e mediation services also provide arbitration services. The ADR Institute of Canad a maintains a roster of arbitrators. The key is to retain the services o f a qualified and skilled professional experienced in both the type of dispute and the dispute resolution process.

The parties decide on the rules for cond ucting the arbitration. They may estab- lish their own rules, or incor porate rules set out in the arbitration statutes or d eveloped by a recognized body such as the ADR Institute of Canada.42 The parties have great flexibility in specifying the d egree of formality in the proced ures. The rules, for example, will specify how the hearing is cond ucted, when and where it is conducted, how evid ence can be presented , and timelines for its presentation.

When Arbitration Ends At tl1e end o f tl1e arbitration, tl1e arbitrator rend ers a decision. The finality o f the d ecision depend s on what the parties have agreed to in their agreement to submi t the dispute to arbitration. Usually, the d ecision will be a final d ecision with little or no right of appeal. Alternatively, the parties may agree to preserve rights of appeal and may provide for an appeal process.

The arbitration award, unless it is overturned or varied on appeal, i s binding, that is, it is enforceable by the courts. The arbitration acts provide for the enforce- ment of the arbit:ral decision in much the same manner as a judgment of the court.

INTERNATIONAL PERSPECTIVE

Binding

final and ~ntorceable 1n the courts

ARBITRATION IS THE NORM IN INTERNATIONAL TRANSACTIONS

Litigation of a business dispute in a d omestic transaction can be time-consuming, d amaging, and expensive. If the dispute arises in an interna- tional transaction, problems are compound ed by questions of which country's law applies, whi ch country's courts will hear the case, and whether the courts of one country will recognize and enforce a judgment obtained in another country. There is no international court for the resolution

of commercial disputes, nor is there a compre- hensive international system for the enforce- ment of award s obtained in d omestic courts o f other countries.

For these reasons, ADR mechanisms are extremely popular for settling international commercial disagreements. In international commercial contracts, arbitration has emerged as the favoured form of settlement, and arbitra- t ion clauses are tl1e norm. In fact, it would be a rare situation where a signific ant international

41 Sf'e foreMmp(e, TheAtbJtr.1llonAct. CCSMc AI20 Tnc? 9eoe1alarb1l!atlonacts do ool gov€1f\ce1 1a;n lypes ot art)ilfation. most ootabty, a1b111ati0ns ,n 1at:o.H 1e\a1i0ns a1e .gcrvern.Qd t7y spec'fic teats\<) lion.

42 Naw arb 1ra1on rutes C'llm.2 into ~Uoct on 1 Dect'.lmbe1 2014, and a1e ava~ab'ie oollne al <h1tp//ad1c ctJ/ aroruletf>

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commercial contract did not have an arbit ra- t ion clause in it . The a rbitration process has been greatly enhanced by the adoption in many countries of standardized rules as well as by pro- ced ures and provisions for the reciprocal recog- n ition and enforcement of the arbitral awa rd. Canada, for example, has adopted the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This convention ensures international a rbitration award s are enforceable in the over 140 countries that are signatories to it. Also, all jurisdictions in Canad a have enacted international commercial arbitration legislation

based on the United Nations Commission on International Trad e Law (UN CITRAL) Model Law on International Commercial Arbitration . The leg- islation sets out the process fo r a n international commercial arbitration as well as its review and enforcement.

Critical Analysis: Is arbitrati on of international disputes a positive development?

Source: M.'.)ry Jo Nichotson & Aty>ssa Bf ieltt¥, Le9tt.1 Aspects Of .VHl.'Y'~ natiOnaJ Business: A CanudiiN'? Perspec:Ne. 3d ed tT01on10 £moM Mol\tgom0y. 2014) at 413-419.

Plaintiff

7he party that 1rnt1ates a lawsuit against anmher party

Defendant -he parcy be1n g sued

Limitation period

The time period spec1f1ed by leg1sl at1on for commencing l eg al action

The Litigation Process As alread y discussed, most o f the legal r isks that materialized for Northland - including the delinq uent customer situation and the pollution incident- are likely to be resolved out of court. However, Northland's conflict with its insurer over the eq uipment failure may end up in litigation because alternative dispute resolution method s have failed. As the parties have been unable to find a compromise, they will now seek a court's answer to whether the continuous mini ng machine broke d own because of an accidental event (whi ch means Northland 's losses would be covered by the insura nce policy) or d ue to improper m aintenance by Northland (which would not be covered).

Litigation arises when one party brings a legal action against another. In this case, Northland would be the plaintiff or claimant. It would sue (that is, initiate legal action, known as a lawsuit or litigation) the insurer (as defendant), claiming that the d efendant breached the insurance contract when it refused to pay out Northland 's loss und er t11e policy.

Litigation should be deployed only when all other feasible method s have fa iled and the claim cannot realistically be abandoned. This is not just because litigation can harm commercial relationships and bring unwelcome publicity. Complicated litigation, in particular, is a drain on corporate resources, diverts operations from profitable business activities, and causes stress for those involved in the process. Beyond this, there is no guarantee of success in obtaining a favourable d ecision from the court or in collecting a judgment from the d efend ant. In short, litigation is generally slow, expensive, and unpredictable.

While litigation often involves just a single plaintiff against a single d efend ant, class actions are also possible, as the Business and Legislation box below discusses.

The legal foundation and outcome of a lawsuit are governed by legal rules contained in common law and statute law. Some of these rules are substantive because they address, in part, who should win the action and why. How d1e claim is carried througll the civil justice system is dictated by the procedural rules- that is, d1erules that man- date such matters as what documents are to be filed with the court, what the process leading up to the trial will be, and in what manner the trial will proceed.

There are crucial rules in each province which set specific time perio ds within which to commence legal action. The limitation period can vary widely, d epending

NEL 103

on the nature of the lawsuit and the province in which the litigation will occur. Ontario,43 New Brunswick,44 Brit ish Columbia,45 Saskatchewan,•• and Nova Scotia47 have a general limitation period of two years (meaning that the action must be commenced within two years of when the cause of action is discovered) and an ultimate limitation period o f 15 years (commencing when the cause o f action arises), whichever period expires first. Alberta48 has a general limitation period o f two years and an ultimate limitation period ofl Oyears. The other prov- inces and territories generally have two- or six-year limitation period s d epending on the nature of the action. Provinces d o provide some exceptions such as for m inors and disabled persons and for sexual assaults, but otherwise the rule is that the right to sue is lost after the applicable time period ends.

The rationales for strict limitation periods include:

providing a very strong incentive for plaintiffs to advance their claims within a reasonable time.

preventing plaintiffs from advancing old claims in wruch evid ence has been lost because time has passed.

providing d efendants with a time after which the threat or possibility of litigation comes to an end .4~

Limitation period rules can be complex and difficult to apply. This is an important reason why legal ad vice should be sought at an early stage in disputes, particularly where there are significant financial consequences. Lawyers in such cases must be aware o f the relevant limitation period and ensure that litigation is commenced if settlement does not o ccur within that period.

BUSINESS AND LEGISLATION

Class action

A l awsu1 launched by one person who represents a class of persons having s1m1tar claims against th _ same defendant

CLASS ACTION LAWSUITS

A class action is a proceeding brought by a rep- resentative plaintiff on behalf of, or for the ben- efi t of, a class of persons having similar claims against the same d efend ant. The purpose of a class action is to improve access to justice by enabling claimants to combine their resources in a single action, and to effi ciently address cases of alleged mass wrong by eliminating the need for a large number of individual actions.

difficult to use this process. Beginning in 1992, all of the jurisdictions in Canada,'°with the exception of Prince Edward Island and tl1e territories,st passed legislation to broaden the availability o f class actions. Generally, the legislation enables a class action to be certifi ed or approved by the court if

Until the 1990s, class actions were uncommon in Canad a because o f preced ents that mad e it

4 3 1.Jm•tatK>nS Act, so 2002.. c 24. Sc~dule 6, SS 4 15 44 L1m1ati0t:S Of Aclk)ftS Act. SNB 2009, c L· 8.5, s 5. 45 LJr>vta1!0nAc1, SBC 2012. c 13. s6. 4 6 1.Jm•tatK>nsAcr, SS 2004. c l 16.L 47 L1m1auon Of Acr.ons Act SNS 2014, c 35 48 Utn'tatk:>ns Aa, RSA 2000, c l •l2, s 3

the pleadings disclose a cause of action.

there is an identifiable cla~s of two or more persons.

the claims o f the class raise issues that are common to all class members.

4 9 P~me" P<.'!()Qaftey, "l 1m 1tal ion Pi'!tiOdS lor Properly Oainlga Losses 11\ C~oada*, Subfagt}t.'On&Recovery Law BJog !15 Augus t 201U, on1lne <hi tp //w""""' su1>roga11oniecovoiy"1!',.,.b(o;i corn/2011/08/arllde>fintt?r'lat:onat -l/ t1ml tal!o:rperi0ds·for·propetty-da~92·bsses·in-~Mja/:..

SO See, lor gx.arnDCe. Class Pro01ed1ngs Act, 1992. SO 1992 c 6; and Qass Proce«Jings Acr, SNS 2001, c 28 51 T~se JUrisdiCl iOns fl"lay slil cE!r1rf1 d.lSS ac1ions under thecomn"IOl"l 1aw

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the class proceeding is the preferable proce- dure for the resolution of the common issues. there is a representative plaintiff who fairly and adequately re pres ents the interests of the class and who does not have a con· flicting interest with other class members.

The result of the legislation has been a com- plete transformation of the class action landscape in Canada. Actions have bee n commenced in a wide variety of areas such as product liability, en vi· ronmental contamination, securities, financial services, employment disputes, consumer pro- tection, franch ises, and pension plans. Notably, there is a trend toward class actions in the area of privacy, as illustrated by the following examples:

a class action (Douez v Facebook, Inc.) was filed in British Columbia against Facebook for the unauthorized use of Facebook users' names and images in "Sponsored Stories." Advertisements featuring a user's name and image appeared on the user's fr iends' newsfeed when the user pressed the "like" button for a business.52

a class action (Condon v Canada) was filed in Ontario against the Federal government after Human Resources and Skills

When isa clDssa<tlon tht prr{trablt method of settling a c/Dim ?

Development Canada announced that it had lost an unencrypted external hard drive containing the personal information (dates of birth, addresses, student loan bal- ances, and social insurance numbers) of approximately 583000 Canada Student Loans recipients."

a class action (Shore v Avid Dating Life Inc. et al) was filed in Ontario against the parent companies of AshleyMadison.com, a website that offered to connect people seeking extramarital affairs. It is alleged that hackers stole and published sensitive personal information of thousands of Canadian users of the website."'

a class action (Emnsv Bank of Nom Scoda) was filed in Ontario agajnst the Bank of Nova Scotia after an employee accessed the confi- dential personal banking information of about 643 customers. The employee gave the infor- mation to hi~ girlfriend who sold the informa- tion to third parties for identity theft.55

The advent of the class action in Canada has not been without controversy. Some applaud class actions not only formaldng it less onerous for ind i- viduals to seek redress agajnst large companies, but also for forcing companies to change behaviour in a positive way. Others complain the courts have been too lenient in allowing class actions to proceed and that it is usually the lawyeis who benefit most.

Critical Analysis: Class action legislation has significantly increased the risk of a class action for business. How can a business address this risk in its legal risk management plan?

Sources: -~ ·"a:.y G1.1 oe ao Legal A:sil M.lf\a<J menl M~MJlill't Ll.P t23 Octo~, 2015J O"'t ne Mo.,<1-.lCI <l"IUp//w>NWtn0no~ C:O'l"tfo)C/Co"lte"'ltCISl)'oo.,t.ent_Cl=li'}.JO>, Lu s M l'\ "Cl.Y.tAct01

CO"'li"-d.rlPTf The Lw..ye's V~Jy (23 Al)'I 2UlGJ 24 J x:oo Zcg~ 'Ctass/lc.to"'lS TheCol'l!iu~rs 6est rroena1· ThcL.a.-.yn.s Vlce.ii,Y t2{) r£t>r1Ja1y 20091 5

S;l See Dout.zv fdccbOa>;, Im:., 2017 SCC 33.. !20L'l SCJ No 33 TM Supreme Coo11 of C.iin."ld,1 ~kl that tno act on G;ill P!OC<ted H\ Bi.ti.sh Columbia desp h'.! a clause ,n raceb001fs te1ms of 1.1.-.c \l·pyl.11 ~ (.at-l<:Hn l oouru lor tho 1csotuton or ct.> ms

S3 Don 6ut1c1, 'C1.lsr.k.t:on law_g;.1 C(!1t1f;(?d 0\oer Lossot 583000 Student lo<ll\ r1k!s' 1hc01t11vt.1 (lf1:tttt 120 May- 20141 Online <hllp//ottav1ac,1~~n.com/news/dass-oct0Mav1Su t ·C<'fl I.Cd o\C1-tou, -o f 5a300C)-SttJd<1nt·\ooan-fAcs>

S4 Joct (.Qstwood b Ben S;xin. ·owners of AshleyMadlSOr\.OOr'n HI W11nCt.-"ls!.Ac11on Su t 'r0tont0Sti11 f 20 Augu1>1 201 !>J. onl•!)C <hltos//www 100sl..lr.com/oows/cal\CY.Ja/2015/0S/20/CANrte1s -or ashlcym1).1.~onc::o1n h 1 t wHl d.:'.11!.S"i>Ct on !IU l .hlrnt>.

SS 'Gan..ld..an Bank. Piopo!;CS 10 ~lit(! Pr "ViY:.y (lass AclOn". Ptrvtl lech 129 May 2016) onl1!V' <nttps l/p1vat«.h ca/iOt b/OS/29fcanadta!'l--Mnk·P'OOOses·prVacy·d<iiss-act on-sautcmcnt />

105 NEL

Commercial litigation (which involves businesses suing businesses) is also known as private (or civil) litigation. The litigants bear the costs o f bringing a matter through the judicial system and any recovery of compensation comes from the losing party. Government's only involvement in the process is through the provision o f the ad ministrative structure, the court fac ilities, the judges, and other court officials. There is no government fu nding for the p rivate liti- gants themselves, w ith the limited exception of legal aid programs which assist in certain civil matters, such as clivorce and custody lawsuits, but not in com- mercial disputes.

Every province and territor y has its own system of courts and rules for civil litigation. In some cases, the amount o f the claim determines the court in which the action would be commenced. When the plaintiff is suing for a relatively small amount of money, for example, the lawsuit can be processed in the local equiva- lent o f a small claims court. The name of the court varies from province to prov- ince, with the monetary limit ranging from $10 000 all the way up to $50000. The small claims process is designed to be simpler, quicker, and less expensive than mainstream litigation. Litigants d o not need to h ire a lawyer to assist them, though some choose to d o so, especially if the matter is complex.

Claims in excess of small claims limits must be pursued in the local equivalent o f the superior court, which has unlimited monetary jurisdiction. Litigation in superior courts is governed by complicated rules o f court determined by each province. Such litigation is orclinarily conducted by a lawyer in consultation with the client. While it is technically permissible for a business to attempt to meet the many for mal requirements of superior court litigation without the benefit o f legal a dvice, this is generally inadvisable. A litigant's need for what can often be costly legal ad vice raises the issue of accessibility to the justice system for those who cannot afford the services of a lawyer.

Stages of a Lawsuit In superior courts, a lawsuit that goes through the full court process comprises four stages.

Pleadings The fi rst stage is known as pleadings and involves the exchange of the formal d ocuments outlining the basis of the suit. The plaintiff initiates tl1e action by preparing a d ocument that contains the allegations supporting the claim . For example, in Northland 's action against its insurer, the in itial d ocument would, among other matters, identify the insurance contract and the coverage provided. The claim would in clicate that the eq uipment was insured under that contract of insurance, identify the accident that caused the loss, and state the d ollar amount o f the loss. The claim would then also state that the insured had mad e d emand for payment of the loss from the insurer und er the policy and that the insurer had refu sed to d o so, in breach of the policy. This in itial d ocument is a notice of the claim and is registered, or "filed", w ith the appropriate court office. It is then formally d elivered to the party being sued (the d efend ant), through a process known as service. If the d efendant has retained a lawyer, that lawyer may accept ser vice of the documents on the d efendant's behalf.

This first stage d oes not include evid ence, but instead outlines the key points that the plaintiff need s to prove at trial in ord er to succeed. The d efendant then has a short period o f t ime (e.g., 2 0 d ays in Ontario) in which to respond to the allegations. Failure by the d efend ant to respond within the allowed time is

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Pleadings

'he form a I documen :s concerni119 th•2 basis for a lawsuit

Claim

~he formal document that 1n1tJa:es l1t1gat1on by sett1 ng out the pla1nt1 ff's allegations against me deiendant

Defen ce

The di=fendam's formal response o me pla1nt1ffs allegations

Counterclaim

A claim by the defendan against the plaintiff

Disco very

-he process o d1sclos1ng evidence to support the claims 1n a lawsuit

equivalent to admjtting the claim. If the d efendant has no defence to the cJajm, he or she may choose to allow the plajntiff to "win" the case. The plaintiff, jn turn, simply explains to the jud ge that the d efendant has conceded the case. The court gives a d efault judgment to the plaintiff, who is then free to move to the enforcement stage.

If there are matters jn dispute, the defendant will likely seek legal advice and prepare a formal response to the claim, known as a defence. The lawyers may agree to allow the defendant longer than the minimum period in whlch to prepare the defence. In Northland's example, the insurer would assert in its statement o f d efence that Northland's loss was not an insured loss. The statement o f defence would state that the loss clid not arise asa result ofaccident but as a result of poor majntenance.

Speaking more generally, the d efendant also has the option of filing a counterclalin against the plaintiff in the appropriate case. For example, when a d efendant is sued for allegedly causing a motor vehlde accident resulting in injury to the plaintiff, the d efendant may turn the tables and file a counterclaim, alleging that it was actually the plaintiff who caused the accident and injury to the defendant.

Discovery Once the basic cJajms and allegations have been made and clarified, the suit proceed s to the second stage, commonly known as discovery. Both parties must now reveal and d emonstrate the facts that support their allegations. These facts are found in documents, in the oral testimony of those directly involved in the situation, and in expert reports. In thls context, documents includ e electronic data {such as email archlves and the contents of hard drives) and g ive rise to complicated issues of preservation and access. Electronic data is easier to access, organize, and distribute, but can be challenging to find and con trol. It has become important for firm s to have comprehensive data reten- tion policies in anticipation of e-cliscovery. Computer technology can help track the numerous documents in complicated cases. In its litigation with the insurer, Nortllland would produce, among other documents, tl1e maintenance records it kept regardjng the continuous mining machine. Unfortunately for North- land, it was unable to locate some of the relevant majntenance records on the bearing.

The time frame for thls stage is undefined and d epends largely on the degree of complexity of the case. The purpose of this stage is to test the strengtl1 of the opposing positions, so that, based on a greater appreciation of the strengths and weaknesses of both sides of the case, the parties will be encouraged to reach a compromise. At this stage, initiatives in various provinces come into play for the purpose of clearing the backlogs in the courts and streamlining the litigation pro- cess. Generally, these initiatives require the parties involved in litigation to engage in a formal attempt to resolve their dispute before it actually goes to court. These attempts may require the parties to engage in a process of mediation, whereby a facilitator, who may be a judge, helps them reach a compromise and avoid a trial. In many jurisclictions, the parties can proceed to trial only when the mecliation phase is completed. Besides tl1ese mandatory dispute resolution methods, the parties are required to participate in a settlement and pre-trial conference, the purpose of whlch is to narrow the issues in clispute and make the actual trial as short as possible in the event that it d oes occur.

NEL 107

Costs

Legal expenses :ha: a Jud ge orders the loser to pay the 'l'lin ner

Any monetary award includes the basic amount of the claim plus interest, and, in the usual case, the legal costs of the successful party. Costs are awarded by the judge based on a predetermined scale, combined with the judge's view of the com- plexity of the case. An award of costs usually falls well short of fully compensating the winning party for all its legal expenses, providing only a partial recovery for the successful litigant. In Alberta, for example, costs typically only cover up to about one-third of the successful party's actual legal costs. In short, even suc- cessful litigation involves expense. The downside for the losing party is signifi- cant: in addition to the amount of the judgment and interest, it is likely to be required to pay "costs" to the winner, as well as pay its own legal expenses.

In exceptional cases where the conduct of the losing party has been seriously objectionable, the court may award what are known as solicitor and client costs. This award reflects the actual legal expenses incurred by the successful party so that they are fully indemnified for their litigation expenses.

The dispute between Northland and its insurer was resolved by litigation, with Northland being mainly successful. To obtain coverage on the bearing, the policy required that Northland produce complete maintenance records. It was unable to do so and, therefore, the judge disallowed that portion of the claim. Fortunately for Northland, the requirement to produce complete maintenance records did not apply to the conveyor belt and attendant losses. The court awarded damages for these losses because it was satisfied that the fire was triggered by an accident, as claimed by Northland. Beyond this, Northland was awarded its costs.

ETHICAL CONSIDERATIONS

THIRD PARTY FUNDING OF LITIGATION In Schenk v Valeant Pharmaceuticals International Inc.,56 a Swiss man claimed that Valeant owed him a $10 million commission on a deal that he had made on the company's behalf. Schenk did not have the money to pursue the claim so he paid for h is legal services with funding from a third party, an English company that specialized in litigation funding. This arrangement, which covered legal costs and disbursements in exchange for a portion of the winnings, was approved by the court.57 .Justice McEwen stated there is "no reason why such funding would be inappropriate in the field of commercial litiga- tion." In Dugal v Manulife Financial Corporation,"' the court approved third party funding in a class

action. In exchange for guaranteeing the plain- tiff's costs, the funder received 7% of any settle- ment capped at a maximum of $5 million.

Litigation, including class action litigation, is expensive and risky. When a plaintiff sues there is the risk that, if she loses, she will be respon- sible for the w inning party's costs. The same applies to class actions" except the risk tends to fall on lawyers who assume responsibility for the winner's costs if they lose. Third party funding is a means of mitigating the risk for plaintiffs and lawyers and thereby increasing access to justice.

As litigation funding agreements are relatively new, particularly in the commercial litigation context, there are few rules. The principles that may apply based on litigation in tl1e class action

56 20150N$C 3215, f2015 JOJ No 2991 51 An inilk11air<lngeme1u 1001 vK>ukl Mve ~en Ille lunde1 recei\oe rrore than 50%of the av1a1d or seufemen1 v1~s

nol :tpproved Thie terins \ ... er~ 1ev-l!ied and later ac:cected by rhe court

58 2011ONSC 1785, 105 OR tldJ 364 59 In ~orne j u1iSdict:ons, !il.lCl't as BntiSI\ Cok.imbia 1 he l oser pa,{ p1inc:'j».:> does not appfy to class actto!\S. Also

1n On~no, section 31 of The C1t1Ss Ptoceet:fir.gsA.c1 snett~rs d&ss members o tt')er tnan too tc-ao ~i f'Hiff l1orr1 COSI S <!i!'Y.l lheOnta10 Class Proce"-!<Hngs rund eSU)b(:s!lad in 1992 may provide COS! 1ndemn11tcal 10!l for <:asos lied in th'1 puot:c inte1es1 in exchal'lg2 fo1 10%of a!\yav1a1d or sen~ment

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Trial and Decision If no settlement is reached at the discovery stage, the plaintiff can pro ceed to trial. The timing will d epend on the availability of the courts and on how long it takes the parties to prepare for the formalities of the trial. Most trials proceed with a single judge and no jury. Jury trials are available for commercial matters, but a jury trial can be opposed if, for example, the case is deemed too complex for a jury to unde rstand .

At trial, the b urden of proof falls on the plain tiff. The plaintiff must fo rmally introd uce evidence, according to established rules, to prove that its version of events is more likely true than not, known as "proving the case on the balance of probabilities." Expressed numerically, the plaintiff must prove that there is a better than 50% chance that the circumstances of the dispute are as it contends they a re and that, furthermore, these circumstan ces entitle it to receive the remedy that it seeks. The d efendant has the opportunity to challenge the plain- tiff's witnesses and documents and to introduce its own account of events to oppose the claim. The judge must decide what happened between the parties and whether their claims are justified . This is not generally a straightforward t ask, as the parties typically have wid ely diffe ring versions of events. Once the fac ts have been established, the judge is then in a position to consider and apply the rele- vant law.

The parties make submissions about the legal r ules and precedents that sup- port their d esired conclusion. The jud ge then identifies and applies relevant legal rules to those fac tual findings to produce a d ecision. The d ecision may be given by the judge immediately at the end of the trial or reserved until a later time, to allow the judge some time for deliberation.

The trial between Northland and its insurer is likely to proceed before a judge without a jury unless one side feels that a jury might be more sympathetic to its position than a judge. In a commercial matter such as this, that is unlikely to be the case. Northland, as plaintiff, will present its evidence to support its claim that its insurer is bound to honour the insurance policy and, more specifically, that the machine in question failed as a result of an accident. The insurer will prod uce evi- dence in opposition to the Northland claim, suggesting that d eficient maintenance proced ures were the cause. In this case, a crucial issue is what caused the North- land equipment to fai l. Both sides will likely rely on experts' repor ts to support their opposing versions of events.

The judge's decision contains the judge's resolution of the case- who must pay how much to whom- supported by the appropriate justification based on the evidence and legal rules. Though most plain tiffs seek a monetar y award, other remedies are available in exceptional circumstances, such as when the successful party requests an order from the court for the losing party to perform a specific act (e.g., transfer a piece of land) o r cease some activity (e.g., trespassing on property) .

In the Northland litigation, the pivotal issue of what caused the machinery to fai l would be determined by the judge, in part, on the basis of his or her assess- ment of expert reports on point. Also important would be the jud ge's assessment of the credibility o f the witnesses who, for example, had responsibility to main- tain the machinery in q uestion. As previously noted, Northla nd, as plaintiff, has the onus o f proof a nd must demonstrate to the jud ge, on the balance o f prob- abilities, that the machiner y failed d ue to an accidental fire and not improper maintenance.

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Trial

A formal l1ean ng before a 1udge tha: results 1n a b1 ndin g dec1 sion

Burden of proof

Th" obl1gat1on of the plaintiff to prove its case

Eviden ce

Proof presented 1n court (O suppor· a claim

Decision

The JUdgmen: of the court t11at spec1f1es which party 1s successful and why

context include: the fun ding agreement must be reasonable (probably not more than 1 0% o f an award or settlement); there must be limits on the fu nder's ability to influence the litigation (partic- ularly the termi nation); the agreement may be required to be disclosed to the opposing party (if tl1e interests of transpa rency warrant disclosure);

In what types of cases m ight litigants seek third party funding? Why might a well-capitalized litigant I/Se third party funding?

an d the agreement may reqllire court approval (pa rticularly in the case of class action lawsuits) _..,

Despite tl1e benefi t of tl1ird party fun ding increasing a ccess to justice, it is not without its criticisms. Critics claim that such agreements vfolate the common law d octrines of champerty (prohibitions against ilie financing of litigation) and m aintenance (tlle improper meddling in a lawsuit by a party with no legal interest in it). These prohibitions reflect the belief that allowing third parties to participate in litigation tlrreatens ilie integrity of ilie justice system.

Critical Analysis: How might th ir d party fu nding threaten the integrity of the legal system?

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Enforcement The fourth and final stage of the litigation process is enforcement of ilie judgment awarded to the winning party. The winner of the suit must enforce the judgment with the assistance of ilie court. The judge issues a judgment for a certain amount of money which, in turn, can be enforced against ilie loser, now known as ilie judgment debtor. If ilie judgment debtor fails to voluntarily pay the judgment, court officials or other d esignated persons will assist in seizing a nd selling the assets of that debtor, which may includ e land, vehicles, equipment, inventory, accounts rece ivable, and other assets. Laws in every jurisdiction limit the extent to which the winning party can take assets when the losing party is a human being rather than a corporation, ilie point being to ensure that tl1e individ ual is not left destitute.

The winner recovers ilie judgment only to the extent that the loser's assets provide; iliere is no public fu nd from which iliese jud gments are pajd . Therefore, it is ad visable for a prospective plaintiff to investigate ilie defend ant's ability to pay before commencing the suit. A judgment in any amount is generally of little value if ilie proposed d efend ant has insuffici ent assets to pay, has many oilier unpaid cred itors, or is in bankruptcy proceedings.

A judgment is valid fo r a long period (up to 20 years d epending on the jurisdic- tion) and can be extend ed.

60 See· Howard Bortoc!<.& Ban Cai ino, 'Th1rd~Patty L ti9a1on Fur\ding in Canada·. McCague Borl;J(:k UP

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110

Judgment debtor

The party ordered by the court to pay a specified amount to the winner oi a lawsuit

Appeal

The process of arguing w a l1i gher court tha: a cou rt decision 1s wron g

Appellant

The par:y who begins or fi les an appeal

Responde nt

The party against whom an appeal 1s fil ed

Appeals A party who d oes not wish to accept the trial d ecision may consider an a ppeal to the next court in the hierarchy. An appeal must be in itiated within a specific perio d of time (such as 30 d ays) . There are several reasons an appeal should be undertaken only after careful consideration. In addition to the time and commit - ment required to pursue an appeal, the chances of success are limited . An appeal is not a rehearing of the case, but merely an opportunity to argue that the trial d ecision contains signifi cant errors in how the law was applied. It is normally not possible to dispute the conclusions regarding what events actually transpired between the parties (i.e., what the trial judge found the "facts" to be), but only to dispute the judge's understanding and application of the law. Appeal courts tend to confirm trial decisions unless serious errors have been d emonstrated.

Appeals at higher levels are normally conducted by a panel of at least three judges. Generally, no new evid ence is presented. The lawyers representing the a ppellant (who makes the appeal) and the respondent (who defends the appeal) make written and oral submissions to the appeal judges, who then d ecide whether to confirm the origjnal d ecision, vary it in some way, reverse the decision, or, in exceptional cases, order that another trial be cond ucted.

After the court of appeal rules, the unsuccessful party can consider a further appeal to the Supreme Court of Canada . The appellant must obtain leave from the Supreme Court to proceed with that appeal. The leave application is only suc- cessful if the case involves a matter o f "public importance" or involves an "important issue of law."., As a result, the chance of an appeal making it all the way to the Supreme Court of Canad a is very slight.

Developments in litigation (in particular, contingency fees, punitive d amages, an d class actions) are addressed in the following comparison of the systems in Canad a and the Uruted States.

INTERNATIONAL PERSPECTIVE

THE RISKS OF LITIGATION IN THE UNITED STATES

A signifi cant risk for Canadian companies doing business in the U ruted States marketplace is Ii tiga- tion with competitors, partners, suppliers, cus- tomers, and governments. The incidence and costs of litigation in the United States are significant62

and high in relation to Canada. Differences between

the American and Canadian civil ligation systems contribute to tl1e greater litigation r isks in the U ruted States. The key differences are as follows:

Costs: In Canad a, the general rule is tl1at the losing party in civil litigation pays a portion of the winner's legal costs. In the Uruted States, there is no general rule63

that the losing party pays any of die

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111 NEL

winner's legal costs. The "loser pay" rule in Canad a increases r isk and discourages weak and questionable cases. In the United States, there is no such d isincentive.

Jury Trials: In the United States, litigants have a constitutional right to a jury trial in a civil action. In Canada, jury trials, except for defa mation and personal injury cases, are rare. Some cases are prohibited by statute from being tried by a jury and, even where juries are permissible, courts have a broad discretion to deny a jury if the legal or factual issues are complex or if the defendant may be prejudiced. The use of juries increases costs (such as the costs of retaining jury con- sultants) and increases risk because of the w1predictability of juries.Juries are often =sympathetic to business and may award large d amages against such defendants. This poses a significa nt risk for business.

Damage Awards: Damage awards in the United States are much larger than in Canada, thus the incentives to sue are greater. In the United States, punitive damages (to pW1ish the loser) are generally available, whereas in Canada they are rarely awarded and, when they are, they are much lower than in the United States.64 Although many states have passed legislation capping punitive damage awards, the awards can still be 10 times the compensatory damages. Also, in Canada damages for pain and suffering in personal injury cases are capped;"' there are no similar caps in the United States. A further factor contributing to laige damage awards in the United States are statutes in areas such as antitrust that provide triple damages.

Class Actions: Class action lawsuits a re wid ely available in the United States and create incentives to sue. A single individ ual

with a small claim is not a great r isk, but when many in divid uals witl1 small claims unite and pursue their claims as a group, the r isk for business is huge. In Canad a, as d escribed earlier, class actions are becoming more accessible and widely used so tl1e distinction between the two systems on this basis may be decreasing.

Contingency Fees: The use of contingency fees is more wid espread in the United States. A contingency fee is an arrange- ment between the lawyer and the client where the lawyer receives a percentage of the jud gment if the case is won and receives nothing (or disbursements only) if the case is lost. Such arrangements increase risk for business because they improve accessibility to the legal system for claimants who might otherwise lack the resources to sue.

Discovery: In the United States, discovery rules a re far-reaching. This results in more time-consuming and expensive litigation. U.S. litigants have broad powers to obtain oral and d ocumentary evidence, whereas in Canad a oral discovery can be restricted in the number o f persons who can be exam- ined and time limits for examination.

Critical Analysis: How can Canadian busi nesses manage the litigation risks of d oing business in the United States?

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The methods of dispute resolution are SW11marized in Figure 4.2.

Contingency fee

A fee based on a percentage of the

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JU dgment awarded and paid by the client to the l awyer on ly 1i the action 1s successful

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FIGURE 4.2 Forms of Dispute Resolution

. . • Parties and a mediator Parties, their lawyers Parties, lawyers,

representatives (usually), and a judge, and, arbitrator(s) occasionally, a jury

By consent or contract By consent or contract By con.sent or contract Byone party or by statute or by starute suing theother

Parties decide Mediator assists Arbitrator makes Judge makes decision the parties decision a ft er after trial

submissions

If sue<essful, If successful, Binding Judgment by the court settlement decision (usually)

Quick, cheap, Quick, cheaperthan Can be quicker and No agreement to controllable~ private, arbitration and less costly than proceed required, helps preserve litigation, controllable, litigation, can be secs precedent, relationships, may private, helps preserve private, choice of final decision produce final decision relationships, may process and arbicrator,

produce final decision decision n)ay be binding

Requires agreement May require May require Slow, expensive, to proceed, no agreement to proceed, agreement, can be as stressful, imposed precedent, may fail no precedent, may fail slaw and expensive decision, no choice

as litigation, imposed over process and decision, no precedent, decision-maker, public, may destroy usually destroys relationships relationships

BUSINESS LAW IN PRACTICE REVISITED

1. How well does Northland's risk management plan deal with the delin- quent customer. the hacking attempt. the pollution incident. and the machine breakdown. and how could its performance have improved ?

Marie prepared a comprehensive risk management plan for Northland whlch is found in Chapter 3 at Figure 3.3. The plan was largely successful because it antic- ipated numerous events that might give rise to legal consequences and offered solutions on how and when to reduce, transfer, or accept the risks associated with those events. Four risks materialized and the effectiveness of the plan in relation to these incidents is recounted in more detail in thls chapter. To recap:

• the delinquent customer situation was anticipated, but not avoided. North- land should have properly investigated the customer's creditworthiness in advance, particularly given the size of the account. Northland requires an improved system for deciding when to grant credit to customers and must ensure that the new system is properly deployed by its staff going forward.

• the hacking attempt was particularly well anticipated by the risk man- agement plan. Firewalls helped prevent data loss and even though the attack caused a temporary shutdown of Northland's network, there was no

NEL 11 3

lasting d amage. Northland also had obtained insurance to cover off legal risks associated with such attacks, but the insura nce proved to be under- inclusive. Northland should investigate purchasing a more comprehensive policy to cover additional costs associated with breaches of its computer system. Its insurance program requires enhancement.

• the risk management plan anticipated the pollution incident, but did not adequately prevent its occurrence. Northland must improve procedures for replacing scrubbers to prevent a future incident, a matter its insurance company will cer t ainly require in any event. Fortunately, the dispute with the farmer whose land was impacted by the pollution was nicely resolved . The farmer was compensated to his relative satisfa ction and he signed a confid entiality agreement. Insurance covered the cost of the settlement.

• the machine breakd own proved to be the most intractable problem for Northland and highlighted a problem with the implementation of the r isk management plan. Even though the plan called for maintenance reco rds on all equipment, the records were incomplete. As a result, Northland was unsuccessful in recovering all of its losses. Setting aside this deficiency, it is hard to see how the dispute with the insurer over the interpretation of the insurance policy could have been avoided. Northland worked hard to resolve the dispute through negotiation and mediation, but a compromise was unattainable. Some disputes- albeit the tiny minority- can only be resolved by litigation.

2. How well does Northland deploy the various methods of dispute res- olution in relation to the legal risks that materialized?

Northland accessed a variety of dispute resolution methods as it sought to manage the legal risks that materialized . With the exception of the hacking attempt, each one of the incidents required negotiation. Negotiation alone solved the problem with the disgruntled farmer, likely propelled by Northland's open approach and will- ingness to offer an apology. Also through negotiation, Northland learned that the d elinquent customer could not pay its bill and has simply decided to write the debt o ff. This outcome, though perhaps disappointing, is based on fac ts surrounding the customer's financial status and is therefore realistic. There is no sense spending money need lessly by launching what would almost certainly be a pointless lawsuit In botl1 of these instances, therefore, ADR proved highly effective for Northland.

Northland's dispute with its insurer over coverage rela ted to the equipment breakd own went through the phases of negotiation and mediation. Because the parties became unwilling to compromise, these phases failed to prod uce a reso- lution. Arbitration was not required by the contract between Northland and its insurer, but tl1e parties considered the possibility in any event. This option was ultimately rejected, however, when the insurer d ecided it wanted a judge's inter- pretation concerning a clause in the insurance policy. Only litigation could pro- d uce the result the insurer wanted. As noted, not ever y dispute can be effectively resolved through ADR.

All in, Marie's risk management plan and Northland's willingness to access AD R proved to be a highly successful combination. The risk management plan red uced agreat many legal risks or prevented them from occurring, but when they did o ccur, Northland's response was largely effective. As a result, only one of the disputes discussed in this chapter will be resolved through the slow, costly, and uncertain process of litigation.

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3. What risks might be associated with operating a mine on Crown land where Indigenous people carry on traditional activities?

The major risks associated w ith the m ine d evelopment other than the usual environmental, regulatory, operational, etc., are twofold. First the.re is the r isk of fai ling to adequately consider and mitigate the impact of the project on the affected Indigenous community. Th is fai lure could result in extensive d elays before permitting bodies and could limit Northland's ability to access the bene- fi ts of working with the affected people. Second, if the Crown fa ils in its duty to consult aboriginal people affected by the issuance of approvals and licences, the mine project m ight be delayed and ultima tely cancelled.

CHAPTER SUMMARY

This chapter has explored a range of disputes in which a business such as North- land might become involved. It also considered the impact of operating a mine on Crown land where In rugenous people carry out traditional activities. A r isk management plan that is well developed a nd carefully implemented can minimize the number of rusputes that arise and provid e guidance for d ealing with those that d o. Legal rusputes should be approached with a view to achieving an acceptable resolution, rather than winning a t all costs.

There are a w ide variety of techniques for resolving rusputes that avoid litiga- tion altogether or enable the parties to min imize d amage to the busjnesses and their commercial relationships. The parties can negotiate their own resolution, or, if that is not possible, they can involve another person as a meruator to assjst them or as an arbitrator to make a d ecision for them. If the pa rties resort to liti- gation, they are involving themselves in a lengthy, costly, public, and risky process with strict procedural rules. The process has four stages- plearungs, discovery, trial, and decisjon. The winner must collect the amount awarded by the court. That amount usually d oes not includ e full recovery of tl1e legal expenses incurred to win the lawsuit.

CHAPTER STUDY

Key Terms and Concepts alte rnative dispute resolution (ADR)(p. 8 6)

appeal (p. 102 )

appellant (p. 102 )

arbitrator ( p. 91)

binding ( p. 9 3)

burde n of proof (p. 99)

claim (p. 97)

class action (p. 9 5)

contingency f ee (p. 103)

costs (p. 100)

counte rclaim (p. 98)

decision ( p. 9 9)

defence (p. 9 8)

defendant (p. 94)

discovery ( p. 98)

e vide nce (p. 99)

judgment debtor (p. 101)

limitation period (p. 94)

mediat or (p. 90)

11 5 NEL

n egotiation ( p. 86)

plaintiff (p. 94)

pleading• (p. 97)

releue (p. 88)

respondent (p. 102)

trial (p. 99)

Questions for Review 1. What are some business law disputes that

could arise from the operation of a fast-food restaurant?

2. What is the goal of negotiation in resolving legal problems?

3. What happens when negotiations fail?

4. What is the process for attempting to resolve disputes informally?

5. What issues should a business consider before deciding to proceed with a legal dispute rather than abandon it?

6. What is mediation? What are the advantages of mediation as a method of resolving a dispute?

7. What are the differences between mediation and arbitration?

8. Why is arbitration particularly attractive in international disputes?

9. What are the advantages of arbitration in comparison to litigation?

10. What are the major steps in the litigation process?

11. What happens during the "discovery" stage of litigation?

12. Why is settlement out of court more common than and preferable to going to trial?

13. How does a class action differ from a normal lawsuit?

1 4. What is a limitation period?

15. To what extent does the winner of a lawsuit recover the expenses of the litigation?

16. How does the winner of a lawsuit enforce the judgment?

1 7. What factors should be considered before appealing a court decision?

1 8. What is a contingency fee?

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116

Questions for Critical Thinking 1. Dr. Julie Macfarlane, a professor in the Faculty

of Law at the University of Windsor and author of The New Law~r: How Settlement Is Transforming the Practice of Law, notes that figmes out of the United States indicate that 98.2% of civil matters are settled before court. The rate is almost as high in Ontario, at approximately 95- 96%.66 Why is settling out of court replacing going to court? Is this a good trend?

2. The Canadian system of litigation partially compensates the winning party for its legal expenses through an award of" costs", to be paid by the loser in addition to any damages awarded by the court. [n the United States, it is usual for the parties to bear their own costs. Which rule is fairer? Does the award:ing of costs encourage or discourage litigation?

3. Class actions are a popular way for a large number of small consumer claims that might otherwise have been ignored to be brought against a corporation. For example, ticket purchasers brought a class action against Ticketmaster alleging that it conspired to have Canadians pay inflated prices for tickets by directing them away from its lower· priced website to its premium-priced website. Ticketmaster settled and concertgoers received $36 per ticket for a projected payout of $5 million. Lawyers received 25% of each payout for a projected $1.26 million.67 Who benefits from a successful class action lawsuit? Who loses from a successful class action lawsuit?

4. In Canada, arbitration clauses in consumer contracts a.re prolubited in some jurisdictions. In other jurisdictions, the courts have often interpreted consumer protection legislation so as to permit class actions even in the face of an arbitration clause. [n the United States, the trend is to uphold arbitration clauses in consumer contracts and thereby preclude class actions. What are the public policy rationales

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for enforcing arbitration clauses? Does their enforcement promote or impair access to justice?

5. Alternative dispute resolution has many positive features. It can be faster and cheaper than litigation. And unlike litigation, the process can be confid ential and the parties can control the process, the timing, and the selection of the facilitator. Are there any downsides to the avoidance of litigation in favour of ADR in the resolution of disputes? When is litigation the most appropriate method ofresolving a dispute?

6. A plaintiff or the d efendant in a civil case (for example, a motor vehicle accident) may request a jury trial. The other party may oppose that request. The judge hearing the case has the discretion to d etermine whether the case is a proper case to be heard by a jury. In making that determination, the judge will consider primarily the complexity of the issues to be tried. What are the advantages and disadvantages of jury trials? Who benefi ts from a jury trial- the plaintiff or the d efend ant?

Situations for Discussion 1. General Mills, one of North America's largest

food companies, updated the legal terms on its website. The new terms provided that any dispute related to the purchase or use of any General Mills product or service would be resolved through binding arbi tration. If consumers "liked" General Mills' social media pages, d ownloaded coupons from its website, or entered any company· sponsored contests, they were agreeing to have any dispute with General Mills referred to arbitration and could not sue or join a class action. After a public outcry on social media, the company revised its position and sent an email stating that it was reverting to the old terms, which made no mention of binding arbitration.68 Why d o you think the public was upset by a clause requiring

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disputes to be settled by binding arbitration? Would Canadian courts enforce General Mills' rescind ed legal terms?

2 . Cameron and Tyler Winklevoss entered into a settlement with Facebook over their allegations against Mark Zuckerberg, tl1e founder of Facebook. They alleged that they had hired Zuckerberg, their classmate at Harvard University, to work on their social networking site, ConnectU, but instead, he stole their idea and launched his own site. The dispute was settled for $20 million cash and $45 million in Facebook shares. Three years later, the Wi nklevoss twins attempted to have the settlement overturned on the basis that they had been misled during negotiations about the value of the shares they would receive as part of the settlement. They lost their attempt at both the U.S. Circuit Court and the U.S. Court of Appeals. The result illustrates that courts are generally very reluctant to reopen settlements.69 Why are courts reluctant to reopen settlements? What steps can be taken to reduce the possibility of litigation after a settlement?

3. York University launched a lawsuit against its former assistant vice-president, Michael Markicevic, accusing him of masterminding a $1.2 million fraud. The case was a year and a half old and not dose to trial when Ontario Superior Court Justice D.M. Brown ruled on a preliminary matter and speculated that the fi nal legal bills for the defendants might be more tl1an $800 000. He wrote: "If we have reached the point where $800 000 cannot buy you a defence to a $1.2 million frau d claim, then we may as well throw up our collective hands and concede that our public courts have failed and a re now open to the rich.''7° What factors contribute to the high cost of justice? How could access to justice be improved?

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4. Joe Smith is in the business of providing equipment and services for dean-up and recovery operations following oil spills and other disasters. Canadian Natural Resources Ltd (CNR) is a producer of natural gas and crude oil. It occasionally hired Smith for clean-up and recovery after a spill. CNR became a member of Western Canadian Spill Services Ltd, an industry cooperative that responds to and contains spills. Membership in this group enabled CNR to rent dean-up and other equipment at no cost. CNR stopped hiring Smith for dean-up and recovery. Smith is considering filing a statement of claim seeking damages for financial losses as a result of CNR's change in bus iness practices and claiming that CNR was operating its equipment in an unsafe manner.71 How much time does Smith have in whkh to file h is statement of claim? What is Smith's cause of action? [f Smith is successful, what will he receive as a remed y? Who is entitled to costs and on what basis?

S. A woman from British Columbia, Saliha Alnoor, recently sued Colgate-Palmolive, alleging that she was injured by a defective toothbrush. She stated that the toothbrush snapped as she was brushing her teeth, which injured her gums and caused them to bleed profusely. Alnoor claimed that she had endured permanent injury and sought damages, including $94000 in anticipated treatments. Colgate denied any wrongdoing. Soon after the trial began, the judge made several rulings against Alnoor, who was self-represented. Alnoor later agreed to drop her claim in response to Colgate's offer to waive legal costs against her (estimated at about $30000) if she did so. According to the National Pose, Alnoor's brother stated as follows: "We spent $21000 on lawyers and experts, but we have no regrets. Now we know how justice works. Now we are much wiser."72 Do you agree with Colgate's approach toAlnoor's litigation? What risks did Colgate face from the litigation? What are Alnoor's risks?

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6. In 2000, Ellen Smith became alarmed upon learning of high levels of nickel contamination in the soil on her property in Port Colborne, Ontario. The nickel particles had come from lnco Ltd's nickel refinery, which had operated in the area starting in 1918 and ending in 1984. She was not alone; residents were concerned about possible health risks and decreased property values accompanying such contamination. In response, a class action representing approximately 7000 residential property owners was brought against lnco.

At trial, the judge ruled that the nickel particles constituted physical damage to the properties in question. He also ruled that potential public health concerns surrounding such deposits meant that the properties in q uestion failed to appreciate in value as much as they otherwise would have. On this basis, the trial judge awarded the plaintiffs $36 million in damages.

In 2011 the Court of Appeal overturned this award.73 The court concluded that the nickel deposits did not cause physical harm to the properties in question, but m erely changed the chemical composition of the soil- like fertilizer would, for example. To win their case, the plaintiffs must show some detrimental effect either on the land itself or on its use by the owners. The fact that nickel particles in the land raised concerns about potential health risk was not enough. The Court also stated that the plaintiffs had failed to show that there was insufficient appreciation in the value of their properties. The action was dismissed and lnco was awarded costs of $100 000. The Supreme Court of Canada refused to hear an appeal.74

What are the risks that litigants take in commencing an action of this kind? Are these r isks outweighed by the poss ible benefits? How does the risk of litigation make industry more accountable for the pollution it may cause?

7. In 2007, the Flynns hired Applewood Construction to build them an

73 Sm1m v /n<:D Lid, 2011 O NCA 628 107 OR i:ldi 3ll 74 Smith v Jrn>:>, 12014} SCCA No 36

environmentally friendly home . The house was erected on a concrete slab. The Flynns moved into tl1eir new home and discovered with in the fi rst year tllat the concrete slab had cracked, caufilng considerable damage to the structure. The Flynns successfully sued Applewood for damages, but before they could collect , Applewood went out of business. In 201 5, the Flynns sued Superior Foundations, tile company hired by Applewood to pour the concrete slab.75 What defence m ight Superior have against tile Flynns' clai m?

75 B.lseo. 1n part, O()Flynnv Super!Ct f-oundat10."'ts Ltd, 2000 NS$C 2%, 269 NSR (2oJ 279.

8. In 2008, several hundred people became ill

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and some died as the result of an outbreak of Listeria bacteria. The illnesses were traced to the consumption of deli meats tllat were prod uced from a single processing plant operated by MegaMeats Inc. Those most affected by the bacteria were tile elderly, tile very young, and tl1ose who were already ill. Is tllis an appropriate filtuation for a class action lawsuit? What do the victims have in common? How are thei r claims different? What process must be followed? How should MegaMeats deal witll these claims?

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CHAPTER An Introduction to Contracts

CHAPTER Forming Contractual Relationships

CHAPTER The Terms of a Contract

CHAPTER Non-Enforcement of Contracts

CHAPTER Termination and Enforcement of Contracts

BUSINESS RELIES O N contract law- more than any other area of law - to fa cilitate commerce. Contract law proyjd es a structure through which indiyjd uals and orgaruzations can create legally binding, commer- cial commitments. Essentially, parties must keep their contractual promises or pay damages to the other side for breach.

A working knowledge of contract law is essential to anyone involved in business. This knowledge is crucial because the law advances commercial actiyjties and can be used to build productive and cooperative business relationships. In fac t, contract law forms the basis o f many commercial relationships, including employment, credit , property, and insurance d ealings, as well as the sale of goods and sernces.

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I-- er:: <( o_

OBJECTIVES After studying this chapter. you should have an under- standing of

• the general concept of a contract

• the business context of contract formation

• the business context of contractual performance

BUSINESS LAW IN PRACTICE Amritha Singh is a rlliddlemanager with Coasters Plus Ltd (Coasters), a company that d esigns and manufa ctures roller coasters for amuse- ment parks across NorthAmerica . She has been appointed one of the project managers for the d esign and delivery of a special roller coaster for the Ultimate Park Lt d, an American customer. A major compo- nent of the project is the steel tracking, and one possible source is Trackers Canad a Ltd (Trackers). Amritha's supervisor has asked her to negotiate the necessary contract. This task causes Amritha some concern, since she has never been solely responsible for contractual negotiations before. She does know, however, that Coasters needs a reliable supplier that can deliver high-quality tracking for under $2 million, and i n good time for installation at the Ultimate Park site.

1. How should Amritha approach her task of securing the necessary tracking?

2 . How can the law fa cilitate Amritha's acquisition task?

3. What rules apply to a commercial relationship between a manufa cturer (such as Coasters) and a supplier (such as Trackers), and how are disputes resolved?

4. What are the legal consequences to Coasters of assigning the negotiation task to Amritha?

5. What are the non-legal fac tors contributing to the proposed legal agreement?

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Introduction to Contract Law This chapter offers a general introduction to contract law and its business context. It also helps prepare the ground for topics that are covered over the course o f Chapter 6 (Forming Contractual Relationships), Chapter 7 (The Terms of a Con- tract), Chapter 8 (Non-Enforcement of Contracts) , and Chapter 9 (Termination and Enforcement of Contracts).

Amritha need s to extract a firm commi tment from Trackers to ensure that Coasters receives the necessary tracking in a timely fashion at the agreed -upon price (see Figure 5.1). The flip side of her task is to ensure that- should Trackers renege- Coasters can sue Trackers to recover any related fi nancial loss. Simply put, Amritha needs to negotiate and secure a contract with Trackers on behalf o f her company.

A contract is a d eliberate and complete agreement between two or more com- petent persons, not necessarily in writing, supported by mutual consid eration, to d o some act voluntarily. By defi nition, a contract is enforceable in a court oflaw.

What follows is a brief synopsis o f these elements, which are analyzed more comprehensively in subsequent chapters.

An agreement. An agreement is composed of an offer to enter into a contract and an acceptance o f that offer; this is a matter explored in Chapter 6. The promises contained in the agreement are known as terms; these are rusrnssed in Chapter 7. The informing idea behind a contract is that there has been a "meeting of the mild s" - that the parties have agreed on what their essential obligations a re to each other.

Complete. The agreement must be complete, that is, certain. Certainty is explored in Chapter 6.

Deliberate. The agreement must be d eliberate, that i s, both parties must want to enter into a contractual relationship. This matter- formally known as an intention to create legal relations- is ruscussed in Chapter 6.

Voluntary. The agreement must be freely chosen and not involve coercion or other forms o f serious unfairness; this is explored in Chapter 8.

Between two o r more competent persons. Those who enter into a contract are known as parties to the contract. There must be at least two parties to any contract, who must have legal capacity- a matter ruscussed in Chapter 8 . As a general r ule, only parties to a contract can sue and be sued on it; this matter is discussed in Chapter 9.

Suppor ted by mutual considera tion. A contract involves a bargain or exchange between the parties. This means that each party must give

FIGURE 5.1 A Contract Contains Binding Promises

Through a contract:

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Trackers makes binding promise s concerning prsce, quantity, and delivery of tracking to

.. coasters Coasters makes a binding promise to pay the purchase price to

• Trackers

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Contract An agreemen • bet'Neen wo parties tha• 1s

enforceable in a court of law

something of value in exchange for receiving something o f value from the other party. Expressed in legal terminology, a contract must be supported by mutual consid eration; this is ruscussed in Chapter 6.

Not necessarily in writing. As a general rule, even oral contracts are enforceable, though it is preferable for negotiators to get the contract in writing. That said, in most Canaruan jurisructions there are certain kinds of contracts- such as those involving an interest in land - that must be in writing in order to be enforceable. These exceptions are ruscussed in Chapter 8.

The genius of contract law is that, once a contract is created, it permits both parties to rely on the terms tl1ey have negotiated and plan their business affairs accordingly. If a ruspute arises between the two parties, there are various options for ruspute resolution, as outlined in Chapter 4. This in dudes taking the matter to court and suing for losses sustained. In short, contract law ensures that each party gets what i t bargained for- namely, performance of the promises mad e to it or monetary compensation in its place. Chapter 9 ruscusses the termination and enforcement of contracts.

For the most part, the rules governing contracts are based on common law. The common law, as discussed in Chapter 2, refers to judge-made laws, as opposed to laws mad e by elected governments. Thi s means that a judge resolving a contrac- tual conflict is usually relying not on statute law to guide deliberations, but rather on what other judges have said in past cases that resemble the current case. As noted in Part One, these past cases are known as p recedents because they con- tain a legal p rinciple found in a past situation similar to the one being litigated. The judge will hear evidence from the two parties in support o f their respective positions and then d etermine whim common law rules of contract are applicable to the situation and what the outcome should be. Depenrung on the nature o f the contract , legislation sum as the Sale of Goods Act may also be relevant.

Contracts are the legal cornerstone of any commercial operation. Through a contract, the business enterprise can sell a prod uct o r servk e, hire employees, rent offic e space, borrow money, purchase supplies, and enter into any other kind of bin rung agreement it chooses. In this way, contract law is facil itative: it allows participants to create ilieir own rights and dutieswjthin a f ramework of rules that a judge wjll later enforce, if called upon to do so.

Contracts come in a wjd e variety. A contract for the purdlase and sale o f a box of pens from the corner store, for example, is casually conducted and instantly completed. The only d ocument that will be produced is the sales recei pt. Other contracts, such as for the purchase and sale of high-q uality tracking for a com- mercial project, will req uire lengthy negotiations, considerable d ocumentation, and time to perform. Some contracts are one-shot d eals, in that the parties are unlikely to d o business with each oilier again. Other contracts are part of a long- stanrungand valued commercial relationship, as one m ight find between supplier and retailer. Regardless of the context, however, every contract is subject to tile same set of mand atory legal rules. This means that contract law principles will be applied by a judge to resolve a contractual dispute between the parties, wheilier the parties were aware of those principles or not.

Amritha's attention is currently focuse d on one transaction: her company's acquisition of tracking from a suitable supplier. Her goal should be to enter into a contract w;th a supplier like Trackers, because Coasters req uires legally enforce- able assurances that its supplier will fu lfi ll its commitments. The alternative to a contract- in the form of a casual understanding- makes little business sense,

NEL 123

even if Trackers is highly reputable and trustworthy, because cooperation and goodwill between parties can suddenly evaporate when an unforeseen conflict or problem arises. Personnel can change, memories may become selective and self- serving, and genuine differences of opinion may arise. At this point, Amritha's company needs the protection of a well-constructed contract-including the right to commence a lawsuit based upon it- not the vague assurances she may have received from Trackers personnel sometime in the past.

This is not to say that informal business arrangements never succeed, but only that there is no remedy in contract law should one of the parties fail to keep its word. This is a risk that a business should ordinarily not be prepared to run.

This chapter has thus far introduced the legal elements to a contract, but busi- ness factors also figure prominently in contractual relationships. The next section locates important legal factors in their business context. Without this context, the legal ingredients of a contract cannot be properly understood .

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C t I N 0 F THE LAW

CONCERT HALL CANCELS ALLEGED CONTRACT WITH MAXIMUM FIGHTING INC .

The Francis Winspear Centre for Music (Win- spear), through its Foundation, is alleged to have entered into a contract to lease its premises to Maximum Fighting lnc. (MFI), a mixed mar- tial arts promoter, for three Maximum Fighting Championship (M FC) events in exchange for a rental fee. According to press accounts, the con- cert hall then cancelled the arrangement, saying that the booking had been ma.de in error.

By way of explanation, a Winspear spokes- person said that the facility was designed for concerts and was not a "suitable venue" for MFC events, and offered an apology: "It is regrettable that this unfortunate situation has occurred and the Winspear Centre has taken steps to ensure that it never happens again. The Winspear has extended its apology to representatives of MFC for what has trans pi red."

Mark Pavelich, president of M FC, responded by filing a $500 000 lawsuit against the Foun- dation responsible for operating the Winspear, alleging breach of contract. The claim seeks com- pensation for loss of profit, loss of sponsorship funds, and out of pocket expenses- such as printing and advertising- as well as for em bar· rassment and damage to reputation .

124

Victor Valimaki, celebrating lliaory at th. Maximum Fighting Championship at the Shaw Cimfw m<L Ontr• In Edmonton on May 9, 2014.

C-itiad ~ -• "1 Is there a contract between the Winspear Foundation and M Fl and, if so, what are the terms? Do you think that the Winspear Foundation has a successful defence, namely that the booking itself was a "mis take" and the music hall was not suitable for sporting events? How can these kinds of disputes best be resolved?

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Objective standard test A test based on how a reasonable person· would view the matter

Equal bargaining power 7he legal assumption that parties to a contrac• are able to look out for their ovvn interests

Legal Factors in Their Business Context: Creating the Contract Communication Most contractual relationships begin with communication, which may originate in a number o f ways- through informal contact between individuals in different businesses who recognize mutual needs, or perhaps through a general inquiry made to a supplier concerning price and availability of materials. Amritha may initiate contact with potential suppliers based on recommend ations from others in her company who have purchasing experience, from colleagues in the in dustry, or from ind ustry organizations. And, of course, Coasters may be approached peri- odically by tracking suppliers. Regardless of who makes the first move, Amritha will likely communicate with several businesses in ord er to d etermi ne who can give her company the most favourable ter ms.

Communication is not just about discussing possibilities with the other side, however. Communication- in the form of contractual negotiations- is automat- ically laden with legal meaning. It is therefore important for the businessperson to know when simple business communications crystallize into legal obligations.

First and fo remost, contract law concerns itself w ith what the negotiators say and do, not with what they thi nk or imagine. For example, if Amritha makes what looks like an offer to purchase t racking, the other s ide is entitled to accept that offer whether it was intended as one or not. This is because contract law is gov- erned by the objective standard test. This test asks whether a reasonable person, obser ving the communication that has occurred between the negotiators, would conclud e that an offer and a cceptance had occurred. Assuming that all the other ingredients o f a contract are in place, the parties are completely bound.

Bargaining Power The kind of contract a businessperson ends up creating is very much influenced by her bargaining power. The business reality is tl"lat negotiating parties rarely have equal bargaining power. It is almost invariably the case that one side will have more experience, knowledge, market leverage, or other ad vantages. The greater one's bargaining power, of course, the m ore favourable term s one will be able to secure.

The law, however, does not recognize or attach legal signific ance to th.is busi- ness reality. On the contra ry, con tract law is constructed on the basic assumption that those who negotiate and enter into contracts have equal bargaining power, meaning that they are capable oflooking out for themselves and will work to max- imize their own self-interest. As a result, courts are normally not entitled to assess the fairness or reasonableness of the contractual terms the business parties have

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chosen. Courts will generally assume that the parties had their eyes open, consid- ered all the relevant factors, evaluated the risks, and were prepared to accept both the costs and the benefits of the contract.

The law applies the principle of equality of bargaining power even though, in almost every situation, one partywrn have some distinct advantage over the other. The rationale is that parties should be able to rely on contractual commitments. Though one party may have agreed to a price she now considers too mgh or, in fact, may have made a bad deal, none of tills is justification for securing the court's assistance and intervention. People are simply expected to take care of themselves.

Churchill Falls (Labrador) Corporation Ltd v Hydro-Quebec, 2016 QCCA 1229

THE BUSINESS CONTEXT: Businesses frequently enter into long-term contracts which, in turn, may set a fixed price governing the duration of the agreement, whether it be for a product or a ser- vice. If the market price subsequently fluctuates to the clisadvantage of one party over another, contract law does not generally come to the rescue.

FACTUAL BACKGROUND: In a lengthy and ongoing dispute heacling to the Supreme Court of Canada for resolution, at issue is the enforce- ability of a long-term contract. The contract, signed in 1 969 for a 65-year term between Churchill Falls (Labrador) Corporation Limited (CFLCo) and Hydro-Quebec, obligated CFLCo to sell nearly all its power to Hydro-Quebec and Hydro-Quebec to purchase that entire output. This long-term contract set a fixed price and clid not includ e a price adjustment clause following the market, for example. Rather, the purchase price of the electricity was fi xed by the contract, and the price was to decrease over time.

The pricing aspect of the contract proved to be markedly disadvantageous to CFLCo given the large increases in the value of energy that followed. Hydro-Quebec benefi ted from thi s r ising market and resold energy acquired from CFLCo at substantially higher prices. In fac t, as reported by the Montreal Gazette, the contract has thus far d elivered about $27.5 billion to

Hydro-Quebec while CFLCo has earned a rela- tively meagre $2 billion.'

THE LEGAL QUESTION: Does Hydro-Quebec have a duty to act in good fai th such that it must adjust or renegotiate the pricing under the agreement?

RBSOLUTION: The Court of Appeal d ecided in favour of Hydro-Quebec, conclucling that the contract was enforceable as written. More spe- cifically, the appellate court agreed with the trial judge that the contract's "guarantee of fi xed, stable pricing as well as protection against infla- tion against operating costs"2 was in exchange for Hydro-Quebec assuming "most of the risks relating to financin g and construction costs of the Churchill Falls project."3 Beyond tills, and as both levels of court observed, CFLCo would

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remain the owner at the end of the contract of a plant worth approximately $20 billion• and with considerable value going into the future. It rejected CFLCo's submissions that the clispro- portionate profit split which emerged between the parties was "clivorced from the original clivi- sion of risk and benefit agreed upon", 5 namely that it was to proceed on a more equal or equi- table basis. On a related front, though CFLCo argued that the good faith principles found in the Quebec Civil Code should lead to a price increase, the court concluded that these good faith principles were not applicable to the case at all. The appellate court quoted the trial judge's assessment that CLFCo was simply "seeking a new contract under terms more favourable to it -.; and had no basis to do so.

The Quebec Court of Appeal went on to decide the case on principles that would be very familiar to common law judges (i.e., Canaclian judges outside of Quebec) , including tl1e idea that parties should, as a general proposition, live with the consequences of the bargain they have struck. As the Court of Appeal stated, the CFLCo:

is attempting to redefine the initial equilibrium (i.e., profit splitl agreed to by the parties. It is appropriate to re-examine the parties· c ircum- stances w hen they signed the contract. The uncontradicted evidence establishes that they knew that the price o f hydroelectric power was subject to fluctuation but they voluntarily agreed to fix the price.7

On a related front, and as the appellate court stated, though the profi ts in the hands of Hydro-Quebec were "much higher than the par- ties' initial expectations ... [they are] merely fa ir consideration for the risks assumed by ... [Hydro-Quebec] in 1 969."8

CRITICAL ANALYSIS: On the facts found by the court, tins case encapsulates the notion tl1at "a deal is a deal" and that Canaclian courts will not lightly interfere with the bargain that the par- ties have freely struck. This is because courts seek to advance certainty in the law even when thls infringes on one's sense of fairness. Do you agree with this approach? Does it lead to the appellate court treating CFLCo's position too harshly, particularly in light of the tremendous profit received by Hydro-Quebec?

Occasionally, circumstances favour one party over tl1e otl1er to such an extent that the court will come to the assistance of the weaker party and set the con- tract aside. Such juclicial assistance is very much the exception, not the rule, as discussed in Chapter 8.

The fact that Amritha may have less bargaining power than the tracking supplier she contracts with does not generally affect the enforceability of tl1eir concluded contract. On the contrary, Amritha must be careful to protect her com- pany's position and not enter into a bad bargain. Coasters is unlikely to succeed in having any contract set aside becauseAmritha was an inexperienced negotiator or because the supplier was a relatively bigger, more powerful company.

Business Context: Performing or Enforcing the Contract Business Relationships Businesspeople regularly breach contracts. For example, a purchaser may fail to pay invoices on a timely basis; a supplier may deliver the wrong product , or the wrong amount of product, or a defective product. All these amount to breaches

4 Jb.d at par.') 19 S lb.d at ~ia 3 6 lb.d a1 para 60 7 Jb.d at par.') 78 8 lb.d at ~ia 150

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o f contract. Whether the other side sues for breach of contract is not just a legal d ecision; it is a business d ecision, too.

For example, if Coasters's supplier is late in delivering its tracking, the sup- plier is in breach o f contract, and Coasters will be entjtJed to compensation for any resulting loss, such as that caused by late completion of the project for the Ultimate Park. However, jf Coasters insists on that compensation, the relation- shlp with that supplier may be irreparably harmed . Absorbing the loss in thjs instance- or splitting the difference- may be a small price to pay in the long term, particularly if the supplier is otherwise reliable and Coasters is not inter- ested in investing time and money in fin ding a replacement. Put another way, suing the supplier may not be the best business option even when the legal action itself stand s a reasonable prospect of success.

The expense and general uncertainty of litigation are also reasons to avoid a full-blown legal conflict.

BUSINESS APPLICATION

GETTING IT IN WRITING

Even when businesses have worked together in the past and built up mutual trust, a written contract between them helps to avoid misund erstandings, legal conflicts, associated litigation expenses, and t11e destruction of business relationshlps.

Thls is the lesson from 1004964 Ontariolncv AviyaTechnologies Inc, 2013 ONSCSl , where the plaintiff contracted with t11e d efend ant without ever putting a written contract in place. In short, because the parties had an established and posi- tive ongoing business relationship, they did not tlrink it was impor tant to d ocument their mutual obligations. When a conflict over the scope o f work arose, the parties ultimately end ed up in court. The court's exasperation with the conflict is clear in the following statement: "It is nearly impossible . .. to repeat each of the fa ctual dis- putes between t11e parties. They agree on very

Reputation Management

little. In fact, tlris case illustrates the need for a written agreement to be in place as opposed to relying upon an oral agreement .. ." at para 21. In relation to one dispute, the court ruled that a key term whlch the d efend ant s aid was part of the agreement- the installation o f a "real time" computer- was not in fact part o f the original scope o f work and had to be pajd for as an extra . Commenting on the case in the Lawyers Weekly, James Kosa accurately observes that business- people should get their contracts in writing and t11ereby "treat the contracting process a~ a business process that can save money and m it - igate real risk. The ... [Aviya Technologies] case does not turn on abstract legal theories- it was entirely about getting the business basics r ight."

Critical AJt11l,.U· Why is an oral agreement sometimes worse than having no agreement at all?

A business that makes a practice of breaclring contracts due to bad planning or in order to pursue an apparently more lucrative business opportunity will certainly be within its legal rights to breach and pay damages in lieu of performance. Such a busi- ness is also likely to acquire a reputation in the industry as an unreliable and unde- pend able company. The long-term viability of a business organization is undoubtedly compromjsed if customers, suppliers, and employees grow reluctant to deal with it.

Similarly, a business that j nsists on strict observance of its legal rights may d amage its reputation in the marketplace. Although a manufacturer may have a valid defence for having prod uced a defective prod uct, for example, it may be

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better in the end to com pensate the customer voluntarily rather than fight out a lawsuit. A lawsuit in the circumstances of tills example may result in a serious blow to reputation and a public relations disaster.

BUSINESS LAW IN PRACTICE REVISITED

1. How should Amritha approach her task of securing the necessary tracking?

Given the size and expense of the proposed acquisition of tracking, Amritha should make it a priority to enter into a contract with a supplier such as Trackers. Nothing less than a contract will do, since Coasters must be able to exercise its legal right to sue, should Trackers fail to perform as promised.

2. How can the law facilitate Amritha"s acquisition task?

Legal knowledge will help Amritha ensure that her negotiations produce an enforceable contract that meets her employer's needs and protects its interests. If Amritha does not know what a contract is, how it is formed, and what its legal significance might be, she is not competent to accomplish the task her employer has set for her.

3. What rules apply to a commercial relationship between a manufac- turer (such as Coasters) and a supplier (such as Trackers), and how are disputes resolved?

The rules governing contracts are found in the common law (which develops through the d ecisions of the courts on a case-by-case basis),and to a lesser extent, in statute law. lf a dispute arises between Coasters and Trackers, the.re are several options available for attempting to resolve the dispute, in duding mediation and arbitration. Litigation is a last resort and will bring the matter to court. A jud ge will evaluate the terms of the contract and the conduct of the parties, apply the relevant law, and then come to a determination.

4. What are the legal consequences to Coasters of assigning the negotiation task to Amritha?

Amritha is representing her employer in negotiations and therefore will need to appreciate at what point legal commitments are being made by both sides. Coasters should consider its relative bargaining position with available suppliers and ensure that Amritha has adequate support in her negotiations. Her inexpe- rience will not likely relieve Coasters o f any obligations she might commit it to. The contract itself will be between Coasters and the supplier (as the parties to the contract). They are the only parties able to enforce rights and the only parties that are subject to the obligations in the contract.

5. What are the non-legal factors contributing to the proposed legal agreement?

If Coasters has a good working relationship with companies tl1at can supply the required tracking, those suppliers are the logical candidates for Amritha's project. Their business practices and reliability will be known to Coasters and negotiating a contract w ith them is likely to be more effici ent than with a new supplier. Even a significant price advantage from a new supplier may not justify endangering long-term relationships with others.

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Although both parties are obligated by the terms of any contract they make, there may be d evelopments in the market or in the situation relating to the operations o f Coasters or Trackers. For example, Trackers m ight want to nego- tiate a contract price increase with Coasters because it has unexpectedly been faced with a large r ise in prod uction costs . When confronted with a d e cision to honour the contract, breach the contract, or seek adjustment, Trackers must weigh a number o f factors, including long-term business d ealings an d its reputation i n the in dustry.

CHAPTER SUMMARY Through an awareness of contract law, business organizations are better able to protect themselves when forming and enforcing contracts. Contracts generally are not required to be in a particular form, but clear agreement on all essential terms is necessary. Those involved in negotiating contracts should be aware of the legal impact of their communication with each other, and they should realize that they are largely responsible for protecting their own interests before agreeing to terms. Contract rules are understood best when assessed in the broader business context, which includ es the impact that any given legal decision by a business may have on its reputation with other businesses, with its customers, and in the community at large. A business must also assess its legal options in light of the business relationship at issue, the need to generate a profit, the uncertainty of the marketplace, and the importance of conducting operations with a sense of commercial morality, honesty, and good faith.

CHAPTER STUDY

Key Terms and Concepts con tract (p. 113)

equal bargaining power (p . 116)

ob jective standard test ( p . 116)

Questions for Review 1. What is a contract?

2. What are the elements of a contract, according to the common law?

3. Must all contracts be in writing in ord er for them to be legally binding?

4. What are the purposes of contract law?

5. Why is clear communication so important in contractual negotiations?

6. Is the matter of whether a contract exists judged according to a subjective stand ard or an objective one? Explain.

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7. Contract law assumes that parties have equal bargain ing power. What is the effect of this assumption?

8. How does the presence of a written contract assist in dispute resolution?

9. What is the role of reputation management and public relations in contracts?

10. Why is the nature o f the business relationship between the parties important to the question o f whether one side will sue tl1e other for breach of contract?

Questions for Critical Thinking 1 . What are the dangers of taking a highly legalistic,

inflexible approach to contractual disputes?

2. Are there any circumstances in which parties might rightly d ecide that an oral contract is appropriate? Discuss.

3. Why are the non-legal factors in a contractual relationship so important? Why is it impor tant to place contract law in a business context?

4. Albert Carr, in a well-known article published in the Harvard Business Review,' argues that business is a game and therefore is not subject to the same ethlcal stand ards that govern one's private life. On this footing, it is perfectly a cceptable for a businessperson to bluff during negotiations since it is merely strategic- just as it is in poker- and d oes not reflect on the morality o f the bluffer. What are the d angers of Carr's approach to business ethics? What are the possible benefits?

S. How important is it to be aware of the law when negotiating a contract? Does it d epend on whom you negotiate with? Does it d epend on the size and complexity of the contract in q uestion?

6. Why is the value o f certainty so important to contract law? Does elevating th.is value lead to unfair results?

Situations for Discussion 1. June is a hair stylist who wants to open

her own business. Though June has absolutely no experience in the business world, she is determined to succeed. June begins negotiations with a landlord to lease appropriate space for her new salon. The landlord insists that he will only enter into a lease with June if June's parents also agree to co-sign the lease, making them responsible should June d efa ult on her rent obligations. June and her parents agree, thinking that such a provision must be a stand ard req uirement o f leases. June has since learned that the newest tenant in tl1e building has secured a lease with the landlord but did not have to produ ce a co-signer.June is certain that the landlord has taken advantage of her naivety. What a re the pros and cons o f June's inexperience be.ing a legal basis for getting tl1e contract set aside?

2. Jason is an a ccountant who works for several small businesses. One o f his clients has

9 Alben Z Cair. ·is Busiooss B1ulti!'\g !:1hct1.r 11968) 46 1 .1-ltNvard Bu!Wless Rewew 143.

unexpectedly refused to pay a recent a ccount, suggesting that Jason has overcharged or otherwise "padded " his bill. Jason is tl1inking of suing in order to recover what he is owed . What fac tors should he take into consideration before making his final d ecision on whether to sue or not?

3. Melissa, an accounting student, interviews for a job with two firms. She really wants to work for Firm X but gets an offer of employment from Firm Y first and a ccepts it. A week later she receives an o ffer from Firm X, whim she also accepts. She does so because she believes she is economically better o ff with Firm X and will be able to "cancel" her acceptance with Firm Y.

a. What is Melissa's legal situation now?

b. Even assuming that she is better off e co- nomically by joining Firm X, what otl1er costs does she face?

c. Do you think that Firm Y will sue M elissa for breach of contract because she has accepted an employment offer elsewhere?

d. What could Melissa have d one to pre- vent th.is situation from occurring in the first place?

e. What should Melissa do now?

4. Assume thatAmritha negotiates all the basic terms o f a contract with Trackers (including price, quality, delivery, and terms of payment). However, when Trackers d rafts the contract and presents it for signature, there are several new and complex terms that protect Trackers from liability if it fails to deliver on time. When Amritha in quires about these new proposed terms, Trackers replies that they are standard for all its customers. How should Amritha deal witl1 iliis situation? What is the role o f b a rgaining power at this point?

S. Leopold applied to his provincial government for a student loan and was a dvanced $1 3 500. The loan agreement obligated the government to a dvance fu rther funds 1u.idway through the school year. Leopold stopped attending classes in September for medical reasons but did not advise his university's Stud ent Services Offic e of this, contrary to a term in his loan

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agreement. He also used the fu nds for living expenses instead of for tuition, contrary to the loan agreement. The university determined that Leopold was not eligible for the second installment of his loan, and the government therefore refu sed to ad vance it. Leopold sued the government for breach of contract and sought d amages in the amount of $1 .5 million. Do you think Leopold's action should be successful? Why or why not?10

6. Assume that Trackers has signed a contract to deliver tracking to Coasters for $2 million in two equal installments. After Trackers has delivered the first installment, another business contacts Trackers and explains that, owing to an emergency, it d esperately needs tracking to

10 Soo Wang v HMTO {8rit1.sh Cdumb1aJ, 2006 SCCA 566, k!ave to oppe.t to SCC •efused, i2007J SCCA No 82.

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complete a major project . This new business offers Trackers $2 million to supply the same amount of tracking still owed to Coasters- d ouble the price that Trackers would receive from Coasters. At this point, Trackers is tempted to commi t what is called an economic breach. This is a breach that occurs when one party calculates that it is more financially rewarding to breach the contract in q uestion than to perform it. Would you ad vise Trackers to breach its contract with Coasters? What are the d angers in Coasters assuming that it will be able to pay d amages for breach of contract with some of the profi ts it makes from the new customer and still be ahead? What other information do you need to answer this q uestion?"

ll ror ltJrl her as::ussbn of ecor.ornic tneoch, sGe Riehatd Posnei'!t, fcor?On'lk: An.Wyss of L.lw 9th ec INew York WouerS K~uv.-e1, 2014)

OBJECTIVES After studying this chapter. you should have an under- standing of

• how negotiations lead to a contractual relationship

• how negotiations can be terminated

• the legal ingredients o f a contract

• how contracts can be amended or changed

BUSINESS LAW IN PRACTICE

Amritha, introduced in Chapter 5, began negotiations with Jason Hughes. Jason is a representative of Trackers, the steel tracking man- ufacturer willing to supply tracking to Coasters, Amritha's employer. Amritha prmrid ed Jason with the plans and specifications for the roller coaster, and they negotiated a number of points, including price, d elivery dates, and tracking quality. A short time later, Jason offered to sell Coasters a total of 900 metres of track in accordance with the plans and specifications provided. Jason's offer contained, among other matters, the purchase price ($1.5 million), d elivery date, terms of payment, insurance obligations concerning the track, and a series of warranties related to the quality and performance of the tracking to be supplied . There was also a clause, inserted at Amritha's express request, whlch required Trackers to pay $5000 to Coasters for every day it was late in delivering the tracking.

After reviewing the offer for several days, Amritha contacted Jason and said, "You drive a hard bargain, and there are aspects of your offer that I'm not entirelyhappywith. However, Iacceptyouroffer on behalf of my company. I'm looking forward to doing business with you."

Within a month, Trackers faced a 20% increase in manufacturing costs owing to an unexpected shortage in steel. Jason contacted Amritha to explain thls d evelopment and worried aloud that without an agreement from Coasters to pay 20% more for the tracking, Trackers would be unable to make its d elivery date. Amritha received instructions from her supervisor to agree to the increased purchase price in order to ensure timely d elivery. Amritha communicated this news to Jason, who thanked her profusely for being so cooperative and understanding.

Jason kept his word and the tracking was d elivered on time. How- ever, Coasters has now determined that its profit margin on the American d eal is lower than expected, and it is looking for ways to cut costs. Amritha is told by her boss to let Jason know that Coasters will not be paying the 20% price increase and will remit payment only in the amount set out in the contract. Jason and Trackers are stunned by this development.

1. At what point rud the negotiations between Jason and Amritha begin to have legal consequences?

2. In what ways could negotiations have been terminated prior to the formation of the contract?

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3. Can Coasters comm.it itself to the price increase and then change its m.ind with no adverse consequences?

4. How could Trackers have avoided from the outset th.is situation related to cost increases?

The Contract Chapter 5 emphasized that Coasters must enter into a contract with Trackers in order to secure the product that Coasters needs. This chapter accounts for several of the basic elements of a contract, namely that it is:

an agreement (i.e., composed of offer and acceptance). complete (i.e., certain).

deliberate (i.e., intent.ion to create legal relations is present).

supported by mutual consideration.

In short, th.is chapter sets out the legal ingred.ients that transform a simple agreement- wh.ich can be broken wid1out legal consequences- into an enforce- able contract.

An Agreement Before a contract can be in place, the parties must be in agreement, that is, they have reached a consensus as to their rights and obligations. This agreement takes the form of offer and acceptance.

Offer Definition of Offer An offer is a promise to enter into a contract, on specified terms, as soon as the offer is accepted. Th.is happened in negotiations between Amritl1a and Jason when Jason committed to provide tracking to Coasters in the concrete terms noted; he named h.is price, terms of payments, delivery date, and other essential matters. At this point, negotiations have taken an important turn because Amritha is entitled to accept diat offer and, upon her doing so, Trackers is obli- gated to supply its product exactly as Jason proposed, assum.ing that the other ingred.ients of a contract are established.

Certainty of Offer Only a complete offer can form tl1e basis of a contract. Th.is means that all essen- tial terms must be set out or the contract will fa.ii for uncerta.inty. An offer does not, however, have to meet the standard of perfect clarity and precision in how it is expressed. If the parties intend to have a contract, the courts will endeavour to interpret d1e alleged offer in as reasonable a fashion as possible and thereby resolve ambiguities.

An offer can achieve the requ.isite standard of certa.inty even if it leaves certa.in matters to be decided in the future. For example, Jason's offer could have made the final price for the tracking contingent on the market price, as determ.ined by a given formula (e.g., cost plus 15%). Though the price would not be set out in

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Offer

A promise to enter a contract. on specified tenns. as soon as it 1s accepted

Invitation to treat

An expression of w1llln gness rn do business

the offer, a workable way of d eterm ining price would have been established, and a contract could be entered into on that basis. A court will not speculate, however, on what the parties would have agreed to had they completed their negotiations.

Invitation to Treat An offer is different from a communication that merely expresses a wish to d o business. In law, the latter form of communication is called an imritation to treat and has no legal consequences. Whether a commun ication is an offer or an invitation to treat depend s on the speaker's intention, objectively assessed. Sub- jective intent is of no legal relevance.

When Amritha prmrid ed Jason with plans for the roller coaster, she was not offering to buy tracking from Jason at that point but merely indicating her interest in receiving an o ffer from him. This was an invitation to treat. Similarly, if Jason had offered to sell tracking to Coasters during negotiations but provided no other d etail, he would simply be demonstrating hls wish to d o business with Coasters. Such expressions of interest have no legal repercussions because they essentially have no content. Vague commitments to buy or sell tracking are invitations to t reat and not offers because they faH to specify the terms or scope of the proposed arrangement.

To assist in the sometimes difficult task of classifying whether a communica- tion is an offer or an invitation to treat, the common law has d evised a number of rules. A rule of particular significa nce to business relates to the ad vertising and display o f goods for sale in a store.

Enterprises such as retail outlets prosper by attracting customer s to their premises. They do this through advertising their existence, as well as d escribing the products they sell and prices they charge, especially when those prices have been reduced. For practical reasons, these advertisements are generally not clas- sified as offers.' If advertisemen ts were offers, the store owner would be poten- tially liable for breach o f contract if the store ran out o f an advertised i tem that a customer wished to purchase. By classifying the advertisement as an invitation to treat, the law ensures that it is the rnstomerwho makes the offer to purchase the ad vertised goods. The owner is then in a position to simply refuse the o ffer if the product is no longer in supply. As a result o f this refusal, no contract could arise.2

In this way, the law seeks to faci litate commercial activity by permitting a busi- nessperson to advertise goods or services without ordinarily running the risk of incurring unwanted contractual obligations.

Similarly, the display of a product in the store is not an o ffer by the store to sell. The display is simply an indication that a product is available and can be purchased. In short, it is an invitation to treat and, by definition, is not capable of being accepted. In thi s way, the store maintains the option o f refu sing to com- plete the transaction at the cash register (see Figure 6.1). 3

Some contracts are only formed after protracted discussions. Other contracts, like the purchase of photocopying paper from an office supply store, a re formed without any negotiations whatsoever. The customer simply takes the purchase

1 An 0.CCOtiOn to 11\1$ 9enert11 rut'.! occt1rS \vhen Lhead\lertisement is so c\ear a~ der1'l.t<? IMl lhe•e ts nctf\ing tell 10 rv'.!gOti;l!e See Lc!kov111z v Grmr MinrieapoJ1s SlJ1p&Js S:o1e. Jnc, 86 NIJ/ 2d 689 U957)

2 Slo1e ov1oors IT'kly h~ve 01he1 feg.¥. p1ot'.li!ems 1f 1hey l\JO out of all advertiSa:l sale proouct. for ex.lmp4e. see 1~ "bart ano S\ ... ilcO settin-;;f proviSiOn or the Catry)et1lion AC!, RSC 1985, c C-34 s 74.04(2J.

3 NOIC, ha .. 1eve1. 11"\Al t"luman 119hLst<:og1!Mti0n<>:10Ss lhecOUnlry !>10l\1!)1tSa OtJS!OE?SSOVlnel from refusing 10 serve a custo!"r'ler-ont~ t>asiS or 1ace, g.:?nder. a!'\id otne1 d1SC11mil\a:loiyg1ounds

135 NEL

to the cashier- thereby o ffering to purchase the item at its s ticker price- a nd the cashler a ccepts the o ffer by receiving payment. Similarly, the standard fo rm contract is entered into without any negotiations. Sales and rental businesses fre- q uently require their customers (consumer and commercial) to consent to a standard set of terms that have been d eveloped by the business over years of operation. Such contracts often heavily

FIGURE 6.1 legal Analysis of t he Retail Purchase

Display of Goods (invitation to treat)

Customer Takes Item to Cash Register (offer to purchase at sticker price)

favour the business that created them and, because they are not usually subject to bargain ing, are known colloquially as "take it or leave it" contracts. Examples includ e renting a car and borrowing

Clerk Takes Payment (acceptance of offer)

money from a bank. Stand ard form contracts are not inherently objectionable, however, since they help red uce transaction costs and increase business volume, thereby potentially lowering price.•

Regard less of whether bargaining precedes the contract or not, the law expects people to take care o f themselves. While there is provincial consumer protection legislation that may be of assistance in certain consumer transactions, the better course- particularly in a contract o f some impor tance-is to read and und erstand the contract before signing it .

When negotiations are complicated, it is important for the parties to know when an o ffer has been mad e, since at that momen t significant legal consequences arise, whether the parties intend them to or not. A fu nd amental rule is that a contract is formed only when a complete o ffer is unconditionally a ccepted by the other side. The key fac tor in d eciding whether an offer has been mad e is this: if the pur ported o ffer is suffici ently comprehensive that it can be a ccepted without further elaboration or clarification, it is an o ffer in law. Jason's proposal to Amritha, outlined in the opening s cenario, contains the requisite certainty and completeness. On this basis, the fi rst building block to a contract between Trackers and Coasters is in place.

BIJSINESS APPLICATION OF THE LAW

Stand ard form contract

A '•al<e 1: or leave 1t contract wl1ere •he c ustom er ag rees to a standard set of terms that favours the other side.

SPAMMING Unsolicited commercial email (sometimes called spam) is a hlghly annoying method of adver- tising good s and services. But even worse, spam has had a large a nd negative impact on the global marketplace. As Professor Michael Gei st notes, two-thirds o f all email are spam and

"as much as 1 0% of global spam can be classified as malicious."'

In response to these kinds of issues, the fed - eral government enacted Canad a's Anti-Spam Legislation (CASL for short), whlch largely came into force in 2 014.6 According to the federal gov- ern ment, the purpose of CASL is to "encourage

4 Fo1 adiSOJssion.of th<! benehts of 1~ s1.aooa1d fo1mcon1rac1,, .see. forex..lmp!e,. MJT1eb'lc:6Ck b ON D~ees. Judlcia\ Conltot of $1.):'lda10 ro1m Col\trac1s· in Paut Bu110\•1s b Cen10 G Veljaoovsk1. eds, The fconomiC Apptoileh to Ltw1 tl onoot\ Butteiworths, 198J)

5 MiCh.'.)etGe:s1, "f\k")\.,. Mo1e T11an £ver. CaMda NoodsaStrong Anl ·Spam La ...... • The GObeatld /vltNI :30 May 2017), of'lli:')e <hll~//\•1v1w.lhegtobea!ldmal.com/!epc1l·O!'>-btJ~!ness/roD"-commen~1y/ 001.Y·morE?•lMn-eve1•ca!lOOa·needs~a·st1ong•anli-spam-(aw/ar1tde3Sl482:16/>.

6 SC 2010. c 23 tO.Sl)

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the growth of electronic commerce by ensuring confidence and trust in the online marketplace"7

and help protect Canadians and Canadian busi- ness from "d amaging and d eceptive spam, spy- ware, malicious code, botnets, and other related network tlueats."8

CASL tightly regulates the sending of com- mercial electronic messages (CEMs). A CEM is any electronic message d elivered to an electronic address (including by email, text message, and social media) whose contents would cause the conclusion that its purpose or one of its purposes was to encourage the participation in commercial activity.• Examples includ e offers to purchase or

Why is spam objectinnab/e?

sell goods and services or to provid e investment or gaming opportunities- with even a single email to a single recipient amounting to a CEM und er the Act.10 The key idea is that CASL is permission-based- one must have permission to send the CEM and one must be able to prove per- mission. u To take a simple example, a business should be able to prove consent if the recip ient actively signs up at the business's website to receive a newsletter containing promotions. 11

Once consent is in place, tl1e CEM can be sent but it must comply with strict rules stated in the leg- islation, including providing an "unsubscribe" mechanism that is simple and easy to use.

Penalties for non-compliance can be steep- the CRTC has the power to levy an administrative penalty of up to $1 0 million per violation by an organization and $1 million per violation by an individ ual.13 It should be noted iliat the Act per- mits the defence o f due diligence to protect the person who is trying to comply but nonetheless makes a mistake and runs afoul o f the rules.14

Nonetheless, there are several examples of ~ ad ministrative penalties being levied so far, !i. including against Compu-Find er, whicl1 was fined ~· $1.1 million for particularly egregious miscon- ~.v_ d uct in sending emails without the recipient's Q conse11t. 15 ;i ii! Q .I! ;:;

CASL also contains a private right of action provision which was to have come into effect July 1, 201 7. However, the federal government d ecided to suspend the implementation of tllis

1 Govo1nm~nl or Car\<X':la, ·c.al'k1da-s Anl ·Sparn legi~al.on. Prwacy 1mpac1 Statem~nl · 01'11i...e <http /lfighLSpam .gc.c.a/eie/site/030 ~f/eng/00322.hl rri>

8 !b<d. 9 Set:! C.li.SL.. su()f~ note 6. s~ctlOn 1(2), uooe1 ·ccM ·

10 ~rry Sookman, "CASL The Unofticat rAO ~egu1a!Ory lmpoct Statemer\t, a'\<'.l Compt.aOCE! Guide(inc:'f U4 JallUaiy 2015), ont10C! <http_//w>Nw bauysooKman.com/201 S/01/14/cast•lhe-i.loo!f clat·f~· i~u1at ory·i m!)<)C t ·S tat~ment -a no <:orn p(iance-.gu iaefi rvt>/ >

11 T1ent S~oos. 'Canada s Anti·Sparn L'2QiSt.ltiOn l(:ASLJ The Top 3 L~ssorn. Business <'.'.an LMrt\ f'rom YMr r . Mdnnes Co0pe1 firm pubJ!ct1t10n 1.29 ~p1ember 2015J, onf1!le· <http·//vt.. ......... mc1ru~scoopei.com/oubCi-t.a1ons/ ~g~·tJ Odate-canadas·an.L l-spam.(eg ~at.o n·-t.ast· I !'le• to:>· 3 •\e ssor\S ·OOS ITTesses·Cal\•\ea1 ,....from..yea1 • L' >.

12 CRTC. ·comptiaoceana Cnfo1C<?l'l">2nl 1nfo1mati0n Bule1i1l, CRTC 2012·5491100c1ober 2012J,ontif')('? <http //v1ww.cr1c.9c.ca/engfarchNe/2012/2012·549.hlm>

13 ro1 fu1Lher dlSCUSSiO!l or p(?nallies. ~e Tom Vi'!~l6, 'Many~ 'fmS Lack UnderSMtnding 01 CASL R1J~S, Cornpfanca, Su1Vey· Soov.·s·, The L~t·s Daily l29 May 2017).

14 See sec1ion 33 ot CASl a!ld Pe1er Mu1phy, 'P1epam'9 Yoor OrgantZatiO!l 101 CASLs C<:>rr'lmercia! CtecttoniC Mt?Ss.')<)t! Requirements· Gowlitlgs INI.C ll Aprl 2014J,on11ne· <htlps //g~A:ngv.ig.com/en/gto~/ 11\SiQhts•resa.i1~s/ore~1ing-you1·o•ga!\12ati0n-for<:ast-s-comm'2rcia1·<!toctronlc:·message·requiremen1s>.

15 CRTC. Corn0(1aoce and £ntorcement Decision C.RTC 2011-369, U9 Octo~r 2017), Orl1ne <http //v1wwc.r1c gc .c<>/e ng/ a<Chi..e/2017 /2017· 368.nim >

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provision "in response to broad -based concerns raised by businesses, charities, and tl1e not-for- profit sector."16 The suspended provision would empower a private person to sue for damages for receiving a CEM which did not comply with the requirements of CASL d escribed above. The jus- tification for the private right of action is to pro- vide a "user-friend ly monetary remedy for people impacted by prohibited practices."L7 At the same time, and as one example, there is considerable concern that legitimate business (rather than tl1ose in the spamming business itself) will be targeted by "anti-spam trolls" looking for "tech- nical mistakes in their messaging."111 In the mean- t ime, the House o f Commons Standing Committee on Science, Industry and Technology has recently conclud ed its tluee year review o f

CASL.19 [t noted that since the CASL came into effect, tl1e amount of spam originating from Canada ha~ dropped by more than 30%. It noted, too, that the legislation req uires more clarity in order to "red uce the cost of compliance and better focus enforcement."2° For example, the Report recommend s tllat tl1e government "fur- ther investigate the impact of implementing the private right o f action",11 given the kind o f con- cerns identifi ed above- including that people could be sued for making technical mistakes that essentially caused no harm.12 CASL's unintended conseq uences can nonetheless be real.

Crltiail A.Judpis: Does Canad a need anti-spam legislation? Why not leave the problem of spam to the marketplace to resolve?

The person who makes an o ffer is known as the offeror. The person to whom an offer is mad e is known as the offeree. In the Business Law in Practice scenario, Jason is the offeror, and Anu itha is the offeree.

Termination of Offer An o ffer can be accepted only if it is "alive", meaning that it is available to be a ccepted . If the offer has been legally terminated, no contract can come into exis- tence, since one of its essential ingredients- the o ffer itself- is missing.

An offer can be ter minated or "taken off the table" by any of the following events:

revocation.

lapse.

rejection.

counteroffer.

death or insani ty.

16 Gove1n~nt ol Canac.'.ll Ne"'s Rek!ase, "Governmenl or Canaca $usPMds la'..., SlJ1l Prov:siOn in Anl i~Sparn Legislalion: 17 June 2017J. Online: h\r)O...aton. Science and (conomic: Oevek>pmenL Ca!\OOa -:.ri1tps·//v1,,1w carooa.ca/en/innov<'ttiO!)-scieoce~conomc-de-..etopment/news/2017106/governl'l"lenl_ol_

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Offeror The person who makes an offer

Offeree

The person to whom an offer 1 s ma de

W hat factors will de termine whethera controct will be the n>sult of leng thy negotiations or will be easily and quickly cond i«led?

Revocation Revocation

Tho withd rawa I of an offer

Revocation of an offer can take place at any time before acceptance simply by the offerornotifying the offeree of its withdrawal.An offer that has been revoked does not exist anymore and therefore cannot be accepted.

In the opening scenario, there were several days between the communication of Trackers's offer and Amritha's acceptance of that offer. During this time, Jason would have been legally entitled to revoke his offer by simply advisingAmritha of that fact. Amritl1a's alternatives would then be reduced, since she cannot accept an offer that has been revoked, nor can she make Trackers do business with her if it is no longer interested.

Bigg v Boyd Gibbins Ltd, (1971) 2 All ER 183 (CA)

THE BUSINESS CONTEXT: For the purpose of entering into a contract, parties may nego- tiate considerably. Difficulties arise when one party believes tl1at a contract has been con- clud ed while the other party disputes that conclusion.

FACTUAL BACKGROUND: Plaintiff and d efen- dant negotiated extensively for the purchase and sale of real estate by the plaintiff to the defendant. The negotiation over this property- known as Shortgrove Hall- took the form of correspondence that the plaintiff/vendor claims culminated in a contract. The firs t legally important letter from the plaintiff stated:

Thank you for your letter received l ast week .. As y ou are aware that I paid £.25000 for this property. your offer of £.20 000 would appear

139

to be at least a little optimistic. For a quick sale I would accept £.26 000. so that my expense may be covered.

In response, the defendant wrote:

I have just recently returned from my w inter ho liday and. turning this rnatter over in my m ind now. would advise you that I accept your offer.

The plaintiff replied:

I thank you f or your letter .. . accepting my price o f £.26 000 for the sale o f Shortgrove Hall. I am putting the rnatter in the hands o f my solicitors .... Mywif eand I are both pleased that you are purchasing the property.

The d efendant denies a contract was formed, asserting that the parties had merely agreed on price.

THE LEGAL QUESTION: ls there a contract between tl1e parties?

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RESOLUTION: The court found for the plain- t iff. There was a contract for the purchase and sale o f Shortgrove Hall. To reach tills conclusion, the court carefully analyzed the correspondence provided and acknowledged the d efendant's argument that agreement on price d oes not necessarily mean that the par- ties have reached a full agreement. On these facts, however, a contract djd exist. As the court concluded:

The impression conveyed to my mind by these letters, and indeed the plain impres- sio n. is that the la nguage used was intended to a nd did achieve the formatio n o f ... (al

contract. As I have indicated. in the last letter stress was laid o n the phrase "accepting my price (emphas is added! of £26000 t or the sale o f Shortgrove Hall." I think. in the con- text o f the letters that preceded that it is to be read. as I have said. as "accepted my offer (emphasis added! to sell Shortgrove Ha ll at that price."

CRITICAL ANALYSIS: Who is the o fferor and who is the offeree in this case? Do you agree with the court that a contract was in place? Should courts hold parties to the meaning of the exact words they use, or should words be interpreted in their larger context?

Revocation in the Context of a Firm Offer As the following landmark case illustrates, the law permj ts offerors to revoke their offers d espite a promise to leave the offer open for a set period of time (called a firm offer). In short, such a promise is enforceable only if the other party has purchased it or otherwise has given the o fferor sometlllng in return for the commitment. Accordingly, if Jason had pronlised to leave h is offer to sell tracking open for 30 days, but Amritha did not provide sometlllng in return for tills promise-like the payment of a sum o f money- she would have no legal recourse if Jason were to break hls word and revoke his offer the next d ay.

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Dickinson v Dodds, (1876) 2 Ch D 463 {CA)

THE HISTORICAL CONTEXT: This case is the leading decision- valid even today- on whether an offeror can renege on a commitment to hold an offer open for a specified period of time.

FACTUAL BACKGROUND: On Wednesd ay, June 1 0, Dodds d elivered to Dickinson a written offer to sell his property to Dickinson for £800. The offer stated that it would be open for acceptance until 9:00 A.M. on Friday, June 12. On Thursday, Dickinson heard that Dodds had been offering or wasagreeingto sell the property to Mr. Allan. That evening, Dickinson delivered an acceptance to the place where Dodds was staying, and at 7:00 A.M . on Friday morning- a full two hours before the deadline- he personally d elivered an accep- tance to Dodds. Dodds declined tl1e acceptance,

140

stating: "You are too late. I have sold the prop- erty." Dickinson sued Dodds, alleging there was a contract between them.

THE LEGAL QUESTION: To dete1·nune whether Dickinson's action should succeed, the court had to d ecide whether Dodds was entitled to revoke hls o ffer prior to the deadline he had set. This d ecision was necessary because if the o ffer had been properly revoked, it was not capable of being accepted, and, accordingly, there could be no contract between the two men.

RESOLUTION: The court d ecided that what Dodds did was permissible: "(I]t is a perfectly clear rule of law . . . that, although it is said that the offer is to be left open until Friday morning at 9 o'clock, that did not bind Dodds. He was not in point oflaw bound to hold the offer over until 9 o'clock on Friday morning."

On this footing, a fir m o ffer can be revoked at any time befo re acceptance because tl1e offeree has not provid ed any conside ration to support the offerer's implicit promise not to r evoke before the d eadline. More contro- vers ially, the court also held that Dodds 's offer had been effe ctively revoked prior to acceptance because Dic kinson learned in a dvance- from a presumably reliable source- that Dod ds was selling the property to someone else.

CR ITICAL ANALYSIS: Being guided primarily by legal principles is certainly an acceptable way of d oing business. However, what might be the impact on your business reputation of going back on your word and revoking an offer sooner than you had promised you would? Do you think tllat the method used by Dodds for revocation (i.e., relying on the fact that Dickinson had learned tllat Dodds was selling to someone else) is the usual way of revoking an offer? What would be a more certain and reliable way of effecting revocation?

Option ag reement

An agreement w11ere. 1n exchange for payment an offerer 1s obligated to keep an offer open for a specified tJme

One way to avoid application of tlle rule in Dickinson v Dodds tllat firm offers can be revoked prior to their d eadlines is for the parties to form an option agreement, whe.reby the offeree pays tlle offerer to keep the offer open for the specified time. An option agreement is a separate contract tl1at may or may not lead to the acceptance of tlle offer and a resulting agreement of purchase and sale. Its purpose is simply to give tlle offeree a guaranteed perio d of time within which to deliberate whether to accept tlle offer or not. If the offerorwithd raws the offer before the option agreement perm its, he has committed a breach o f contract and tlle offeree can sue for d amages.

Option agreements are commonly found in real estate d evelopments- tlle d eveloper will buy a number of options to purchase land from owners in the d evelopment area. The d eveloper can choosewhetller to exercise tlle options an d knows that during the option period, tlle owners are contractually bound not to witlld raw tl1eir offers to sell at tlle specified price.

Dickinson v Dodds also demonstrates that an offer d oes not have to be directly revoked by the offerer- that revocation can take place tlrrough a reliable third- party source. This method of revocation, however, is both unusual and unreliable. Prudent business practice would have the offerer expressly revoking offers as necessary.

Revocation in the Context of a Tendering Contract A specialized set of rules governs tlle tendering process. When an owner wishes to secure compet- itive bids to build a large project, for example, it typically calls for tende rs. In response, contractors (also known as tend erers) submit tenders tllat set out a price for tlle work to be d one. If tlle ordinary rule of revocation applied, a con- tractor could si mp! y withd raw its tender at any ti me prior to acceptance and tllus be positioned to avoid any commitments it would ultimately rather not pursue. However, such latitud e would und ermi ne tlle tendering process and so the Supreme Court o f Canada, in R v Ron Engineering & Construction Ltd,13 d evised a new legal structure for how tenders are to be und erstood . Instead of regarding the call for tende rs as an invitation to treat, the Supreme Court of Canad a s aid tllat the call for tenders could be construed as an offer of a preliminary contract known

23 11981] l SCR 111.

NEL 141

as Contract A. While thjs is a fa ct-specific m atter, Contract A typjcally requires the tenderer and the owner to follow the rules governing the tend er selection process, inclurunga promise by the tenderer not to revoke its tender fora specified period o f time. Everyone who submj ts a tender js accepting the offer o f a Contract A to govern the relationsrup as well as offerjng to enter into Contract B, if chosen to do so. Contract B refers to the larger contract to perform the work jn q uestion. While there would be as many Contract A's as there were tenderers, only the successful tenderer would enter into a Contract B with the owner.

Should the tende rer seek to revoke its tend er before the specified period o f time has elapsed , jt is lil<ely a breach of Contract A and subject to legal action by the owner. As well, jf the tenderer refu ses to enter jnto Contract B when chosen to do so, it has comm jtted another breach of Contract A.

Lapse An offer can lapse in one o f two ways. It may contain a d ate upon whjch it expires; after this date, it is no longer "aJjve" and therefore cannot be a ccepted. If the offer contains no expiry d ate, it will remain open for a reasonable period of time, whlch, in turn, will depend on all the circumstances of the case, including the nature o f the transaction at issue. For example, an o ffer to sell a piece of wood land that is sitting idle would probably remain open longer than an offer to sell a piece o f property that is about to be commercially d eveloped. A judge will bring as much precision as possible to the question of when an offer lapses, but the whole exer- cise is inherently speculative.

With this in mj nd, an offeror should consider specifying an expiry date for the o ffer and thereby avoid the d ebate altogether. For hls part, the o fferee should act promptly, because of the principle in Dickinson v Dodds permitting revocation p rior to the expiry d ate, or at least keep in contact with the o fferor to ensure that the sta tus of the offer is known.

Rejection It is importan t fo r those involved in contractual negotiations to know that an o ffer is automatically termmated upon rejection by the offeree. The o ffer can be a ccepted only if the offeror revives it by offering it anew o r if the offeree presen ts it as his own offer, whlch can tl1en be a ccepted or rejected by tl1e original o fferor. The risk in rejecting an offer is that it may never be renewed by the other side.

Counteroffer A counteroffer is a form of rejection. Through a cou nteroffer, the offeree is turrung d own the offer and proposing a new o ffe r in its place. The distinction between an acceptance and a counteroffer is not always readily apparent. For example, suppose that a seller offers 100 widgets to the buyer at $1 0 per wid get, and the buyer responds, "Great, I'll take 800." Or suppose a seller o ffers a car fo r $10 000, and the buyer says, "I'll take it. I'll give you $5000 today and the balance next week." In both situations, it looks like the buyer has accepted, but in law she has made a counteroffer. Any change to a term of an o ffer- inclurung to price, quantity, time o f d elivery, or method o f payment- is a counteroffer. Because a coun teroffer is a rejection, the original offer is a utomatically termi- nated and can be accepted only if it is renewed by one o f the parties. Whenever a party makes a counteroffer, she jeopardjzes the chance of bej ng able to accept the original offer.

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Lapse

'he expiration of an offer alter a specified or reasonable period

Rejection

,.he refusal --o accept an offer

Counteroffer

'he re1ect1on of one offer and proposal of a new one

Accep tance

An unquahl1ed w1l11n gness tO enter into a contract on me terms 1n the offer

Death or Insanity While the matter is not free from controversy, i t would seem that an o ffer gener- ally dies if the offeror or offeree dies. However, if the offer concerns a contract that would not require the affected party to personally perform it , a court may d ecide that the offer could be a ccepted notwithstanding that party's d eath.

Someone who makes an offer and then, subsequently, becomes insane would not be bound, as a general rule.

Acceptance Definition of Acceptance When an offer mad e by one party is unconditionally and unequivocally a ccepted by the other party, a contract is formed. To be effective, the acceptance must d emonstrate an unqualified and complete willingness to enter into the contract on the precise terms proposed. If the purported acceptance does not mirro r the offer by agreeing to all its content, it is a counteroffer and no contract has been formed.

In the opening scenario, Aruritha dearly accepted Jason's offer- she did not propose modifications or alterations to his proposal. While she expressed some reservations, saying that she was not entirely happy with the offer, this was not a rejection. Rather, she went on to fully and completely a ccept his o ffer. At this point, two of the building blocks o f a contract between Coasters and Trackers are in place- namely, offer and a cceptance.

Communication of Acceptance In order to effect legal acceptance, the offeree must communicate- by words or by conduct- an unconditional assent to the offer in its entirety. This message of acceptance can be conveyed in any number of ways: in person, in writing, by mail, by fax, by email, by telephone, and by other actions. In fa ct, any manner of com- munication that is reasonable in the circumstances ordinarily will d o. However, the offer must be scrutinized to d etermi ne if it requires a specific method of com- municating an a cceptance. If it d oes, and by the terms of the o ffer that method o f communication is mand atory, tllen the offeree must follow tllat method of com- munication in order to ensure legal a cceptance. For example, if a company offers, by telephone, to sell a given item but specifies that acceptance must be in writing, then the o fferee's calling back with a purported a cceptance will be ineffective. In this case the offeroris entitled to insist on written a cceptance before it is bound.

Lowe (DJ) (1980) Ltd v Upper Clements Family Theme Park Ltd (1990), 95 NSR (2d) 397, 1990 Canlll 4194(NSSC)

legal requ irements o f contract formation. This lack of focus can lead to disappointed expectations.

FACJtJAL BACKGROUND: Mr. Bougie, construe· ti on managerof Upper Clements Family Theme Park, was unde r a tight construction sched ule and need ed a crane q uickly to complete con- struction of a theme park. He discussed leasing

THE BUSINESS CONTEXT: Bus inesses o ften have to act q uickly to add ress a problem that has d eveloped. In such circumstances, proper attention may not be given to the

143 NEL

a crane from Mr. Lowe's company, but the two men could not come to an agreement. Lowe insisted that the crane be leased for a min- imum period of two months, whereas Bougie did not want to commit to that length of a term, preferring to prorate" charges based on a monthly rental. The next day, however, Bougie d elivered a letter to Lowe from Mr. Buxton, the general manager of the theme park, dated November 24, 1 988. The letter summarized the parties' agreement and included this statement: "The Upper Clements Family Theme Park Limited agrees to pay the sum of $10 000 (ten thousand dollars) per month, prorated for partial months for crane hire." The letter concluded by asking Lowe to sign a copy of the letterif hewas in agreement with this condition.

This letter did not, in fact, reflect the parties ' agreement and was never signed by Lowe, but he did send a crane to tl1e construc- t ion site. Lowe apparently believed that he and the theme park personnel could come to an agreement on price, and within two days of delivering the crane, approached Bougie with a draft agreement setting out a montl1ly rate for a two-month term. Bougie said that he had no authority to d eal with the docu - ment, and it would have to wait for Buxton's return from an out-of-town trip. In the end, the theme park had the crane on-site for four days and then immediately returned it, along with payment of $1250. Lowe's company sued for the balance, claiming that it was owed a total of $20 000.

THE LEGAL QUESTION; Is there a contract between the parties? If so, did Buxton's terms on price prevail or did Lowe's?

RESOLUTION; The trial judge d etermined that there was a contract between the parties for the

rental of the crane. Whether Buxton's letter was classffied as an acceptance or a counteroffer, said the judge,

... it was the serious expressio n of an intention by the Theme Park to enter into a contract w ith the Lowe company ... Having received that l etter. Mr. Lowe had his company go ahead w i th delivery o f the crane. knowing it was essential th at the Theme Park have it at the earliest possibl e moment. Rather than risk l osing the contract Lowe accepted the offer by delivering the crane and acquiescing in the Theme Park's use of it.

In doing so Mr. Lowe was not in ten - ti o nally capi tu lating to an unfavourabl e counteroffer. Based upon his experience in the in dustry and his previous dea lings w ith th e Theme Park. Mr. Lowe was taking a cal culated risk that even though his com- pany was entering into a contract. he c oul d later negotiate more sati sfactory terms . H is expectatio ns were not unreasonabl e. However they were frustrated fi rst by Mr. Buxton's absence and then by hi s own . The two-month term (set fo rth in th e draft l ease that Lowe subsequently presented to Bougie! was not part o f the con tract th at was entered into. The governin g provi sion is in Mr. Buxton's letter o f November 24th . That is th e provi sion o f the cou nter-offer Mr. Lowe w i shed to avoid . but it is th e o ne that governs . Th e Th em e Park i s en titled to return the crane t or the monthly rental prorated for the partial mon th w hen it h ad possessio n o t the crane .... The amount to be paid was ca lculated at $1250.00 by the Theme Park and previously ten dered to the Plaintiff. I accept that calculatio n and award the Plaintiff damages .

CRITICAL ANALYSIS: How can a business avoid unwanted obligations when there is insufficient time to properly negotiate a contract? Is it rea- sonable for the judge to d ecid e the case based on the terms of one letter?

24 Vl tx:;:l a sum is o-o•a ted, il mo:\11'S 1na1 \•1hal s cMrgeo is di?IC1m1ned ii\ recc; 1on: 10 a ce1 tail\ 1at<:i. In l his examp6e, I~ ITY.>nlhty raltl iS $10000. Basoo on a 30·day month. the pro1at~d da~y cha19e \...OUto ba $10 {)!)() dv<l•d oy 30, or $333

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CRITICAL ANALYSIS: This case is an example o f an o ffer o f a unilateral contract , though the court did not identify it as such. Through such an o ffer, the offeror promi ses to pay the offeree a sum of money if the o fferee performs the req uested act. For example, a company m ight o ffer a $ 2 00 reward to anyone who fin ds a m issing laptop computer. Unlike the ordinary business contract , where both par- ties have obligations, in the unilateral contract only the o fferor is bound because the offeree can perfo rm the req uested act - fi n d the

laptop- or not. He has no obligation even to try. If he does fin d the computer and returns it, the contract is complete, and the offeror is contractually required to pay. For obvious reasons, this k in d o f o ffer typically d oes not require people who d ecide to look fo rthe com- puter to advhe the company of the.ir intention to d o so. From the company's perspective, it is enough to hear from the person who actually fi nd s the computer. Why do you think unilat- er al contracts would be rare in the businessj world ?

Ordinarily, however, communication of a cceptance is expected and required. In practical terms, the offeror needs to be aware o f the acceptance in ord er to appreciate that the contract ex.ists and that performance of the obligations in it should proceed.

A problem arises when the offeree send s an a cceptance that for some reason never reaches the o fferor. Perhaps a letter gets lost in the mail, an email message goes astray, or a fax gets sent to the wrong number. Has there been a cceptance or not? Normally, the answer would be that no acceptance has occurred until actually received. Put another way, acceptance is effective only when communicated- it is at this moment that a contract comes into existence.

A specific exception to this general r ule is the "postbox rule", also called the "postal rule." If it is dear that the offeror intends the postbox rule to apply to her offer, then acceptance is effective at the time of mailing the acceptance, rather than the time of d elivery. Even if the letter containing the acceptance is never delivered to the o fferor, a contract has been formed. Since application of the postbox rule means that an offeror could end up be.ing in a contract without even knowing it , that person is best advised to avoid application of the postbox rule by making it clear in the offer that actual communication or notice o f acceptance is absolutely required.

When a court will apply the ordinary rule (which requires communication of a cceptance) and when it will apply the postbox rule depend s on the facts of the case. As Lord Wilberforce states, "No universal rule can cover all such cases; they must be resolved by reference to the intentions o f the parties, by sound business practice, and in some cases by a judgment, where the risks should lie .. . . "26 Courts have applied the postbox rule to telegrams,27 presumably on the basis that the offeror had impliedly constituted the telegraph company as his agent fo r the pur- pose of receiving the a cceptance. Otherwise, the ordinary rule applies and the a cceptan ce by telegram is effective only upon recei pt."" The postbox rule has also been applied where the acceptance was d elivered by courier.29

20 Bt,iflkibOn Ltd v S:ahtJg Stahl LJ(id Stah1warenhlJ(t(JeJ.sgeseNschafl mbH, 1198312 AC 34 tHU IBt,iftkibOnJ, the nJ~~ in 81itlk1bon v1as adOOti?d ill C-anMa by Castern P-owe1 Ud \t Az!endtl ComunaJe Ene1g1a f.J A:t'Jlm-rtte 199:/, 178 D LR (4th) 409 (Ont CAI

27 Jonn McC.arnus. TheLaworCon11'1'a 2o ed !Toronto; hwin Lavi, 2012Jat 14. 28 SocH'!th Ce1 A Resp.:Yi!><JbJ/Jta !Jm1thta v P1sdtel.'J, !19881CLO679 lOnl 0.-sl Cl) 29 NOV;> Scot.''1 v Vl eym:'.>uth Sea Products Ltd, U983) 4 DLR {41hJ 314 !NSCAJ and fp Bou1g<K1it Jnd. CuUNtnOt

Drvisien Ltd v Ntcnols TUJtJge Tools Inc 1988, 63 Sask. ~ 204 tO BJ.

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Sin ce entering a contract i s about assent, the law determines that the offer is effective only when it has been communicated to the offeree. In this way, the offeree becomes aware of its terms and can respond. Similarly, the acceptance, if any, must be commun icated to the offeror so that the offeror is aware of the unqualified accepta nce. Acceptance is achieved expressly, as when the offeree accepts in person or sends a message through some medium to the offeror. Occa- sionally, however, acceptance can be indicated by cond uct , as the case just above demonstrates.

It is also possible--though less than usual- for the offer to be expressed in such a way that no communication of acceptance is need ed.

Carlill v Carbolic Smoke Ball Co, (1893) 1 QB 256 (Eng CA)

THE HISTORICAL CONTEXT: This case was decided at a time when Victorian England was being inundated with quack cures. Examples of "miracle" cures included Epps Glycerine Jube Jubes and a prod uct called Pepsolic, which claimed to prevent marriage breakups because it prevented indigestion. The ad for this prod uct noted that indigestion "Causes Bad Temper, Irritability, Peppery Disposition, Domestic Quarrels, Separation and- the Divorce Court."'5

FACTUAL BACKGROUND: This case considers the legal obligations that r esulted from the adver tisement placed by the Carbolic Smoke Ball Company in a London newspaper at the turn of the 19th century (see Figure 6.2).

FIGURE 6.2 Carbolic Smoke Ball Advertisement

£100REWARD WILL BE PAID BY T H E

CARBOLIC SMOKE BALL CO.

To any person who contracts the increasing Epidemic,

INFLUENZA

Colds, or any diseases caused by taking wld,

AFTER H AVING USED the BALL

3 times daily for two weeks according to the printed

directionssuppliedwitheach Ball.

£1000

ls deposited with t he ALLIANCE BANK, REGENT STREET,

showing our sincerity in the matrer.

During the last epidemic of Influenza many of our

CARBOLIC SMOKE BALLS were sold as Preventives

against this Disease, and in no ascertained case was

0 ~ ~ "' 0 ~

§ "' "' 8 ~ ~

1l 5;

~ Mrs. Carlill used the smoke ball as directed for two weeks but caught influenza a nyway. When the company refused to pay her the ad vertised reward, she commenced an action for breach of contract.

.'.l t he disease contracted by those using the >

THE LEGAL QUESTION: Was there a contract between the parties, even though Mrs. Carlill did not communicate her acceptance o f the Carbolic Smoke Ball Compa ny's offer?

RESOLUTION: While communication of acceptance is generally required, this is not always the case. Because tl1e Carbolic Smoke Ball Compa ny- the offeror- had chosen to

CARBOLIC SMOKE BALL. ~ '--~~~~~~~~~~~~~~_.a

dispense with the necessity of notice, it could not complain about Mrs. Carlill's fai lure to commun icate acceptan ce now. In the end, the court found that Mrs. Car lill had accepted the company's offer o f a reward by using the smoke ball as requested and that, upon beco ming sick, she was contractually entitled I to the £100. _)

25 AWB S:mpson. ·ouockeiy and Contra:':t Law The C.a~e or Lile CaiOOtiC Smoke ~r lJune J985J 14 2 J !.eg<JJ Siud 34 Sat 355 ... 56. Tne nts1oncti 1nforrna1on con1a1oed in thiS box dra-.vs on S1mpso1l's a00itys:s.

NEL 145

That said, it is much more common for the courts to apply the orclinaryrule- that acceptance is effective only when communicated . They have d one so wjth respect to many forms of instantaneous communication, including the telephone, the telex, and the fax.30

The p ractical application o f the rules governing offer and acceptance is affected by the req uirement of proof that the necessary events occurred. Someone who seeks to enforce a contract thatthe other party d enies exists must be able to prove that o ffer and a cceptance occurred. WhHe, ideally, this proof is created through d ocumentary evidence, d ocuments are not always avaHable. In such circum- stances, the individual seeking to rely on the contract must convince the court of its existence wjthout the benefi t of extraneous proof. Oral agreements are very difficult to prove wjthout some independ ent verification or cor roboration- by a wjtness to the negotiations, for example- of what was said . Beyond this, some contracts must be evid enced in writing to be enforceable."

TECHNOLOGY AND THE LAW

ELECTRONIC CONTRACTING Electronic commerce (or econunerce) refers to cond ucting business- such as the sale o f goods and services- over the Internet. Its volwne has grown tremend ously over time.

In an effort to facilitate the growth o f ecom- merce, the Uniform Law Conference o f Canad a has adopted the Uniform Electronic Commerce Act (UECA)' 1 based on the United Nations Commis- sion on International Trad e Law's (UNCITRAL) Model Law on Electronic Commerce.33 The UECA serves as the basis for electronic commerce legis- lation across the country.34

The UECA and the legislation that it has inspired across Canada d o not mod ify or change the general rules applicable to contracts. The formation of electronic contracts is governed by the same general rules as other contracts. There must be an o ffer, acceptance, and communica- tion o f the acceptance.

How does e<ommerce benefit from a standardi:zed set of legislative rules?

Offer: The UECA provid es that an o ffer may be expressed electronically. The legislation does not,

however, specify whether communication dis- played on a website is an offer or an invitation to d o business. Generally, ad vertisements in cata- logues and good s displayed in a store are not viewed as offers on the basis that merchants have only a limited supply and therefore could not rea- sonably be making o ffers to everyone. Presum- ably, electronic catalogues, ad vertisements, and

30 (~stern Po)'tet Ud v Azl€rrd;, Corrvnut:a'e £ne1gia, U999J 1 !8 DLR t41hJ 409, 1999 C.anlll 3185 {()N C.AJ, leave 1oapp0at 10SCC 1elus«l. U999J SCCA No 542.

31 ~e Ch.lpter 8 101 h.Jrthe1 disc:uS!.;on. 32 Uni101m Law Conrerence ot Caooda.. ·un.1fo1m Elcctromc Coml'l'Y.!rca Acl U<J9C.)f 100 datcJ, 0~1~· ULCC

<http·//vN1w.ukc.ca/en/1999~v1.n.nipeg·m!>/359·ci\l\\.~cton<iocumenlS/ll38·199'9·eteclronic·comn-erce· achtlnnotated>

33 UnttOO N ()tiC!U Commisson on lnternalOnal T!ade law, ·1996-UNCITRAL Modet La'_., on £\ectiomc Commerce W tth Guide 10 £1\aclmenr 100 dale) ol'tline UNCIT R.t..L <http //w>Nw.une11ta.org/uoc.11r;:J./en/ oncilr~texts/ek:!ctr0oic_comin~1ce/l9%Modef.hl'Ti>

34 SGe.101 gxarn~a the t:Jecuon:c 'lfar.sactons Act, SBC 2001. c 10 (BC) and !he £~tronA: Commerce Act SO 2000,cJ7

NEL 147

price lists would be subject to the same rule. However, if the website clisplaying goods or ser- vices for sale not only indicates the price but also indicates that the item is in stock then the online a dvertisement could conceivably be considered an offer, without clear wording to the contrary.35

Acceptance: The UECA provides that acceptance of an offer can be made electronically. Thus, an offer made electronically may be accepted electron- ically unless the party making the offer insists on some other means of communication. Case law has recognized that an offer made electronically can be accepted by d icking on an online icon or an "I agree" button. In Rudder v Microso~.""an Ontario court held that an online membership agreement became enforceable against the subscriber once the subscriber clicked on the "I agree" button.37 The UECA also recognizes that an acceptance (as well as an offer) can be effec ted byanelectronicagent.38

Communication of Acceptance: An acceptance of the offer must be communicated to the offeror to take effect. Where the acceptance is effective usually d etermines where the contract is formed and consequently what law applies to the transac- tion. In the absence of an agreement, an accep- tance using an instantaneous means o f communication (telephone, telex, facsimile) takes effect where the offeror receives the communica- tion, whereas, generally speaking, acceptance using a non-instantaneous means of communica- tion (such as the mail) can be effective on sending,

that is, where the offeree is located. What then of communication by electronic means? Is this an instantaneous means of communication? Elec- tronic mail is not qwte like orclinary maH because, generally, it is significantly faster and it is often dependent on the actions of the recipient for arrival; it is not qwte like a telephone because there is no clirect line of communication between the parties and it is not always possible to verify whether the intend ed recipient has received the message. Internet communication can be interac- tive andin real time, however, therefore exhibiting characteristics of instantaneous means of commu- nication .39 The UECA has provisions specifying when a message is sent and when it is received, but it does not specify where an acceptance becomes effective. While still a matter to be decide d on a fact-specific basis, some jud ges have taken a posi- tion. See, for example, the case of Christmas v Fort MacKay"' which applied the instantaneous rule of communication to email acceptances;., such accep- tance is effective in the place where it is received.

Critical Analysis: Legislation has removed some of the uncertainty about online contracting. How- ever, questions still remain concerning whether communications on a website are an offer or invi- tation to do business and whether an electronic acceptance is effective on sending or receipt. What risks d o these uncertainties pose for busi- ness? What steps can a business take to minimize these risks and avoid contractual clisputes?

35 Ba•1y Sook.man.. Chapt~1 10 in Campurer. Jnuunet Md C1ecr1onJc Corru?X!tce L.'W1 on4ine· 'IJ/~s.M:\'.'Ne.xtc.anada al roo1no1es 60.l to 62 and su110\Jrl0 1fl9 text {accessed 30 March 2015J.

36 11999). 2 CPR (41ilJ 4 74. 1999 Caolll 14923 iO N SC). 37 The statement hom l?uddet tM t an enforc..:'!abh? contract can t-e fo1mt2d ~ c1ick.in-;::i an online con has

sobsaouentty been C l~ w ith app1ovat Ul Do~z v f~c&xJoi<, Jnc 2017 SCC 33, 12017! $CJ N :'> 33 at Clara 137 in 1ne dl$Soenl ng opiruon Hov1ai-e1. in context ol t'W! enfor<.~~t>illy of a tol\Jm sek!c t:o!l clause, oo te t'la <".au tiOn by .)Jsuce . .\~ ~n a oonct.nri~ do::iSiOn) a t par~ 99: ·onu~ contr<x': ts such as 1ne one !n this C.'.)se pu t t1ooitionat controc l pnnc1P4e-s 10 the test. V/l\a t does consent mean \Yi¥.'!() me ag1ee1nen1 1 s sad to be made by p1essing a compu ter key? Can it 1e~iStiC~y be sad 11\at 1ne consumer tu1"K'!d l'\:1sor her rnind toa1 1ne terms aoo gave mean!ngfut CO!lS(!nl? In o tner \•101ds, 11 see"r'IS to me that some ~9<11 <iick.no\<Aedgment shOukl be gM'!() 10 the au torrauc r~h.11e o l the cornrn1tfnents 1nad£> v11tl\ this kind o f c.-ontra: t.. n01 lor tM! pi.noose o f 1nvalda1tng 1he contrac t fl.sell, bu t a t 1ne ve1y~as1to 1ntens fy t'le scruhny to1 clauses thal ha...e the e ffect o f 1mpa11 ,ng a co:\Su1n2(s a.:cess to poss!~ remedies: f\bte tM t tne-enlorc~bl+ ty o f these types o f cont1.x:ts- koov1n as ch::k··vv1ap <YJIE:~menls-is lur1ne1 diSCussed in Chaplo1 7

38 According to tn.e UECA. su(>fa not~ 32, section 19, a!l: ~c11on1c agent ,s a coml)t>ter prog ram or etectronic mMnsusoo to 1n1tiut€ anar.::liono1 10 1espo"'1 10 ~~ctronicdocuments 1n v1 h0$e or 1n pan w 1l h0ut 1evt1v1 tty an actuat oorsott a l the hmtl o r lhe resPonSC! 0 1 aCllOn. £k!c:t1o n:c ag3'nts a1G ciscussc.'d in Ch.-1p1e1 13.

39 Sookmal\. su(>fa note 35al1ootno1es93 11095 aoo suiroundil"IQ tGXt. 40 Christm,>S v Foti McKay, 2014 ON$C 373 al para 18, l19 OR t3d) 21 41 Tn:s apprc»:h has atso bc£>n(!ndOrsed by the d1ssen1Jng decision in Ltlpalnte Ro:senstan Matehtlnd f.-lelllm;on

LLP vCasse/s B">=k It BJackweN LLP 2016 SCC 30. 12016! 1 SCR 851 a l pa•a 79

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Consideration

-he price paid ror a promise

Developments in technology have created new methods of doing business that test the relevance and applicability of the older common law rules regarding offer and acceptance to which this chapter has already alluded.

Formalization Even though the parties may have reached an agreement through offer and accep- tance, this will not always produce an enforceable agreement. In fact, it is common that businesses may not wish to be bound in any way until the contract's formal language is agreed to and the formal contract signed. The question, should a dis- pute arise on point , is whether the parties intend further documentation as a precondition of a contract existing at all or simply as "an indication or expression of d esire as to the manner in which the con tract already made will be imple- mented."41 Though the court will take into account all the facts of a given case, the word s "this agreement is subject to formal contract" can indeed signal that there is no concluded contract"" unless and until the formal contract comes into exis- tence. In such circumstances, there are generally no enforceable obligations between the parties.

Consideration The Nature of Consideration A contract is a set of commitments or prom ises. It therefore entails a bargain or an exchange between the parties. Each party must give up something of value in exchange for receiving something of value from the other contracting party. In the example of the agreement between Jason and Amritha, it is clear that there is considerat ion on both sides of the transaction: the buyer promises to pay the purchase price in exchange for the seller's promise to provid e tracking of the spec- ified quality and quantity. Seen from the other perspective, the seller promises to provide tracking of the specified quality and quantity in exchange for the buyer's promise to pay the purchase price (see Figure 6.3). This bargain, or exchange of promises, is a classic example of the legal requirement of consideration.

Consideration is a key ingredient that distinguishes a legally enforceable promise from one that is not legally enforceable. If Trackers promises to provid e tracking to Coasters at no charge and later d1anges its mind, Coasters cannot successfully sue for breach of contract. Coasters has not given something back to Trackers in order to purchase Trackers's prom ise; accordingly, there is no contract in place, and any lawsuit by Coasters will fai l. In law, Trackers has made a

FIGU RE 6.3 Consideration as an Exchange of Promises

Coasters

•••• promises to pay in consideration for Trackers's promise to supply

Trackers

•••• promises to supply in consideration for Coasters·s promise to pay

42 Klemke "'"""9 Corp v S"eu <:anad• Lid. 2007 ABOB l i 6 • I paia. 183. afro 1200819 WWR 203. 433 AR 172. 93 Atta LR !4th) 225

4 3 >-lolly Cbwns Devek';lpments Inc v 1428508 Ont<11io L:d. 2014 O NSC 1628 al ~ra 41

NEL 149

g ratuitous promi se- that is, a prom ise unsupported by consideration. Classi- cally, the law has conclud ed that such a promise can be broken wHh legal impunity because it has not been "purchased ", though, as discussed below, another view on the matter is emerging in circumstances discussed infra.44 Certainly, if the parties have exchanged promises or something else of value, their obligations are contrac- tual and, therefore, und oubtedly enforceable.

As the above examples illustrate, a "price" must be paid for a promise before a party can sue when it is broken. Most commonly, the price for a promise to supply good s or services takes the form of another promise-including a promise to pay an agreed-upon sum in the fu ture- or immediate payment of money. However, the consideration need not be monetary. The only requirement is that something o f value be given up by the party seeking to purchase the promise of another. Fur- thermore, that item of value may be conferred on a third party and still amount to consideration, provid ed it was conferred at the request of the other side. For example, if Jason requested that the purchase p rice of the tracking be paid to a creditor of Trackers, Coasters's agreement to d o so would support Trackers's promise to supply the tracking.

The requiremen t for consideration is strongly linked to the idea of freed om o f bargain ing. Although the law requires that consideration be present on both sides of the t ransaction, it is up to the parties to negotiate a deal that is mutually a cceptable. They, not a judge, d ecide what constitutes a fair and reasonable price. Therefore, the adeq uacy of consideration is nor mally not open to challenge. If Amritha has agreed to pay a price for the tracking that turns out to be well above its market value, that is her choice. She cannot later go to a judge and ask that the p rice be lowered on that basis alon e. The law will generally enforce a contract even where one party has agreed to pay too much because the parties are responsible for being fully info rmed o f all aspects of the t ransaction and for evaluating the r isks involved. If Amritha is concerned that she may end up paying too much for tracking, she should consult experts in the field and seek competing bids to help her establish a fair market price befo re accepting Jason's offe r. Similarly, if one or both of the parties is concerned that the value of the good s or services contracted for may change between the time of agreement and the time of performance, a clause allowing the contract price to be adjusted for market fluctuations should be includ ed in the contract. In short, parties are expected to take care of themselves and plan for contingencies.

Pre- Existing Legal Duty When parties to a contract agree to alter the contract in a way that benefi ts only one of them, the traditional legal perspective says that the alteration is unenforce- able unless there is fresh consideration. For example, if a contract provid es that a project is to be completed on a particular date, a promise by the owner to pay an additional sum of money- say, $ 2000- to ensure completion on that date is unenforceable. The p romise to pay an additional $2 000 is not supported by fresh consideration because completion on a particular date is already required und er a contract. In short, it is a pre-existing legal duty. This is the view taken in the following case.

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Gratuitous promise !'>,promise •or which no cons1derauon 1s given.

Pre-existing legal duty

A legal obl1gat1on chat a person already owes

Gilbert Steel Ltd v University Construction Ltd (1976), 12 OR {2d) 19, 1976 CanLll 672 {ON CA)

THE BUSINESS CONTEXT: A business may enter into a contract that suddenly becomes unfa- vourable because of changes in the market. If it secures a concession from the other side in response to these changes, without regard to legal requirements, the concession may prove to be unenforceable.

FACTIJAL BACKGROUND: Gilbert Steel (Gilbert) and University Construction (University) were in a contract that req uired Gilber t to supply a set amount of fa bricated steel at an agreed- upon price. When steel prices rose d ramatically, Gilbert asked U ruversity if it would pay more for the steel. Uruversity agreed but later refused to pay the increase and sent only payment for the originally agreed-upon price. Gilbert sued for breach of contract.

THE LEGAL QUESTlON: ls there consideration supporting Uruversity's promise (i.e., what is Gilbert doing in return for Uruversity's promise to pay more for the steel)?

RESOLUTION: There is no cons idera t ion from Gilbert for Uruversity's promise, and it

is therefore unen fo rceable. Gilbert is d oing only what it is alread y contractually obliged to d o- namely, supply steel to Uruversity. P ut another way, Gilbert has a pre-existing legal duty to provid e the steel and, accordingly, is giving nothi ng "extra" to Uruversity to support University's promise to pay more. The promise is therefo re unenforceable, even though Uni- versity mad e the second promise in good faith, possibly with a fu ll intention to pay the higher price. Gilbert's action for breach of contract therefore fails.

Gilbert should have contemplated a rise in the cost of steel when setting the orig inal price and built into the contract a fo rmula permitting an increase in the contract price. Alternatively, it could have provid ed some· thing in return for the higher price, such as earlier delivery or any other benefit that Uni· ver sity requested. A final option would have been to get University's promise under seal (see below).

CRITICAL ANALYSIS: Does this rule con· cerrung perfo rmance of a pre-existing legal d uty reflect the reasonable expectations of both the parties involved and the broader busi- I ness community? _,,}

Variation of Contracts The rule that performance of a pre-existing legal duty is not good consideration for a new promise also fi nds expression in the traditional rule that all variations of a contract must be supported by "fresh" consid eration. As Gilbert Steel Ltdv University Construction Ltd illustrates, just as a contract needs to reflect a two-sid ed bargain, so must variations or changes to that contract. This is why Uruversity'spromise to pay more for the steel is, under this traditional analysis, consid ered to be worthless and unenforceable without some corresponding concession from Gilbert.

More recently, however, the New Brunswick Court of Appeal (in NAV Canada v Greater Fredericton Airport Authority lnc'15) has ruled that a contractual variation unsupported by consideration is enforceable- provid ed it is freely chosen.46 As the court notes, among other matters:

The realit y is that existing cont racts are frequen tly varied and modified by tacit agr eement in order to respond to contingencies not an ticipated or identified at t he

45 2008 NBCA 2B. 229 NBR 12oJ 238 INAV CMadaJ. 40 Jbid More SP<lCifiCaly, t'la court si.atOO ll\al lheie mtJSt not Mve been al'ly economic: duress, a doctri~ wnicn

i$ discussed tur1he1 10 Chaple• 8. B1iefty s~ted, econo:niC du rt'? SS refers to the th1~1 of ecooomiC Mim 1Ml cocnces the v1.U ot the inr.ocant Clarty and reStillS 1na controct. II inct!;dos l~ dM that Iha innocen1 par1y Md oo p1ac1cat or 1~.atisLc ~1~rna11ve IX.II to a;iree to 11\e varStlC'>rt

NEL 151

time the initial contract was negotiated. As a matter of commercial efficacy, it becomes necessary at t imes to adjust the parties' respective contractual obligations and the law must then protect their legitimate expectations that the modifications or variations will be adhered to and regarded as enforceable.41

The court expressed the view that the doctrine of consideration should not be frozen in time and that incremental change to the common law is important in order to advance modern policy objectives.•• Provided that the party who agrees to a gratuitous variation did so voluntarily, it is enforceable.•• The idea is to respect the parties' legitimate expectations that the contractual modifications would be adhered to.50

As the box below explores, the British Columbia Court of Appeal has recently followed the lead offered by NAV Canada.

Rosas v Toca, 2018 BCCA 191

THE BUSINESS CONTEXT: When someone lends money, he or she may subsequently d ecide to accommodate the d ebtor and not insist that the loan be paid back by the contractually specified d eadline. Such flexibility can lead to litigation, however, and includes the risk of losing out on repayment altogether.

FACTUAL BACKGROUND : In 1 990, Ms. Rosas (tl1e plaintiff) moved to British Columbia from the Philippines and became good friends with Ms. Toca (the d efendant). In 2007, Rosas won $4 million in the 6/ 49 lottery and promptly lent $630 000 to Toca so that Toca could buy a house. The loan was to be repaid in one year but, at the request of Toca, Rosas extended the repayment date on several occasions. Eventually, Rosas sued Toca because Toca never did pay back this very large loan. Rosas lost her case at trial, how- ever, because Toca successfully raised what is called a limitations defence. Under BC law which applied at the time of the litigation, Rosas's action had to be commenced within six years of the debt being due." According to the trial judge, the debt was due on January 1 0, 2008, but Rosas did not sue unti1July17, 2014- six months too late. The trial judge agreed that ifRosas's prom- ises to accept late payment were enforceable, the

47 Jbkt at pa1a 28.

limitations defence would fail because the d ead- line for repayment in the contract would have been contractually varied and extend ed . How- ever, the difficulty was that there was no consid- eration coming from Toca in exchange for Rosas's promise to extend the payment dead- line. That is, Toca gave nothing back to Rosas in return for Rosas' s promises to extend the dead- line. This meant that their contract had not been successfully varied and Toca was able to walk away from her $630000 debt.

THE LEGAL QUESTION ON APPEAL: Has the contract between Toca and Rosas been varied in a binding way or does the limitations d efence prevail?

RESOWnON: The Court of Appeal reversed tl1e trial judge and found that tl1e contract had been varied in a binding way. Rosas won her case and Toca was obligated to pay back the money.

Rosas won because the appellate court d ecided not to follow cases like Gilbert Steel, dis- cussed above, and instead concluded that fresh consideration was not required in order to establish a binding contractual variation . Even though Toca had provid ed no fresh consider- ation and was only fulfill ing her pre-existing legal duty in response to Rosas's promise to give additional t ime to pay, the Court of Appeal

48 lbkl at paras 3Q .. 3l retyi"9 on WtJ!itJm.'> v Rolfty Bms ft NJChOllS (Contr.'JetotsJ Lld, 1199011 Al ER 512 (CAL 49 lmd <ll oara 55. SO Jbkt at pa1a 28. 51 Note thal flm tatiO!l perods tHldt.?1 BC law Mve sincE! <::hanged. See I he LirrYt/Jtloo Act SBC 2012, c 13

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Lottery winner and plaintiff, Ms. Rosas

decided it was time to reform the law. This deci- sion to reform came, in part, because o f the analysis offered by the New Brunswick Court of Appeal in NAV Canada discussed above. The Court of Appeal in Rosas agreed that consider- ation is an important signal that parties intend to be bound but should not be "an end it itself."5 2

The court went on to state as follows:

In my view. that is the case before this Court. When parties to a contract agree to vary its terms, the variation should be enforceable w ithout fresh consideration, absent duress. unconscionabihty. or O!her pub be pobcy concern s, w hich would render an O!herw isevalid term unenforceable. A variation

supported by valid consideration may continue to be enforceable for that reason, but a lack of fresh consideration w ill no longer be determ inative."

Thjs means, essentially, that in British Columbia, a freely chosen contractual variation js enforceable even without consideration. Applying this new rule, the court enforced the variations to the payment d ate.54

Here is the court's conclusion:

The annual modificatio ns extended t he date o n w hi ch payment was due from Ms. Toca by several years. and consequently del ayed t he run- ning o f t he Ii m itation period for that same t ime. The judge found t hat the original due date was 10 January

2008. and Ms. Rosas testified t hat Ms. Toca came to her seeking o ne-year extensions until 2013. Wh en t hose modificatio ns a re recognized, Ms. Rosas·s cause o f actio n did not ari se until Ms. Toca failed to pay by 10 January 2013. Ms. Rosas's statement o f c laim was filed o n 17 July 2014, w hic h means i t was well w it hin t he si x-yea r li m i tatio n period under t he former Limitation Act. 55

CRITICAL ANALYSIS: Do you agree with the British Columbia Court of Appeal that the law should make contractual variations more easily enforceable by dispensing with the need for con- sideration? Why or why not?

The forego ing means that there are now two lines of authority in Canada regardjng the enforceability of gratu jtous contractual variations. In Ontario and jurisdictions following the Gilbert Steel approach, even freely chosen contractual variations are not enforceable. In British Columbia, New Brunswick, and any jurjs- dictions d1oosing to follow their newer approach, consideration is not essential though it must be shown that the parties freely consented to the variation. That is, there must be no duress,56 unconscionability,57 or public policy concerns."' See Chapter 8 for more d etail.

52 Rosas v Toca. 2018SCCA 191at r»•• 182 53 Jbtd a1 pa1~ 183. 54 Jmd at pa1a ! BS. 55 Jbid a t pa1<l 186. 56 ro1 t>1ief discussion Of du1ess, Sec;'! Supta OO te 46. 57 S1iel'ty sU)ted, tJnconsconabl11y relers to an onfa.1 contrac t whCh was lo1med tx:caure one pa1ty Look.

advan1ageof~ak~ss in li'M:! olhe1 p.tt1ty. SeeChapte1 8. 58 Public Odit':y ~a wide r()'\Qing, con1extuat coxep1which 11'\E! courl in l?osas does nol del ioo. ll tnctudes a

cons1d~1ationot thecommun1tys common.senseaoo commoncortSc1er.ce and taloes many spec1l1C lorms Set:! Ch.clOler 8.

NEL 153

Note that when parties to a contract decide to terminate the contract and replace itwith a new contract, there is no d oubt dutt consideration is present in that both parties have given som ething back to the other. If only one side has given something up, however, then the contract has been varied (as opposed to being replaced) a nd the enforceability of the variation depends on what authority the court in question relies on- Gilbert Steel on the one hand, or NAV Canada and Rosas on the other.

When Trackers, through Jason, asked Amritha's company to pay more for the tracking, it was seeking a variation of the contract. Because Trackers did not provid e anything new to Coasters in return, Coasters's commitment to pay an increased price was a gratuitous promise. On the traditional analysis, the fact that Trackers supplied the tracking on time d oes not count as consideration because Trackers had a p re-existing duty to do just that. On this basis, Coasters is not bound by its promise to pay more. Its only obligation is to pay the price recited in the contract that Amritha first negotiated . From a business perspective, however, its refusal to abide by its own prom ise will almost certainly d estroy any possibility o f Coasters and Trackers ever doing business together again. On the new analysis o ffered by the New Brunswick Court o f Appeal in NAV Canada and the British Columbia Court of Appeal in Rosas, it would seem that Coasters's commitment to pay an increased p rice is enforcea ble. This is because Trackers did not cond uct itself unconscionably, did not put Coasters under economic duress, and did not violate public policy. There seems to be little d oubt that the ag reement to pay more was entirely voluntary and something to which Coasters consented .

Promises Enforceable Without Consideration As seen a bove, consideration is not always necessary for a contract or contractual variation to be enforceable. Beyond this, consid eration is not required when the promise is under seal, the d octrine of promissory estoppel applies, and, in some jurisdictions, in the context of partial payment o f a debt.

Promise Under Seal Before commercial negotiations became as commonplace and sophisticated as they are tod ay, and before the rules o f contract were fully developed, a practice o riginated to authenticate written agreements by putting hot wax beside d1e sig- nature on a d ocument and placing an imprint in the wax, uniq ue to the person who signed. The use o f a seal has evolved so that today the seal takes the fo rm of a red gummed circle or wafer attached to the d ocument beside the signature of the party making the promise. The legal effect is the same, however. If the d ocu- ment contain ing the promise is signed and the seal affixed , the fact that there may not be consideration for the promi se is irrelevant. The seal is taken as evid ence of serious intent by the promisor and amounts to an acknowledgment that the promise is enforceable, even if it is gratuitous. Contracts of guarantee, for example, typically have seals attached.59

59 Guarantees a1~ diSCtJSSed in dela~ 1n Ch.clotar 26.

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Promissory estoppel

A doctrine wl1ereby someone who reties on a gratuitous promise may be able to enforce 1t

J. nd DeJJvc-rcd in

What is the p1upo5" of placing a seal on a dawment?

Promissory Estoppel Without a seal, a gratuitous promise is traditionally not enforceable at common law, even if made with great d eliberation, and regardless of the adverse conse- quences to the person who relied on the promise. In response to the harshness that this common law rule could sometimes generate, courts began to assist par- ties tluough the equitable d octrine of promissory estoppel.

Promissory estoppel focuses on tl1e idea of fairness, but since fairness is rel- atively subjective and courts are reluctant to stray too far from the d octrine of consideration, the party seeking to rely on tile doctrine (Party A) must show iliat a number o f distinct fac tors also exist in relation to the promise mad e by Party B, as listed below:

Party B has, by word s or conduct, made a promise or an assurance to Party A that was intended to affect their legal relationship and to be acted on.

in reliance on the representation, Party A acted on it or in some way changed its position.'"'

Party A's own conduct has been above reproach and , in iliis way, Party A is d eserving of the court's assistance.

A final requirement is that promissory estoppel can be used only as a d efence to legal claims mad e by the promise-breaker.6 '

60 "''tJt;)dev TrtlVel.'ers Indemnity Co Of Canada. 11991l 2 SCR 50. 61 Most <."'.ana::iielncou11S ;nsis1 tMt 0<0missoryestoopefcan be use<J o!'\tyasadelGnce. tf\a.Jg'l thert"? 1s so~

case lt)w to Lile contrary. See, !Of ex.arnpUt, Rob.v::.haud v C.l•sse Papu.111 . .>re de Pokemouche Jtee {1990) 69 DLR {41h) 589, 1990 CanUI 8'11 5 INB C . .o.,J. See too, er .1icisn1 ol tM I rute ofla1ed in NAV Ctlnt1da, SLJ()fi'I note 4 5 a t para 29. Based O!') the traditona1 doc11ine, 0<0m:ssory estoppef cannot be ossei by T1acke1s 10 e'lforce Coast~rs s oromtSe to pay more 101 the l1.X:ki()Q Traci.Eis c~nnOt 9J<.< on the p1om1sa-rl can ose .1 only as adelance

NEL 155

Assume, for example, that Jason contacts Amritha one month before the delivery date specified in their contract. Jason tells her that Trackers is having m inor prod uction difficulties and there is a chance that the tracking will be d eliv- ered three days late. He asks Amritha if thi s will be a problem for Coasters. He also wants to know if Coasters will insist on enforcing the late d elivery clause in thei r contract obligating Trackers to pay $5000 per day for every d ay it is late. After securing instructions from her supervisor, Amritha gets back to Jason and tells him not to worry: "Jason, it poses no problem for us if you are up to one week late, and no, we won 't come after you for late charges. We just want our tracking in good time." In the end , the tracking is delivered three days late, and Coasters suddenly takes the position that it is owed $1 5000.

Subject to the reach of NAV Canada and Rosas, Coasters's promise not to rely on the late charges clause is unenforceable at common law because there is no consid- eration supporting it. Trackers is giving nothing back to Coasters in exchange for Coasters's promise to a ccept late d elivery without complaint. For this reason, the traditional common law would allow Coasters to go back on its word and collect the $1 5000. If a court applied either NAV Canada or Rosas, however, the result might well be different and the variation binding.

Beyond this, there is an excellent chan ce that the do ctrine of prom issory estoppel would be applied by a judge to assist Trackers because

Coasters promi sed not to rely on its contractual right to collect late charges.

Trackers relied on this promise and changed its position by scheduling prod uction accordingly and t aking no additional steps to speed up its sched ule.

Trackers's conduct throughout has been beyond reproach- it did not threa ten Coasters or otherwise place und ue pressure on it to accept late delivery.

Trackers is using the doctrine to defend itself from a claim by Coasters for tl1e late charges.

For these kind s of reasons, Coasters would be estopped from relying on the late charges clause, a nd its action for $15000 would fai l.

Promissory estoppel is a relatively complicated doctrine and cannot be fully detailed here. The foregoing analysis is offered only as an introd uctory a ccount o f how the doctrine m ight arise ina business context.

Partial Payment of a Debt A common difficulty encountered by a business arises when the customer cannot pay its account but offers a smaller amount to settle the d ebt in full. Can the business agree to the customer's proposal, accept the smaller an10unt, and then sue fo r the balance? Put another way, does the compromise on a bill amount to a binding contract, or is it simply a gratuitous promise by the creditor to accept a lesser an10unt? The discussion und er promissory estoppel illustrates that equity may provide assistance to the debtor and enforce the creditor's promise. As well, under traditional analysis, the debtor may have recourse because she has provided consideration or because tl1e new agreement is und er seal. Finally, there may be a statute that makes the creditor's promise binding.

The common law rule thata creditor can go back on a promise to accept a lesser sum in full satisfaction o f the d ebt has been reversed by legislation in several

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juris clictions, including Ontario. Section 1 6 of Ontario's Mercantile Law Amend- ment Act, for example, essentially provid es that once the lesser amount has been freely agreed upon and p aid, the creditor cannot later claim t11e full aroount.62

A policy rationale for the legjslation is to promote settlement of d ebts on a fi nal basis.

For example, assume that Coasters has fallen on hard times and has been able to pay only $1 roHlion on its a ccount w ith Trackers. Therefore, $500 000 is out- stancling. Trackers agrees to accept $300 000 from Coasters and write off the bal- ance. Accorcling to traclitional common law, Trackers can go back on its word and sue fo r the remaining $200 000 because its promise to accept a smaller sum is gratuitous. There is no consideration from Coasters supportingTrackers's promise to accept less than what is owed . Since Coasters has a pre-existing legal duty to pay $500000, paying $300000 is not consideration for Trackers's promise to forgjve the balance. Put another way, Coasters is not gjving Trackers anything in return for Trackers's prom ise, except a $300000 payment that it was obligated to make in any event.

In jurisclictions that have legjslation making such agreements binding, the creditor cannot sue for the balance once she has received from the d ebtor the smaller amount promised. In jurisdictions without such legjslation, the creclitor's promise is not enforceable, und er traclitional analysis. The consideration rule remains in force so that, in order for the promise to be enforced, the creditor roust gjve the promise und er seal or rece ive something in return for her promise to accept less (such as payment earlier than required).63 Another alternative for the debtor seeking to enforce the creditor's promise is to rely on promissor y estoppel, if circumstances permit.

The varying status o f how partially paid d ebts are handled across Canad a illus- trates two important aspects of contract law. First, provincial legjslatures may intervene at any time to alter or override a common law rule governing contracts. Second, though largely uniform across the country, contract law is under provin- cial control and is therefore subject to important provincial variations.

Intention to Contract The last impor tant ingreclient in a contract is the intention to contract. In ord er for one party to enforce ilie prom ise of another, the promise at issue roust have been intended to bea contractual one, that is, one iliat would be enforceable by a court of law. Absent such an intention, there is no contract between the parties.

62 The Mercartri.'e Law Amet/dmenr Act, RSO 1900. c M 10, ~cllon 16 states. ·Part perlO!rnanceol an ooh~aLOn ei1he1 befo1c or after brcw:n tnereof v1heo ex.p:es~yaccept~d t7y 1~c100: 1or or rende•ed ii\ ptirsuance of an agr~el'l"'(!nl 101 Iha! pu1pose, 1h0u91-t \'lilhOOl any !"MM' conslderaton.. sha~ ba hakl 10 ~XL1f')Qu1Sh the ob4:·g.l!On: $imla1 p1oviSIO!lS are in ~ltec1 '" JUrisdlctOns such as BntJSh COkJmbia ILaw atld £quJry Act, RSBC 1994 c 253. section 43J. Man11ot>a (lvle1cM1Aie Law /Jn'Jettdment Acl, CCSM c M.120, sectbn 6UJ. Sask.a1cnewan {Ouee-fs Benc.h Act SS 1998,c 0·101 sec11ott64); and Atberta UudtCMureAct, RSA 2000,c J.2, secton 13)

63 Tile d£>t>tor in Nevi B1u~iCk tw!l.21e lhi.'!re is no tegislaliO!l binOing t~ credil01 to a gr~tuitous promiSe to a::cept a tesser !lJm) ma}' rv,:,w ht:lvi.'! a ~ a~gum~t 1Mt the c1edito1 is bOuM notwit!tt1a~1og, due 10 NAV Can~;,. SJ.Jpra note 45. The cooctuson v..outo be that, absen1 duress and ot~r lo1ms ol unf~ir 01es!ru1e, the c1ed11or"sg1al\JtlOOS pro"l"llSi.'! toaccopta (eSSi.'!r !Um ShOukl be<?nforce.')b4e, lor ll'le pdiCy ri.'!asOr'5g1~n in 1Mt C.'.)se. Tr11s k.100 of a:gum~t mqht atso S!JCCec;"?d ,n British Cctumbia, aui.'! to Rosas. thOIJgil 1~1e is .atso a 6egistativi.'! sotutlOo in IJv0tJ1 of tile deb101 10 thAl p1ovmce. Sei.'! Iha Law and £qwty ACt RSBC 1996, c 253. sectiO!l 43. Tile c:ooctus'On or tne Cng1i$h Court of Appe!at 1n Se.iectmove snouid atso be mentiO"K'!d Thi$ cou11 stated thal the common~ ... , ruk! lv1hieh say-s that a p1omise to tak.-e a tesser sum is u!'K?l'~fo1ceab&2! absen1

cons1de1atiOnJ sh.out: nOL be 1ev<:!rscd by the cou1Ls. IQ1her, •I v•outd be uo 10 Part~rnt'.lnt to <.'!Mel tagista ton to effect such a 1~utl 1111 v1ere so i')C;fiOOC'J ~e Re_ ~lectmove ltd. l19551 2 Al CR 531 {CA).

NEL 157

Business Agreements Most agreements in the commercial world, such as the one between Trackers and Coasters, are quite obviously intended to be contractual. The co mmon law recog- ruzes this reality through the rule stating that in the marketplace, the intention to contract is presumed. Therefore, if Trackers end s up suing Coasters for breach o f contract, it will not have to prove that the agreement between them was intende d to be a contractual one. The law gives Trackers a p resumption to this effect; it is a rebuttable presumption, however. This means that while the court will assume that intention was present, Coasters can try to displace that presump- tion by proving a lack of intent to contract , jud ged objectively. Given the circum- stances of its relationshi p with Trackers, Coasters fac es an uphill battle on this point.

Family Agreements Agreements between family members are regarded differently in law because of the personal nature o f the underlying relationship. In fa ct, the common law pre- sumes that promises between family members are non-contractual. Therefo re, people who want to enforc e an alleged contract against their parents or siblings, for example, must demonstrate to a court that there was an intention to contract. If they cannot positively prove that intent, their action will fail.

Managing the Risks in Contract Formation Negotiators such as Jason and Amritha face two main risks. The first is the risk o f misunderstanding when statements and cond uct have legal conseq uences. For example, if Amritha makes what objectively looks like an offer to Jason, he is enti- tled to a ccept it and a contract is thus formed. Amritha cannot then go back and unilaterally amend the terms of her o ffer. The second risk is failing to anticipate and plan for contingencies that might occur after the contract has been formed. For example, if Jason agrees to supply tracking at a set price and later faces a substantial increase in prod uction costs, Trackers still must provide the tracking as agreed , even though this will cause enormous financial hardship to Trackers. Customizing contractual terms in order to a ccom mod ate fu ture contingencies such as these is discussed further in Chapter 7.

BUSINESS LAW IN PRACTICE REVISITED

1. At what point did the negotiations between Jason and Amritha begin to have legal consequences?

When Jason made an offer to sell tracking on specific terms, his negotiations with Amritl1a took a legal tum. At tlus point, Amritha was in a position to accept Jason's offer and, if she did, Trackers would be obligated to supply tracking on precisely those terms.

2. In what ways could negotiations have been terminated prior to the formation of the contract?

Amritha could have ended her negotiations by rejecting Jason's offer a nd telling hi m that Coasters would be looking elsewhere for its tracking. Though Amritha is not legally obligated to reject an offer, it is helpful to do so to ensure clarity and to avoid misund erstandings and disappointed expectations later on. Amritha should

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Rebuttable presumption A legal presumption 1n favour of one pa r;y tl1at ·he o her side can seek to re bu; or d 1slod gp by lea ding evidence to the con:rary

also withdraw any o ffer she may have made on behalf o f Coasters to prevent Jason from accepting it sometime down the road. While the doctrine of lapse will pre- vent Jason from accepting after a certain point in time, it is clifficult to predict how long a court would consid er the offer to be open. It is preferable simply to withd raw the offer and avoid the debate altogether.

3. Can Coasters commit itself to the price increase and then change its mind with no adverse consequences?

Trackers has a pre-existing legal d uty to supply the tracking at the price stated in the contract. Since it has given Coasters nothing in return for Coasters's promise to pay more, the traditional view is that Coasters has no legal obligation to pay the increase. Put another way, the promise is gratuitous. Any change to a contract- known in law as a "variation"- must be supported by consideration or be under seal in ord er to be enforceable. There is, however, a sigrufi cant consequence to Coasters's de cision from a business perspective; its relationslup with Trackers will be seriously harmed and possibly d estroyed. If Coasters ever needs tracking again, it is unlikely that Trackers will agree to be its supplier.

A competing analysis is offered by the New Brunswick Court o f Appeal and British Columbia Court of Appeal: provid ed the variation is freely chosen, a con- tractual variation is enforceable.

4. How could Trackers have avoided from the outset this situation related to cost increases?

Trackers should have negotiated a clause in the contract that included a formula for varying the price according to prevailing market conclitions, as established by a third party, trade journal, or other source. Other possibilities include negotiating a "cost plus contract", meaning the contract price would comprise the tracking manufacturer's actual costs, plus a set percentage o f profi t . Anotl1er alternative would have been to charge a higher price to begin with to cover unexpected cost escalations.

If Trackers were unsuccessful in getting such price adjustment mechanisms into the contract, it would assume the full risk o f unanticipated cost increases. [f Coasters clid subseq uently agree to pay more for tl1e steel, Trackers should provide consideration for that promise or get it under seal.

CHAPTER SUMMARY

A contract comprises four essential elements: offer, acceptance, consideration, and intention to contract. Before a contract can be formed, one party must make an offer on a complete set of certain terms. An offer can be term inated in a number of ways, incluclingby revocation, lapse, rejection, counteroffer, d eath, or insanity. Assuming that an offer is on the table, the other party must unconclitionally accept all the terms o f the offer for the offer to be considered accepted. Each party must give something (called consideration) in exchange for the promise or performance of the other. The parties must intend their bargain to be a contractual one. [f any one of these elements is missing, the relationship is non-contractual by d efinition.

There are occasions, however, when the law will enforce a promise that is not supported by consideration. [ n short, if the promise is under seal, meets the requirements of promissory estoppel, or is subject to a specialized statutory scheme, such as the partial payment o f d ebt, it will be enforceable. As well, the

NEL 159

New Brunswick Court of Appeal and British Columbia Court of Appeal are willing to enforce gratuitous contractual variations provided they are freely chosen. Aside from these exceptions, a gratuitous promise is not binding, no matter how seriously it was intend ed and no matter how much the other party may have relied on it. Thls legal reality is particularly important when varying a term in an existing contract.

WhHe the conditions for creating a legal agreement may seem stringent, they serve an important purpose. Contract law is about creating voluntary agree- ments and is therefore faci litative. In sum, it helps those in the marketplace to determine-in advance of litigation- the legal enforceability of commitments they have received, and thereby lets them d o business more effectively.

CHAPTER STUDY

Key Terms and Concepts acceptance (p. 134)

consideration (p. 140)

counteroffer (p. 133)

gratuitous promise (p. 141)

Invitation to treat (p. 126)

lapse (p. 133)

offer (p. 125)

offeree (p. 129)

offeror (p. 129)

option agreement (p. 132)

pre-existing legal duty (p. 141)

promissory estoppel (p. 146)

rebuttable presumption (p. 149)

rejection (p. 133)

revocation (p. 130)

standard form contract (p.127)

Questions for Review 1. Whatmustanoffer contain?

2 . Is an advertisement an offer or an invitation to treat? Why?

3. Are oral contracts enforceable?

4 . What is a standard form contract?

5. Explain why it might be a good idea to get a contract in writing.

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6. Does the acceptance of an o ffer have to mirror it exactly, or are slight variations permissible?

7. What is the "postal rule"?

8. How is the postal rule different from the "ordinary rule" for acceptance?

9. When must an offeree communi cate acceptance to the o fferor in a specific form?

10. Why is a counteroffer a fo rm of rejecting an offer?

11. When can an offeror revoke or withd raw an offer?

12. What is consideration?

13. What is an option agreement? How is the concept of consideration related to the enforceability of such an agreement?

14. What is a pre-existing legal d uty?

15. ls a promise to pay more for performance of a pre-existing legal duty generally e nforceable?

16. What is a gratuitous promise? Give an example.

17. Are the rules governing the formation o f electronic contracts different from those for written or oral contracts?

18. How does the relationsrup between the parties affect presumptions concerning their contractual intent?

19. What does Contract A refer to in a tendering context? What does Contract B refer to in a tendering context?

Questions for Critical Thinking 1 . What is the justifi cation for changing the

traditional common law rule that contractual variations must be supported by fresh consideration? Explain.

2. Anti-spam legislation in the United States follows what is called an "opt-out" approach.64

Thls means that someone can send a commercial electronic message (CEM) but that message must contain an opt-out or unsubscribe mechanism whlch the sender must respect if triggered by the recipient. By way of contrast, Canada follows an "opt-in" approach whlch requires the recipient's permission before a CEM can be sent. Whlch legislative approach to spam d o you prefer and why?

3. Family members are presumed not to intend legal relations, while businesspeople are subject to the opposite presumption, namely that an intention to create legal relations is present. Why should the relationshlp between the parties affect the enforceability of their pronlises?

4. Christmas v Fort McKay,65 discussed in this chapter, applied the instantaneous rule of communication to an email acceptance, based on the fa cts of the case. That is, the court conclud ed that an acceptance sent by email occurs where the communication is received. It did not discuss applying the postal rule- which would hold that acceptance occurs where the communication is sent. Do you agree that the instantaneous rule should apply to email acceptance? What arguments are there to apply the postal rule?

5. What risks d o negotiators face if they lack knowled ge of the rules o f contract?

6. Do you trunk that the do ctrine of pronlissory estoppel serves a useful purpose? Would it not be easier if the law simply insisted that all contractual variations be supported by consideration?

64 Cbt: troNing :tte Assault oJ Non-SoUcit«I Po1nogft)()hy and Mark&tlng A<:I ol 2005. 15 USC 770L

65 Supra f'\Ol€ 40 .

Situations for Discussion 1. Daniel owned some out-of-town real estate

whk h Paul had been eyeing for some time. On June 1, Daniel's real estate agent passed along an offer to Paul, whereby Dani el offered to sell Paul that land for $590000. The offer was expressly to be "open" until June 8 and acceptance had to be in writing. Paul was delighted and even more pleased to learn from the realtor that there was plenty of time to consider the offer and that no one else was "d ealing on tl1e property." On June 3, tl1e real estate agent gave Paul some bad news: Daniel had unexpectedly sold the property to someone else. Paul replied, "Well I accepted last night by initialing Daniel's offer so Daniel is clearly already in a contract with me. And I'll hold rum to it." After hanging up, Paul wrote out a formal acceptance and delivered it, along with the initialed offe r, to Daniel. Is Paul in a contract with Daniel?66

2. Joel went to hls local convenience store and purchased a lottery ticket at exactly 8:59 P.M. for a May 23 Lotto Saskatchewan draw. The deadline for a ticket to be includ ed in the May 23 draw was 9:00 P.M. Joel's ticket was registered on Lotto Saskatchewan's central computer at 9:00:07 P .M. The ticket was printed out at the convenience store, showing that it was entered in tl1e May 30 d raw. Thls result did not concern Joel at the time but when the May 23 draw occurred, hls view changed . Thls is because the numbers on the winning ticket for the May 23 d raw were also Joel's numbers. Joel took the position that he was entitled to share in the May 23 jackpot but Lotto Saskatchewan refused, pointing out that Joel's ticket dearly stated that it was for the May 30 draw only. Joel's argument was that his contract for the purchase and sale o f a lottery ticket was formed at 8:59 P.M.- in time for the May 23 d raw. The time it took for the purchased ticket to actually be registered on Lotto Saskatchewan's central computer (past the dead line at 9:00:07 P.M.)

66 ~sed, 1n part. on 1-lughes v Gyratlbt1 oe .. ,.ek>(Nl').1'ttts L:d, 119881 B.C .l. No 1598.

NEL 161

was an internal matter that could not be used to penalize him. When was Joel's contract vlith Lotto Saskatchewan formed? Why does it matter?'"

3. Stilk was one of 12 crew members hired by Myrick to work on his ship. All members of the crew signed a contract which included a clause requiring them to do "all that they could under all emergencies of the voyage.· While in port, two of the crew members quit their jobs and walked away. Myrick was unable to hire any replacements so spoke with the remaining crew members and promised them the wages of the two members. The remaining crew members agreed and worked the balance of the voyage. However, Myrick then refused to pay out the wages of the two members, contrary to his promise. Stilk wants to sue Myrick for breach of contract. What is the argument that Myrick does not have to pay the extra wages? Do you agree with that argument?""

4. On October 30, Casgrafo offered to purchase some farmland from Butler for $14 500, with possession in January. On November 15, Butler made a counteroffer, by telegram, at $15 000. The telegram was delivered to Casgrain 's home on November 20 but Casgrain was absent on a hunting trip. Casgrain's wife read the telegram and wrote back to Buder saying that her husband was away for 10 days and asking that he hold the deal open until Casgrain could consider the matter. Butler did not respond. On December 10, Casgrain returned home and immediately wired Butler, purporting to accept Butler's offer of $15 000. The wire was received on December 12. By this time, Butler had already sold the land to someone else. Has Casgrain accepted the offer in time or has it lapsed?"'

5. Mr. and Mrs. Smith were regular participants in a lottery pool with their friends. Each Friday, the group would meet at the local pub and contribute to a pool of cash which would then be used to purchase lottery tickets. The group

61 Bac.Q<:i on ll<'tg1Jft c So:~!(I des lotc11os du Ou<!bcc 201.2 OCCS !:i600_ .,)fl o J!c-r~1n c Soc;)('r(4. des lotc:'11Cs du O~c. 2014 OCCA ll14 ICanLlll ~mit" IO appcl\4 to the SC<.: t(:fur.co. 201!1GlriUl 3370 tCSC)

68 Ba.-.t'<:i 1n patl onStil.11 v/vlynch U809) 2C.ainp311. 69 Based ,, part ooB,>rlCA VC/.Nk jl.)511SCR 177.1950CMLll 511SC(l

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agreed that if a winning ticket were purchased, the amount would be shared among the participants. There was also discussion that if someone in the group did not come to the pub on the day in question, another person present would contribute on the missing person's behalf and get paid back later. On one Friday, the Smiths did not attend the pub and therefore did not contribute to the pool of lottery cash, but they trusted that their friends would contribute on their behalf. This did not happen. One of the tickets purchased turned out to be a winner and Mr. and Mrs. Smith say they are entitled to a share. The others in the group say that only those who actually paid into the pool for that winning ticket are enti tied to a share of the prize. Which view do you think is correct andwhy?10

6. ABC Lt d is owed $1 0000 from Mr. Smith for home repair. Mr. Abbott, a senior officer with ABC Ltd, went to Smith's home to secure payment and spoke with Smith. Abbott explained that, without payment, ABC faced bankruptcy. In response, Smith began complaining about the poor quality of the work done (even though he knew the work was perfectly fine) and that he would only pay $4000. "Take it orleave it, buster", he said. Abbott took his cheque and cashed it, feeling that he had no choice in the matter. He would now like to go after Smith for the balance. Can he doso?71

7. April manufactures leather chairs and sofas, and she is happy because she has just negotiated a contract with Bob's Fine Furnishings Ltd to supply them with her handmade furniture. The terms of the contract are that, on the first Monday of every month, April is to send over 10 chairs and two sofas, and Bob's Fine Furnishings will pay her $7000. She is excited to learn that her furniture is so popular that Bob's Fine Furnishings has a waiting list of rnstomers who have prepaid for their chairs, as her last shipment sold out in

70 Sasad, 1n pa11,.onOiJfleyvGough, 20 11 A8')643q S9 AUb LR iSU>i 108.

71 Bas~d. in pa1 1, onD& C &ttJdcts vl?c<'S_ !196SJ 3M. LR 831 ICAJ

only a week. April is a little worried, however, as she has just received a phone call saying that her leather supplier will not be able to send her any leather for the next three months, due to a local shortage. Without the leather, she knows she cannot fi ll her order for Bob's Fine Furnishings by the first Monday of next month, much less for the two months after that. What could April have done when negotiating the contract with Bob's Fine Furnishings to help manage the risk of a situation like this? What should she do now that the contract is already in place?

8. Jack was in a lease with Douglas for the rental of a farm, including a large barn. In order to secure a lower monthly lease payment, Jack agreed to be responsible for all necessary repairs to the barn, repairs whk h had to be completed within six months of Douglas giving notice of those repairs being required. Failure to

complete those repairs within six months of that notice gave Douglas the right to evict Jack. In January, Douglas gave Jack notice that some of the hand-built trusses in the barn roof needed replacement. Jack started the repairs but then had the idea that perhaps he could purchase the farm outright from Douglas. To Douglas's knowledge, he stopped doing repairs on the roof. "Why would I do repairs on Douglas's timelines when I may just become the owner of the place?" Jack observed to a friend. Jack and Douglas discussed a possible sale of the property for fi ve months at which point negotiations broke down irretrievably. Jack then resumed doing repairs but still had not completed them by the next month. At that point, Douglas served Jack with an eviction notice for fai lure to make repairs in the six- month notice period. Can Jack rely on the doctrine of promissory estoppel to prevent the running of time this way? Explain.71

72 ~sed. in Dari. on Hughes v Metropolitan RaiJwfly. U877J 2 Aoo Cas 439 iHLl

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BUSINESS LAW IN PRACTICE

Th e dispute discussed in Chapter 6 between Coasters and Trackers over the purchase price was resolved reasonably amicably- the par- ties agreed to split the increased cost of the steel required to manu- facture the tracking and thereby avoid the expense and disruption of litigation. All the tracking has been delivered, and the new purchase price has been paid. Jason not only is tremendously relieved but also wants to improve hi s performance as a negotiator, since matters did not proceed entirely smoothly. He is reyjewing the Coasters- Trackers contract to determ ine whether it did, in fact, contain the terms Trackers needed to protect itself.

The contract between Coasters and Trackers covered a num- ber of terms already discussed in the preyjous chapter, including: price ($1.5 million); quantity (900 metres); d elivery dates; and late-delivery d1arges ($5000 a day). Other significant clauses are excerpted below.

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Excerpt from the contract between Trackers (the "'Seller") and Coasters (the "Buyer") for the purchase and sale of traclUng (the "Goods")

12. Warranties-Guarantees.

Seller warrants that the Goods shall be free from defect in material, workmanship, and title and shall conform in all respects to the design specifications provided by Buyer and attached as Schedule A to this contract. '<\There no quality is specified, the quality shall be of the best quality.

If it appears within one year from the date of placing the Goods into service fur the purpose for which they were purchased that the Goods, or any part thereof, do not con- form to these warranties. Buyer, at its election and within a reasonable time after its discovery, may notify Seller. If notified, Seller shall thereupon promptly correct >uch non- conformity at its sole expense.

13. limitation of Seller's Liability.

Except as otherwise provided in this contract, Seller's liability shall extend to all damages proximately caused

(Continued on th e next page)

164

OBJECTIVES After studying this chapter. you should have an under- standing of

• the difference between impli ed and express terms

• how judges determine and interpret the content of a contract

• how a party can use terms as a business tool to pro- tect itself from liability

Express t erm

A provision of a contract that states a promise explicitly

by the breach of any of the foregoing warranties or guarantees, but such liability shall in no event exceed unit price of defective Goods and in no event include loss of profit or loss of use.

14. Exemption of Seller's Liability.

Seller is exempted from all liability in respect to losses, damages, costs, or claims relating to design of Goods.

20. Entire Contract.

This is the entire agreement between the parties. covering everything agreed upon or understood in connection with the subject matter of this transaction. There are no oral promises. conditions. representations. under~tandings. interpretations. or terms of any nature or kind, statu- tory or otherwise, as conditions or inducements to the execution hereof or in effect between the parties or upon which the parties are relying relating to this agreement or otherwise.

1. How is the scope of Trackers's and Coasters's obligations d etermined?

2. Are there any ambiguous or unclear terms in the contract?

3. Are there any additional terms that Jason should have tried to include?

4. Does tl1e contract relieve the parties from responsibility for inadequate performance?

The Content of a Contract This chapter is about the content- or terms- of a contract and how the courts interpret those terms. The terms of a contract simply refer to promises made by one party to another by virtue of offer and acceptance. From a risk management perspective, a contract is a business tool that can be used to manage a business's exposure to liability- also the subject matter of this chapter.

Terms Contractual terms can be express or implied.

Express Terms An express term is a provision of the contract that states or makes explicit one party's promise to another. In the Coasters-Trackers contract, for example, a num- ber of terms are express, including the price, quantity, and warranties associated with the tracking. It is important that the essential terms of a contract be expressed so tllat each party knows its obligations and tl1e obligations of the otl1er side. Par- ties negotiating a contract should be very careful not to make assumptions about any aspect of the transaction, as only terms, not assumptions, have legal weight.

Judicial Interpretation of Express Terms Vague or Ambiguous Language Even when a term is express, there may be problems inter preting what it means because the language is vague or ambig- uous. Assumingtllat the existence of the contract is not in doubt, the court assigns

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as reasonable a meaning as possible to vague or ambiguous terms.1 As well, if the contract has been drafted by one of the parties, any ambigttity in language will likely be construed against that party in favour of the otl1er.2 The policy rationale for this rule is that the drafter should bear the risk of unclear language.

The reference to "best quality" in clause 12 o f the Coasters- Trackers contract is somewhat nebulous for arguably introducing an express element of subjectivity: what, exactly, is "best quality"? ff faced with sudla question, a court would conclude that "best quality" refers to the highest quality available, whidl, in turn, is a matter that expert evidence would establish. A court would not set the contract aside for uncertainty because some meaning can be assigned to the phrase "best quality."

There is a point, however, at which language is so ambiguous tl1at the contract cannot be understood. In sudl cases, the contract will fai l for uncertainty, and none of the promises it contains will be enforceable.

How a court will interpret any given contract d epend s on rules of construction- that is, guiding principles for interpreting or "constructing" the terms o f a contract. According to the Supreme Court of Canada in the recent deci- sion of Sattva Capital v Creston Molly Corp,3 the goal of contractual interpretation is "to understand the mutual and objective intentions of the parties expressed in the word s of the contract."4 This involves applying the plain meaning rule- interpreting the words the way a reasonable person would regard them- but in combination with the contract's factual matrix or surrounding circumstances. The factual matrix includes tile backgroun d facts known to the parties when the con- tract was concluded but excludes evidence o f the party's subjective intention or negotiations leading up to the contract.5 In tile word s of the Supreme Court, a judge must:

readthecontractasa whole.giving the words used their ordinary and grammatical meaning. consistent with the surrounding circumstances known to the parties at the time of the formation of the contract. Consideration of the surrounding cir- cumstances reco!,>nizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning.•

At the same time, the court appears to return to the importance of the word s used in the contract' when it states that evidence o f the factual matrix "must never be allowed to overwhelm the word s of the agreement"• nor be used to "deviatefrom the text sudl tl1at the court effectively creates a new agreement."•

The Supreme Court of Canad a's instructions regarding contractual interpreta- tion can be followed in some circumstances but do not provide an obvious solution when one party has an interpretation of the contract based on a version of the factual matrix that the other side contests. For example, in the Coasters-Trackers contract, Trackers promised to pay $5000 to Coasters for every d ay it was late in

l S1epMn.~ Ben-lsha i b D.-')vld R Pe1cy, eds. C:On1r.rc1s -CtlSes tmd Commenttlfles, ~:H l\ed tT01on10 ON Ca1swet, 2014) at ill.

2 .tl>dat 509 3 120141 2014 sec 53. 2 scR 633 4 Jbid at para 57 5 .Ibid at paras SB aoo 59. 6 R>ld al pa1a 4 7 'l Yihan Got\ ·rrom Conlext to Text in Cont1t)Ctu~ lnte1p1e1ati0n Is There l'lealy a Pio~m l/V!lh a Ptai!l Mea!l1n9

Rut€!?· (2016) 45 Comll').')n L.=w1 Vlorld Review 298 at 303 8 Suprtl 001e 3 .ll para 51. 9 .tl>d

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Rules of construction

Gutding pnnctpl es for interpreting or "constructing· t11e terms of a contract.

Implied term

A prov1s1 on th a- is not expressly included 1n a contract but tha- 1s necessary to give effect to the parties' 1ntent1on

delivering the tracking. Trackers m ight argue that the intent of the parties, objec- tively assessed in its fac tual matrix, was to motivate Trackers to d o everything in its power to provide the tracking by the contractual delivery date. On thi s basis, if Trackers were late in delivering because of a mechanical problem in its plant, the clause would apply. It would be more contentious to apply the clause if late delivery were caused by an event completely outsid e Trackers's control- sud1 as a severe lightning strike disrupting electricity to its plant for several d ays. Trackers might advan ce the position that to apply the clause in sum circumstances would be contrary to the parties' intentions.

In response, Coasters would argue that there is nothing in the factual matrix surrounding the contract to change the plain meaning o f the words used in the contract itself. Application of the late-delivery clause is unconditional. Put another way, if Trackers wanted its obligation to pay a late delivery charge to be limited to certain circumstances, it should have bargained for express words in the contract saying so. To a dd these new provisos now would be to go beyond the dear words of the contract and seek to rewrite it.

When parties fai l to address an important aspect of their contractual relation- shlp, the law may help to "fill in the blanks" through implied terms, discussed below. The assistance that implied terms can provid e, however, is sporadic and cannot be relied on with any certainty.

Implied Terms When an event arises that is not addressed in the contract through express ter ms, courts may be asked to imply a term in order to give effect to the parties' inten- tions. A jud ge will d o so if he is satisfi ed that not all of the terms that the parties intend ed to in dude in the contract were, in fact, includ ed. In the classic scenario, the plaintiff argues to includ e an implied term but the d efendant asserts that no such term was intend ed. Sin ce the plaintiff carries the burden of proof, she will

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lose unless she can d emonstrate that the term exists based on the balan ce of probabilities (i.e., she needs to prove that it is more likely than not that the parties intended such a term to be included).

Courts will imply terms based on a number of grounds, such as those listed below.

Business Efficacy The doctrine of business efficacy permits judges to imply terms necessary to make the contract workable. According to the Supreme Court of Canada, these are terms "which the parties to a gjven contract would obviously have assumed."'° For example, if Trackers promised to use a certain grad e of track- ing, "providing it is available", a court will almost certainly imply a promise by Trackers to put reasonable effort into trying to fmd thatgrade of tracking. Though Trackers has not expressly committed itself to make systematic efforts in this regard, business efficacy makes the obligation implicit." Were it otherwise, the express term in relation to the quality of tracking would mean next to nothing. Similarly, courts have held tl1at:

a contract for the supply of a staircase includ ed an implied term that the staircase would be compliant with the applicable building code;l2

a contract to supply news to a news agency contained an implied term that the news would be accurate. 13

BUSINESS APPLICATION

TELUS CUSTOMER RECEIVES $24 000 CELL PHONE BILL AFTER PHONE STOLEN

Dr. Jesse Janssen, a Vancouver emergency room physician, lost his cell phone at a hotel while on vacation in Chicago. Janssen was confident that hotel staff would locate his phone- perhaps between the cushions of a couch - and return it to him in due course. As Janssen stated to the press: "Theft wasn't at the top of my radar." 14 As well, Janssen wrongly believed at that time that if he reported his new $600 cell phone missing, it would be permanently d eactivated. Janssen ulti- mately waited two weeks before contacting Telus, during which time 8 GB in data roaming was con- sumed by whomever stole his cell phone or came into possession of it. According to press accounts, when Janssen complained to Telus about the

highly distressing $24000 bill he subsequently received for data roaming, Telus advised that he had provid ed text consent to incurring additional roaming charges and he was therefore responsi- ble for paying the full amount of the bill.

Dr. Jesse Janssen

10 Mi>Chtmger v HOJ lr.du.orles Ud, {199211 SCR986. 1992 Canlll 102 (SCCJ. ll ror a case lhal lolOws lhiS aMtystS, soe Dftwson v J-lehcop:er £>'(>Jor.:n1on Co, 119551 SCR 868, 1955

CanLll 4 5 iSCC). 12 G Fo'd H<:m<>s Udv D'ah Ma.<onrylYOfk} Co lid 119B3), 4 30R l2dJ40l 1983CanLll 1719 tO NC.'<),cli.d by

John Mt:Carrms, The Law of Conl/3cts IToronLo hv1io, 2012J <')I 783. 13 AJ/an v Bu!Jtnel/ TV Co lid t1968) 1 DLR (:Id) 534 tOn1 HCJJ, 1968 (".oolll 330 ION C.'<) cr100 by McCamu~

!bid. 14 Sooha Hanis.. let.is Cus1ome1 H11 With $24K CeUpho0€ Bil· Coutd It Happe() to Your CBC. f'1ell1S t? rebruaiy

2017J, on(111e <hllP //w..v>N.cbc.c.~/oev1s/bus1ness/lt(us•cetlph0ne-Dll-consen1·1.3969166>

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Under the CRTC's Wireless Code- designed to protect consumers on a variety of fronts- a ser· vice provider is required to "suspend national and international data roaming charges once they reach $1 00 within a single monthly billing c ycle, unless the account hold er or author ized user expressly consents to pay additional charges." 15 When Telus sent a text to Janssen's cell phone number pursuant to this CRTC requirement, it received a reply of "yes." It would seem that d1e thief or otller unautllorized person had replied "yes" to the text message sent by Telus. Most certainly, Janssen had not.

Though the exact terms of the contract between Telus and Janssen were not reported in the media, Telus's standard "Mobility Ser vice Terms" for British Columbia recites a number of obligations between the customer and the ser· vice provid er. Clause 1 5 provid es that the Telus customer "is responsible fo r ... [fuel account and for the activities o f anyone who uses it." 16 It would seem, therefore, that Janssen is responsi- ble for the extra d ata roami ng charges. That is, until Janssen notified Telus that his cell phone was missing, he would be contractually responsi- ble for the account, regardless of who was actu- ally using his cell phone- even a th ief. On a related front, clause 1 6 in Telus's Mobility Ser· vice Terms also points to Janssen's liability. That clause states: "If your d evice is lost or stolen, please contact TELUS immediately. You will con- tinue to be responsible for the use of your d evice until you notify us. Following notification of the loss or tlleft, you will no longer be responsible for pay· per-use charges. However, you will remain responsible for all regular recurring charges.such as your rate plan fee."

There is an argument that Janssen is not liable, however, and this is based on the CRTC Wireless Code provision that the service provider "must suspend d ata roaming once they reach

$100 wit:IUn a s ingle monthly billing, unless d1e account holder or authorized user expressly con- sents to pay additional charges." As noted, no such consent was secured since the thief or otller culprit is not "the account holder or authorized user." However, this interpretation is unlikely to succeed since it would make Telus responsi· ble for d ata roaming above $1 00 even where an account hold er, such as Janssen, knew the phone was mi ssing but waited weeks before contacting Telus to report the loss.

Janssen subseq uently rejected Telus's offer to lower h is bill to $1224. His view was that $500 would be a fairer number as it represented the charge Janssen would have faced had he pur- chased a US roaming package fo r 8 GB of data in preparation for his trip to Chicago.17 As well, Janssen stated to the media that as a victim of a fraud, he "was hoping that there would be some degree of protection afforded" to him.18

Telus was unmoved by this counteroffer. Next, Janssen lod ged a complaint with tl1e Comm is· sion for Complaints fo r Telecommunications Services (CCTS). As part of that process, Telus mad e the submission that "the sole responsibil· ity lies with Mr. Janssen" because he did not report his lost phone to Telus for two weeks.19

Ultimately, the matter did not proceed to a CCTS investigation because Janssen d ecided to accept Telus's renewed offer to lower his bill to $1224.

Though Telus's legal argument appears to be sound- tllat Janssen is responsible-the tele- communications company is open to criticism for not taking steps to detect or suspect a fraud par- ticularly g iven the extreme facts o f the case. Janssen's usual monthly charge on his cell phone bill was $6 7. As the d ata consumption onJanssen's account started rising precipitously, Telus a rgu- ably should have done more to prevent its esca- lation d ue to fraud. For example, Janssen told

I S CRTC. "TM W1retess Code Simp(itled·. onl'ne <http//c11c.9c.caleng/phO!le/~ble/cooesimptlilm>. 16 Tt!(u$.. ·Mcblity Service Te1ms Servie:e Te1ms Betv..sen You a'ld Tl:.Lus·. o(l(ifli'!'. <hnos://w""'' t~s.corn/en/be/

9J opo 11/ a rtide/ service ·t e1 ms-be1v1ee n-ya.i ·and~ le~.Js > 17 Supta note 14. 18 Jb<d. 19 Ibid

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the press that every tim e he contacts Telus, he has to provid e a verification cod e as a security measure: "They [Telus) made me verify who I was constantly, but to charge me $2 4 000, there was no verification", Janssen stated to the media.20

Perhaps, then, Telus should change its practice and require a valid verification co de when seek- ing consent from the account holder or author- ized user to permit overages. This step would not alter the customer's ultimate responsibility for his or her own account but it would assist in red ucing the fall-out from a cell phone theft. In short, a thief is unlikely to know the verification

co de associated with the account and would be blocked at that point. CriticalAnolyris: On what contractual basis can Janssen argue that he should only be obligated to pay for a US roaming package as opposed to being responsible for all the data roaming charges incurred prior to his reporting hi s cell phone as missing? Do you agree with Telus's d ecision to offer a compromise on Janssen's bill? Do you agree with Janssen's d ecision to accept the com- promise proposed by Telus? Why? What risk clid Janssen take when he rejected Telus's first offer to lower his cell phone bill to $1224?

Established Custom i n the Particular Trade or Commercial Context of the Transaction Another basis for implying a term is to rely on established custom in the particular trade or commercial con text o f the contract. This approach is rarely successfu l, however, since it must be proven that the custom is so noto- r ious that the contract in question must be presumed to contain such an implied term.21 Though a party is occasionally successful in relying on custom in a trade, the more prud ent course is to ensure that all important terms in a contract are expressly recited.

20 Ibid.

Glenko Enterprises Ltd v Ernie Keller Contractors Ltd, (1994] 10 WWR 641 {Man QB), aff'd (1996] S WWR 135, 1996 CanLll 7293 {MB CA)

THE BUSINESS CONTEXT: Unpaid accounts are an unfortunate reality of the business world. Even when the customer ad mits that the account is owed , disputes can arise on the rate of interest payable if the contract does not expressly address this matter.

FACTUAL BACKGROUND: Though a number of factual and legal matters were at play in this case, it is most germane to note that the sub- contractor, Glenko Enterprises Lt d, worked on a project but was not paid by the project contractor (Ernie Keller Contractor s Lt d). The

21 McClmJs, !J.Jpta no1e 12 al n7

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contractor ad mitted that it owed $123 862.75 but insisted that since no interest had been stipulated in the contract , no interest on the overdue a ccount should be payable. The plain- tiff stated that interest was owed at the rate o f 1.5% per month or 1 8% per annum on a ccounts over 30 d ays for three reasons:

there was an implied agreement that such interest was payable based on the term being contained in the invoices sent to the contractor.

the contractor did not object to the term regarding interest and, on the contrary, continued to d eal with the subcontractor.

it is a common trad e practice to be charged, and to pay, interest on ove.rd ue

accounts. The contractor itself included such an interest provision in its

on overdue a ccounts. This was largely because the contractor had itself includ ed a provision fo r interest in its own invoices. The plai n- tiffs were therefor e entitled to the interest as claimed.

own invoices.

THE LEGAL QUESTION: Since the contract between the contractor and subcontractor was silent on the point of interest, what interest, if any, would be payable? Could a term be implied based on trad e custom?

CRITICAL ANALYSIS: Why should ind ustr y or trade practice be relevant to understanding the parties' contractual obligations? Would it not be simpler for a court to apply the contractual terms as stated and refuse to look outsid e that document? What a re the r isks o f relying on ind ustry practices as a way of implying terms into a contract?

RESOLUTION: Even though this matter was not extensively discussed at trial, the judge ruled that the contractor was aware o f and fol- lowed an industry practice of charging interest

Entire contract clause

A term 1n a contract 1n which the parties agree that their con~rac: is complete as written

Previous Dealings Between the Parties If parties have contracted in the past, it may be possible to imply that their current contract contains the same terms. 22 A risk management perspective would suggest, however, that the parties clarify the basis of d1eir contractual relationship each time they d o business with eadl other.

Statutory Requirements An important source of terms implied by statute23

is found in provin cial sale-of-goods legislation, which is largely uniform across the country. This legislation provid es that certain terms are a mand atory part of every contract for the sale of good s unless specifically excluded by the parties.24 Special- ized rules governing the sale of goods and the extent to which consumer transac- tions can exclud e their application are discussed in more detail in Chapter 2 3.

If Trackers d elivers too much tracking to Coasters und er its contract, the Ontario Sale of Goods Act,15 for example, would resolve the situation according to the following rule:

29 (2) Where t he seller delivers t o tlle buyer a quantity of goods larger tllan t he seller contract ed to sell, tlle buyer may accept t he goods included in tlle cont ract and reject tlle rest , or may reject t he whole, and if tlle buyer accepts t he whole of tlle goods so delivered, tlle buyer shall pay for diem a t tlle contract rate.

In general, terms are not easily implied except in routine transactions or unless the Sale of Goods Act applies. It must be dear d1at both parties would have includ ed the term in question, had they addressed the matter.

Similarly, courts ordinarily will not imply terms when the parties have agreed that their contract is complete as written. TI1e dearest way parties can signal this intention is through an entire contract cla use like the one in the Coasters- Trackers contract excerpted earlier in this dlapter. The function o f this clause is

22 GHL r1x:ht1an. TheLiW1of Conll()d in{.an<Jd;,, 61h cd tT01onto Clrsv.-el 20ll) at472 23 F"or d!SOJssion. s(!~ ~d at 4 75 a:"td rolOwl~ 24 ror a diSOJssion cl s<)!e ol goeds \eglt\atiOO. ~eCMple!' 23 as Y.<el as GHLrr:dman.. Sa.le of GoOds }(I Catt<Jda

610 ed lToron10 : Ca1swdt, 2013) 25 RSO 1900. c S.l.

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Hot.I/ can a business avoid having terms imp lied intt> a mntract?

t g ~ j i m

~ Contractu al quantum merult Awarding one pany

to require a court to detenu.ine the parties ' obligations based only on what is recited in the contract itself.

a reasonable sum for the goods or services provided under a contract

c •:iiii t:• 111.14a; 1;.ca 1.111.111: 111.s:.1 •

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A REQUEST FOR GOODS OR SERVICES: IMPLYING A PROMISE TO PAY

When someone requests the supply o f good s or services, the law- be it through common law or by applicable legislation such as the SaleofGoods Act- will imply a promise to pay a reasonable price for those goods or services. The law draws this conclusion because, in a business situation, it is the intention of the parties that good s or services are not to be provid ed for free, but rather are to be purchased. Implying such a term reflects what can only be the reasonable expectation of the parties and is need ed to give purpose and effect to the rest of the contract. If the goods or services have already been provided but there has been no agreement on p rice, a term must be

Bhasin v Hrynew 2014 SCC 71, (2014) 3 SCR 494

THE BUSINESS CONTEXT: Parties to a contract are generally entitled to put self-interest first but there is a point at which the conduct is dis- honest and can cross a legal line. In the face o f

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implied to require payment. 1h e obligation on the customer is not to pay whatever the supplier chooses to charge or whatever the customer is willing to pay, but to pay a reasonable amount, as d etermined by the judge. This is known as a contractual quantum m eruit , which is Latin for "as much as is merited or d eserved ." Given the expense and uncertainty of judicial proceerungs, it is in the interests of both pa rties to agree on the price, in ad vance, as an express term. The objective is to avoid the surprises and m isund er- stanrungs that may lead to a legal ruspute.

CriticalAaal,,.U: Does the law's willingness to imply a promise to pay lead to uncertainty? Why should someone have liability on a pr01u.ise that she has not expressly made?

such conduct, courts may interpret the contract so as to ensure that such a party cannot benefit from its rushonesty.

FACTUAL BACKGROUND: The d efend ant, Canaruan American Financial Corp (Can-Am), was a marketer of ed ucation savings plans to

investors. Can-Am's product sales were mad e by enrollment director s- small bus iness owners- who would earn compensation and bonuses by building their own sales teams. The plaintiff, Mr. Bhasin , was just such an enroll- ment director wjth Can-Am. The agreement between Bhasin and Can-Am essentially per- mitted either side to d ecide not to renew the contract on six months' notice. The contract did not require that there be a reason for non- renewal. It simply called for notice.

As fo und by the trial judge, Can-Am was either untruthful o r eq uj vocated a bout its intention not to renew under the clause and its desire to merge Bhasin'sagency wjth that of his competitor when asked about these matters by Bhasin. When Can-Am did finally provid e the six months' notice, Bhasin learned about these earlier mi srepresentations and sued for breach of contract including for loss of income and loss of value of hls business.

THE LEGAL QUESTION: Is Can-Am in breach of contract?

RESOLUTION: Bhasin was successful at trial, wjth the jud ge ruling that the d efendant exer- cised its option not to renew the contract in bad fajth. The Court of Appeal reversed, ruling that- by the plain words of tl1e contract - Can-Am was entitled not to renew on giving the requisite notice. Having good fai th reasons was not required and should not be implied as a prerequisite, particularly as the contract here contained an entire contract clause.

The Supreme Court of Canada rejected both these appro aches and found for Bhasin accord- ing to its own analysis. First, the Supreme Court

stated that contract law is in fu sed by a good fai th prin ciple in contractual performan ce, which insists that parties act "honestly and rea- sonably, not capriciously or arbitrarily." Second, and based on thls principle, the Supreme Court conclud ed that common law contains a newly recognized d uty o f honesty, wh ich means as follows:

... parties must not lie or otherwise know - ing ly mi sl ead eac h oth er abo ut matters d irectly linked to th e performance o f the contract. This does not im pose a du ly o f loyalty or o f di sclosure or re qui re a party to f orgo advantages flowing from the co ntract: i t is a sim ple requirement no t to lie or mis- l ead the other party about o ne's contractual performance.

The court went on to note that parties m ight be free to modjfy this duty by contract in the right circwnstances but could not eliminate the duty's "core requirements."

The Supreme Court foun d that Can-Am had breached its d uty of honesty on multi- ple o ccasions by being untruthful or eq uiv- ocating w ith Bhasin about the renewal and merger. It also ruled that, if Bhasin had known the truth, he could have taken steps to r etain the value of hjs agenc y prio r to notice being given. On thls basis, Bhasin was award ed the value of the agen cy at the time of non-renewal: $87 000.

CRITICAL ANALYSIS: If Ca n-Am had sim - ply avoided all communication wjth Bhasin about its intention not to renew, would it be in breach o f the new d uty of honesty? Why or why not?

The Parol Evidence Rule Contracts can take three possible forms:

entirely oral (i.e., the terms of the contract are based on a conversation).

entirely written (i.e., the terms of the contract are contained in a written contract) .

both oral and written (i.e., some of the agreement is written down and other assurances are not). For example, if Jason gave Amritha an oral assurance that Trackers would provid e expert advice on how to install the t racking as a ser vice included in the contract price, their contract would be both oral and written.

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Except in a few specialized instances, discussed in Chapter 8 , the form a con- tract takes does not affect its enforceability. So long as the party claiming that there is a contract can prove it- through witnesses, for example- the fact that the parties only "shook hands" on the deal is not an impediment. Nevertheless, from the perspective o f proving the contract , a written contract is always best.

There is an important conseq uence to havinga written contract. Such contracts may trigger the parol evidence rule when a court is asked to d etermine- a ccording to the parties' intentions- what a contract means and includes. "Paro!" means "oral" or "spoken" but in this context refers to any kind o f evidence that is extrinsic to the written agreement. The rule forb ids outside evid ence as to the terms o f a contract when the language of the written contract is clear and the d ocument is intend ed to be the sole source of contractual content. In the example above, the parol evidence rule may prohibit Aruritha from bringing forward evi- d ence of Jason's oral promise to provid e expert installation advice. For this reason, a businessperson must be careful not to rely on oral assurances made by the other party, because if the assurance is no t in the contract, a court may d ecline to enforce it as a contractual ter m.

Entire contract clauses are intended to ensure application of the parol evid ence rule to the contract in q uestion. As noted earlier, such clauses generally operate to p revent a party from arguing thatthe terms of the agreement were found not just in the written d ocument, but also in oral form . Clause 2 0 of the Coasters-Trackers contract is an entire contract clause. Such a clause seeks to ensure that any oral com111itment mad e by one side to the other that is not ultimately written into the contract simply dies and is of no effect.

The parol evid ence rule emphasizes the sanctity of the written agreement and means that the parties should, before agreeing to a written contract, ensure pro- vision of all terms important to them. Failure to d o so may mean that the rule is invoked against the party that cannot support its interpretation o f the contract without leading evidence "outside" the contract.

The parol evidence rule has itself become the subject o f judicial consideration which, in turn, has justifiably limited its operation. Ind eed , there are several situations where evid ence outside the contract is important an d is permit - ted, as when:

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there is an alleged problem going to the formation of the contract- because one party alleges fraud at the hand s of the other or asserts that there has been a mistake, for example- a party may bring to the court evidence to establish that allegation. Chapter 8 considers problems going to the formation of a contract in more detail.

the contract is intended to be partly oral and partly in writing. The rule has no application. The rule applies only when the parties intended the docu- ment to be the whole contract.

the promise to be enforced is contained in a separate (collateral) agreement that happens to be oral. The rule does not apply. For example, an agree- ment to sell (for a set price) a building with all the equipment i n it may not actually includ e the eq uipment if the written agreement f ails to mention it. If there is a separate agreement and a separate price for the equipment, however, the fact that the agreement for the building says nothing about the eq uipment is likely not a concern. The difference in the two s ituations is in the matter of there being separate consid eration for the building and the eq uipment. If there is only one agreement and one price, the rule likely

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Parol evidence rule A rule tha'. limits .he evidence a party can 1n trodu ce con cern1 ng rhe contents of the con:ract

applies to the d etriment of the party seeking to enforce the purchase and sale of the equipment.

the language in the contract is ambiguous, evidence outside the written contract can be used to resolve the ambiguity.

the objective is to establish the factual matrix of the contract as an aid to contractual interpretation, as outlined by the Supreme Court of Canada in Sattva. 26

BUSINESS AND LEGISLATION

EVIDENCE OF ELECTRONIC CONTRACTS

Those who seek to enforce a contract must be able to prove that the contract was formed and that its terms support the claim that is made. Traditionally, that proof takes the form of wit- ness testimony and documents that are submi t- ted to the court as evidence. Of course, in proving the contract , the parties will have to respect the parol evidence rule and other rules of evid ence.

With the growth of electronic business, con- tracts are increasingly negotiated online and the terms are recorded electronically, without a paper version. This method of doing business creates difficulty if it becomes necessary to produce the "original" contract in court. In response, govern- ments across Canada have begun to enact legis- lation addressing this point.

In 1 997, the Uniform Law Conference of Canada proposed draft legislation- called the Uniform Electronic Evidence Act, or UEEA for short- to make the proof of electronic contracts subject to a uniform set of rules. This draft legis- lation has since been implemented in a number of jurisdictions. For example, Ontario implemented

the UEEA by amending its Evidence Act. Section 34.1 of that Act, as amended, provides

Authentication:

(4) The person seeking to introduce a n el ectronic record has the burden o f proving its authenticity by evidence capable of supporting a finding that the electronic record is w hat the person claims it to be.

Application o f Best Evidence Rule:

(5) Subject to subsectio n (6) w here the best evi dence rule is applicable in respect o f an el ectronic record. it is satisfied o n proof of the integrity of the el ectro nic records system by or in w hich the data was recorded or stored.

Beyond Ontario, other provinces and territo- ries (including Alberta, Manitoba, Nova Scotia, PEI, Saskatchewan, and Yukon) , as well as the fed eral government, have enacted legislation which mirrors, in whole or in part, the Uniform Conference of Canada's draft act.27

Critical Analysis: Are these kinds of amend- ments to Evidence Act legislation necessary to d eal with electronic contracts? Could judges not be entrusted w ith the task of providing rules on a case by case basis?

Using Contractual Terms to Manage Risk The planning function oflaw permits a businessperson to use contractual terms as a buffer against future, uncertain events as well as a way of limiting liability.

26 Supra no1e 3 a t para 60 21 See. for eX.lmp!e fvider.ceAa, RSA 2000, c A·18 ss 411""'11.8 tAtDerta), t:wd<!!ttee Acl, RSNS 1989, c 154 ss

23A .. 23H (Nova ScoLial; £Jecttot1k: fv.denceAct, RSPCI, c £.4 J {P1i~ E'.dw~·d ls\aiOO) and t~n1toba Cvk/ence Act,CCS M C 1:150 ss 511·51.8 ro1 OiS.cussonot U£(Ate915'at10f\ inCaM.1~. see Chaites f"1019an& Ji;tK:>n Sau'91a11\. £·/vi;).~ L1w !Markham l axisNex.is, 2008) at 130-132.

NEL 175

Changed Circumstances Numerous circumstances may arise that prevent a party from performing its contractual obligations or that make performance much more expensive than a nticipated. The r ule, however, is that the terms of a contract are settled at the time of acceptance. Therefore, if disaster strikes- such as when a plant bums, railways go on strike or are closed, trade regulations change, or an entire manu- facturing process becomes obsolete- the obligations in a contract a re enforce- able, unless a clause to the contrary is includ ed . Though the legal d octrine of "frustration" occasionally relieves parties from their obligations (see Chapter 9), it operates in very limited circu mstances and cannot be counted on to provid e an avenue of escape.

I t is therefore particularly important in longer-term contracts that negotiators evaluate risks, speculate on possible changes in the business environment, and be wary o f making inflexible commitments. Taking these precautions is essential because changed circumstances may rend er a contract extremely disad vantageous to one party. For example, the price for the t racking that Trackers needed to fill Coasters's o rder dramatically increased, making it very expensive for Trackers to complete its end of the bargain. Rather than run such a risk, Trackers could have negotiated for a term that would permit the contract price for the tracking to rise should the price of tracking increase. A contractual term could

provid e a formula setting the price of the goods supplied , in a manner that is tied to ma rket value.

set the price according to the cost of materials, plus a specific percentage for profit.

allow the parties to reopen negotiations or terminate the contract altogether if specifie d events occur, such as a commodity price reaching a certain level.

[nstead of having to go to Coasters for some kind of accommod ation, Trackers could have includ ed a clause protecting its interests.

Though the approach of voluntarily altering the agreement as the need arises can be successful, legally there is no obligation on either party to reach agreement Furthermore, as discussed in Chapter 6, any voluntary agreement arrived at i s unenforceable unless:

fresh consideration is given or a court is willing to follow newer cases which dispense with the need for consideration;"'

promissory estoppel applies; or

the d ocument is put und er seal.

Parties should try to build some flexibility into their agreements, while avoid- ing creating a d ocument that is so vague that they run the r isk of having no con- t ract a t all. If in negotiations a customer such as Coasters refu ses to accept a price-variation clause of any d escription, the supplier must then choose to risk an adverse change in market conditions, try to negotiate a higher price to compen- sate for possible ma rket changes, or lose the order altogether.

28 $00 Chap1e1 6·s diSCussoo ol 1'1AV CtNlad;J vC1et1:er f 1e<hYrc:on AN port Authonty Jnc. 2008 NBC.lt. 28, 229 N6R 12oJ 238. a'ld Rosas v Toca 2018 BCCA 191.

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Condition subsequent

An even_ .:ir circumstance that, when 1t occurs. brings an existing contract to an end

Condition precedent

An ':Ven" or circumstance that until 1t occurs. suspends the parties' obliga t1 on s to perform their comractual obliga:1ons

Why d-0 well·drafted contracts anticipate events that can affect peYformance?

Cond itional Agreements Conrutional agreements are essential when one party wants to incur contractual obligations but only under certain circumstances. For example, a business enter- prise may be interested in buying a warehouse, but only if it is able to secure fmancingfrom the bank. If the business simply agrees to purchase the warehouse without making its agreement conrutional on securing financing, it will be obli- gated to complete the transaction even if the bank refuses the request for a loan. This outcome could have d evastating financial consequences for the business in question. Conversely, if the business makes an offer to purchase the property subject to financing,29 and that offer is a ccepted by the vendor, the business is obligated to complete only if and when the financing is approved.

From a risk management perspective, it is important that the law provid e a mechanism not only for making the contractual obligation conrutional on acer- tain event happening, but also for binding the parties in some way during the time set aside for that condition to occur. If the vendor of the warehouse was entitled to sell to someone else while the business enterprise was trying to secure necessary financing, the whole arrangement would be somewhat futi le.

To bind the other side during the time set aside for the conrution's fulfillment, the law provid es two mechanisms: the condition subsequent and the condition preced ent. A condition subsequent will always bind the parties to a contract penrung the fulfillment of the conrution. The occurrence of a condition subsequent operates to terminate the contract between the parties- that is, it must, by defi- nition, relate to an existing contract. For exan1ple, parties to an employment con- tract may agree that an employee is to work for an organization unless the employee's sales d rop below a certain amount. This is a contract subject to a con- dition subsequent. If the condition occurs- that is, if the employee's sales fall below the threshold - the contract automatically comes to an end.

For the most part, a condition precedent works in the same way- that is, there is a contract between the parties.30 However, unlike the condit ion

29 Suen a c~s~ mus1 con~1n suffic1en1 de"" I; 0 1Miv1isc, 11 wU ee uoonfo1cca~ <N11ng to uncertainty. ro1 d tS• OJSS1on ol such dauses, see G\•1lym DmtieS. ·::iome Th0ugn1s on U\e Omllif"4 or CoM lio!l$ in Con1rac1s ror IM Sale or t.ano' 11977) 152 Alla L Rev 42 2.

30 Not ~' cona tons precooen1 operate w it n1!') l~ cont~xl of a COl'ltract, h0v;e\e1, and lhiS is \Yhete t ha taw ran OOc:o~ som2Wt\at confus11·.g As a rute. coodilio!\S 01eceden1 v1lt bind 1ne pa!l ie-S 10 ~contract ii t he co!ldll tO!l 1t setf is reasonably ai1t.ain and ob,iec twe _ Co001110ns that are hed to \Yhl!'n, taocy, or extrema $Ubjec1iv1 ty-as in. T1 buy your l'K)use it I decide tl\al I t111e 11·-do nol bind t l'k'! parties oecause they essentially t\alle no ob;oc: trve content. TheSa a1e knovvn as 1tuso1ycooo1ti0M 01eceden1 ~~~ave the !)i)rt lC':s fr<.'!E? to do a'\ t hey p(M:se. since t he.1<.'! :s no contract bel\'IOOn toom. f'orobViOu!. reason~ 1luso1ycoa.11tlol\S p1e~den1

~re rare. ror <hscussJO:') and case t:Y"' on l his Po:nt. see Berr-tshal b Percy. supra note 1 a t 329 c°jfld fO!!owing.

NEL 177

subsequent situation (where parties perform their contractual obligations until the condition occurs), the condition precedent situation means that the parties' obligations to perform are not triggered pending fulfillment of the condit ion. That is, a contract exists between the parties, but the obligation to perform the contract is held in abeyance pending the occurrence of the event. Because there is a con- tract between the parties, the law is able to imply certain terms binding on the parties in the meantime. In the real estate situation, for example, a court would imply a term that the vendor must wait until the time for fulfilling the condition has passed before it can sell to someone else. Similarly, a court would imply a term on the purchaser to make good faith efforts to secure the necessary financing. Without a contract between the parties, these kinds of terms could not be implied because, without a contract, there are no terms whatsoever.31

Purchasers of real estate, for example, frequently rely on the conditional agree- ment by maldng the contractual obligation to buy and sell subject to

rezoning.

subd ivision approval.

annexation of the property by a municipality.

mortgage financing.

provision of adequate water and sanitary sewer services to the property.

Conditional agreements might also arise in other contexts. For example, a busi- ness may be willing to commit to perform a contract provided it can

access a certain source of supply.

• engage people with the necessary expertise.

• obtain a licence to use certain intellectual property.

Conditional agreements would permit such an enterprise to contract with the otl1er side but would provid e an established reason to escape the obligation to perform.

Wiebe v Bobsien (1984), 14 DLR {4th) 754 {BCSC), 1984 CanLll 383 {BC SC), aff'd (1985), 20 DLR {4th) 475 {CA), 1985 CanLll 142 {BC CA), leave to appeal to sec refused (1985), 64 NR 394 {SCC)

THB BUSINESS CONTEXT: Because the purchase of real estate can involve a large expense, busi- nesses and individuals alike often require time to either borrow the money necessary to make the purchase or divest themselves of an existing

property, the proceeds of which can be applied to the contemplated purchase. Such a process can take weeks or months, during whi ch time the freedom of the vendor to deal with other buyers or back out of the arrangement altogether can become an issue.

FACTUAL BACKGROUND : Dr. Wiebe made an offer to purchase a house owned by Mr. Bobsien. This offer was made conditional on W iebe being able to sell his current residence on or before August 18, 1 984. Wiebe's offer was accepted by

31 11 l" beyOM the scope Of lhis text 10 dtSCoss the iSsu<! o r w~wer o f colld110!\S orec<:?de~L r-01 an assessme()l o f this ;»rtlCU~rty thOmy i:no~m. se<: Gv.·tfm ~ves, ·co!ld1Li0r~Con11octs 101 the'! Saleot Land ;nCal)Ad.l. ll97n 55 2 Can 8.>r Rev 289

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Bobsien. However, on July 22, 1 984, Bobsien changed h is mi nd and in fo rmed Wiebe that their agreement was "cancelled." Wiebe did not accept this cancellation and on August 18 he informed Bobsien that he had obtained a buyer for his current house and that, since the condj- tion had been fulfilled, the main transaction had to go through. Bobsien refused to complete the sale, saying that he had no contractual obliga- tion to do so.

THE LEGAL QUESTION: Was there a contract between Wiebe and Bobsien such that Bobsien was obligated to wait until August 1 8 to see whether Wiebe could fulfill the condit ion?

RESOLUTION: According to the court, the condition preced ent that Wiebe be able to sell his current residence merely suspend ed the

obligation to perform the contract pending occurren ce of that event. On this basis, W iebe had a contractual obligation to take all rea- sonable steps to sell his house, and if he fa iled to take those reasonable steps, he would be in breach o f contract and liable in d amages to Bobsien. As for Bobsien, he was contrac- tually bound to wait and see if W iebe would be successful in selling h is current residence and did not have the legal r ight to "cancel" the contract on July 22. Sin ce Wiebe ful fi lled the condition Mthin thetime provided in the contract, Bobsien was contractually bound to sell to h im. Bobsien's failure to d o so was a breach o f contract.

CRITICAL ANALYSIS: Do conditions preced ent introd uce too much uncertainty into contracts?

limitation of liability Clause When a party fails to meet its contractual obligations, it is liable for breach o f contract and is responsible to the other side for any reasonably foreseeable d am- ages the breach may have caused .32 For example, in the Coasters-Trackers con- tract , a failure by Trackers to d eliver ad equate tracking may result in Coasters losing its contract wjth the American amusement park, the ultimate purchaser of the roller coaster (see Figure 7.1 ).

FIGURE 7.1 Trackers's Liability to Coasters

1. Trackers Coasters breaches contract by

supplying substandard tracking 2. Coasters American customer

breaches contract by failing to deliver tracking

3. American customer finds an alternative supplier and terminates contract with Coasters.

4. Coasters loses $1 million in profit on contract with American customer.

32 The cl<>ssiC test for foreS(!eat:>lity in con11()Cl, diSCuSS.::'!d tu rt her in Chaote1 9, Is stated in 1-ltKJJey v Btlx<Y?da.re 11854J, 9 rx Ch 341 V/h€1~ IVIO pa11ies t\a\(! madG a contra:l \VhCh OrK! or t~m Ms b1ok.en. thtl daltl.YJaS v1nCh 1he other p.lrtyough1 10 rec<?tve in respect or such 1>1e()ChOI contract shOutd be such as IT'kly f();1ty .lnd 1easo:'lt)bty be COl)Sldt'Hed erthe• ,_1is1~ 001u1atty, Le .. . such <')S may 1easoMbfy be suppo~d to have ~en in the contemP4aton or botll Cla'IES.. alt~ time they lhi>:le the con11a:1,, as the pro bat.¥- resiutl ol l~ b1eact\ er 1L N.")w.11 the spe<:i.')1c:.1cums1aoc.esunder wnCh 1he contract \'-'as made were communiCata:! by Ille p4ain1 trs 10 thadefer'lda'llS, and thus kl'K>v1n 10 both panies, 100 darn.lges re1AJtling hom the brMch of $uCh a controc1,, whlCh Liley v..ou\O 1eas0Mbfy con1e1npta1~. v1oukl be me amount of 1nµ1y w hCh vl':iutd 01d1!la1ty ro1ov1 hort1 a brea::h ol con11ac1 uooc1 1~ speci<t. c,roJmsta')Ces .so know!l ano communicat!!d.

NEL 179

On the basis of this scenario, Coasters could recover from Trackers its loss of profi t , particularly since Trackers knew very well that Coasters needed the track- ing to fulfill contractual obligations to an American amusement park. However, since contracts are about consensus and choice, parties can agree to limit liability for breach to something less than would otherwise be recoverable. This is precisely what the parties to the Coasters-Trackers contract a ccomplished. Clause 1 3 of the contract (set out in the opening scenario) is a limitation of liab ility clause. It provides that Trackers's liability shall in no event exceed the unit price of the tracking, and in no event shall it include loss of profit. Therefore, by the clear words of the contract , any loss of profit that Coasters may suffer from Trackers's breach is not recoverable. Since the parties agreed to place such a liruit on d amages when they entered into the contract, Coasters is bound .

Exemption Clause (or Exclusion Clause) 1h rough an exemption clause, a party to a contract can identify events or circum- stances causing loss for which it has no liability whatsoever. Clause 1 4 in the Coasters-Trackers contract achieves such an end, since it exempts Trackers from all liability with respect to losses, d amages, costs, or claims relating to d esign o f tracking. This means that if there is a problem with the design, Coasters cannot sue Trackers for any loss it m ight sustain to replace or alter the t racki ng, for example.

Limitation of liability clause

A term o o contrac tha limits hab11ity for breach o something less than

would otherwise be recoverable

Exemption clause

A term o a comrac- ,ha· 1d en t1 fies events ca using loss for which there 1 s no hab1l1ty

Tilden Rent-A-Car Co v Clendenning (1978), 83 DLR (3d} 400 (Ont CA}

THE BUSINESS CONTEXT: A business may d ecide to use a standard form contract with its customers in order to save money. However, this may prove to be a fa lse economy should the busi- ness fail to properly explain to the customer the conseq uences of the stand ard form contract in question. Such a business runs the risk of a court taking the customer's side and disallowing a term that would otherwise protect the business because, in the court's estimation, the clause was never part of the contract to begin with.

agreement without reading it. An exemption clause, on the back of the agreementandin very small type, provid ed that the insurance would be inoperative if the driver had consumed any alco- hol whatsoever at the time the d amage occurred . Clend enning was unaware of the clause. When the car was damaged- Clend enning drove into a pole after consuming some alcohol- Tild en sued to recover the f ull cost of repairing the vehicle.

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FACTUAL BACKGROUND: M r. Clend enning rented a car from Tild en at the Vancouver air- port. At tl1e time of entering into the agree- ment, he was asked if he wanted additional insurance, which involved a higher fee but did provide full, non-deductible coverage. Thinking that this would protect him if the car were dam- aged in his possession, he agreed. As he was in a hurry, he signed the long and complicated rental

180

W hat r isks do lengthy conr:racti>-as fo und in the car rental industry- pose tJ:J the con sumer and to the business supplying the vehicle?

THE LEGAL QUESTION: Can Clendenning rely on the clause providing him with full, non- deductible coverage, or is that clause inopera- tive be ca use Clendenni ng had consumed some alcohol?

RESOLUTION: The Ontario Court of Appeal held that Clendenning's signature on the con- tract was not a true assent to the terms of the contract and, therefore, Tilden could not rely on the exemption clause denying insurance coverage to Clendenning. The clerk who had Clendenning s ign knew that he had not read the contract and knew, therefore, that the contract did not represent his true intention. Given that the contract contained "stringent and onerous provisions", it was incumbent on Tilden to show that it took reasonable mea- sures to draw these terms to Clendenning's attentfon. This did not occur and therefore Tilden could not rely on the exemption clause.

The court went on to observe that since the trial judge had accepted that Clendenning was capable of proper control of a motor vehicle at the time of the accident, and since Clenden- ning had paid the premium, he was not liable for any damage to the vehicle.

CRITICAL ANALYSIS: Though the consumer in this case won, courts may be less helpful to the customer in a non-consumer context, since parties there are expected to look after their own interests. In a 1997 decision from the Ontario Court of Appeal, for example, the court emphasized that inadequate notice of the kind complained of in the Tilden case will not ordinarily be grounds for attacking an exemption clause in a commercial s ituation. The court affirmed the rule that a person will be assumed to have read and understood any contract that he sign s.33 Should consumer and j commercial contracts be treated differently?

Tilden concerned a challenge as to whether an exemption clause was part of the contract. Only if the clause is part of the contract can it be relied on. Beyond this, the exemption clause can be challenged for being unconscionable or contrary to public policy, as discussed in Chapter 9.

CLICK-WRAP AND BROWSE-WRAP AGREEMENTS

Even when terms are written down, one party may claim not to have known that certain terms were actually part of the contract. As noted above, this can arise in the standard form contract, for example, when a customer of a car rental com- pany signs a lengthy agreement without having read it. Questions of enforceability of terms also arise in the more modern context of dick-wrap and browse-wrap contracting practices.

Click-Wrap Ag--.,em .,l · A click-wrap is an agreement that appears on a user's computer screen when a user attempts to download soft- ware or purchase goods or services online. The user is instructed to review the terms prior to assenting by clicking an "I accept" button, a hyper- link, or an icon. Usually, the user cannot proceed any further without agreeing to the terms.

In Canada, the validity of this method of con- tracting has been upheld. For example, in Rudder v Microso~ Corp, 34 the plaintiffs brought a class action suit against Microsoft ( MSN), alleging

33 SCct f:td!iCt Jcwdlet~ (1984 J.ld v {)cyf'l:t1/0n {leelt1c Ptotec.llon Co 11997). 34 OR 13dJ l 1991 (J\nlll 4'4S2 ION c.AJ. SC?~ too, Suha.-tq Jcvtel~rs Ud v AJa1m fac.toty Inc 2016 ONCA 33, k'!avt? to aPOCat to t he ~uor~rn.1 Coot! ol C•Mda f<!lo>Cd 2016 Canlll 41038 ISCCJ.

34 D99 01nl11149:!! iON SO. llm). 47CCLT12oJ 168 (OntSCJJ

NEL 181

that MSN had breached the member service agreement. MSN applied for a permanent stay of proceedings based ona clause in the click-wrap agreement that indicated that all MSN service agreements are governed by the laws of the state of Washington and that all disputes arising out of tl1e agreement would occur in that state's courts. The Ontario Superior Court granted the applica- tion. In response to the plaintiffs' argument that they did not receive ad equate notice of the term, Mr. Justice Winkler said,

All o f the terms o f the Agreement are the same fo rmat. Although there are certain terms of the Agreement that are displayed e ntirely in upper-case letters, there are no physical dif- fe re nces whic h make a partic ular term o f the agreement more difficult to read than a ny othe r term. In other words. there is no fi ne print as the term would be defined in a w ritten docu- ment. The terms are set out in plain language. a bsent words that are comrnonly referred to as "legalese: Admittedly, the entire Agreement cannot be displayed at o nce o n the com puter screen. but that is not materially different from a multi-page written document which requires a party to turn the pages."

Note too that electronic commerce legislation in jurisdictions across Canada permit an offer to be accepted electronically by "clicking" online. See for example, s. 15(1) of the Electronic Trans- actions Act, S.B.C. 2001, c. 1 0, and its express rec- ognition by tl1e Supreme Court of Canada in the 201 7 decision of Douez v Facebook. 36

Browse-Wrap Agreements: Also of interest has been the validity of browse-wrap agree- ments. Browse-wrap agreements are said to be formed on this basis: the user agrees that- by virtue of simply using the website-he or she is bound by the terms of use associated with the website and agrees iliat those terms are part of a binding contract between the parties. In short,

35 Ru<lder. !b.d •• 173

a browse-wrap agreement is formed not because the user has clicked on an "I accept" button. Rather, the webpage presents a link or button that takes the user to the terms and conditions that apply to the transaction or the terms are found at the bottom of the website in question. This would seem to be a potentially risky way of attempting to create a contract , particularly as the common law requires that the person pur- porting to accept an offer d o something affirma- tive or positive to signal assent.37

That said, tl1e Quebec d e cision in Canadian Real Estate Association ("CREA") v Sutton (Quebec) Real Estate Services"' recognized a browse-wrap form of acceptance. In this case, the realtor (Sutton) had been d ownloading listings from the Multiple Listing Service website of the Canadian Real Estate Association (CREA), which was expressly contrary to the terms o f use posted on the website. Sutton argued that any such breach was not actionable because it had done nothing to expressly consent to these terms of use, such as clicking on an "I agree" button. Th e Court dis- agreed, noting that the terms were posted on the MLS website and could be accessed via hyperlink. Moreover, as Charles M organ et al. point out, Sutton itself had similar terms of use on its own website and therefore "should have known" that sum terms would also govern CREA's MLS site.39

Relying in part on the CREA case, the British Columbia Supreme Court in Century 21 Canada v Rogers Communications lnc'0 also enforce d a browse-wrap agreement, concluding tlut a con- tract had been formed between the plaintiff and def endant. The court noted that a "properly enforceable browse-wrap agreement will give the user an opportunity to read it before deemingthe consumer's use of the website as acceptance o f the Terms o f Use."41 Here, the d efendant had a dear opportunity to review the terms of use of

36 Douez v facebook, Inc. 2017 SCC 3l. !2017] 1 SC~ 751 at pa1a 46. See too Jus tce Abellc"l·s asSE?!>Sr'nen.L tin a corx:urring deciSionJ at para99.

3i Mo19an li Saulgraio., s1..1pta oote 27 al 10. 38 Cattt1dmn Rml fstate-Assoo.1t'On v Sutton (Ou'ebec) l?ea.1 £sta:eServJce-s Inc, 120031 JQ no 3606 tCS'J, 2003

CanLll 22519\(lC CSJ. 39 Moigan & Sau\graio, supta oote 27 al 15. 40 CMtUI)' 21 Canada Ud Pt1rtnersh)p v l?ogttrs CommunlCiltt0ns Inc t.2002J, 338 DLR l4th) 32, 2011 SCSC U96. 4 1 Ibid a l p.lra 108

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the website and knew that acceptance would be d eemed by continued use.

Note too that browse-wrap agreements have been deemed enforceable as they relate to amend- ing an existing contract, but not consistently so. In Kanitz v Rogers Cable Inc.,42 for example, a click-wrap agreement expressly allowed tele- communications company Rogers to amend its online service agreement wjth customers by simply posting such amend ments on its website. The court agreed that the customer's continued use o f the service after such amendments were posted amounted to a cceptance of Rogers's uni- lateral amend ments. In short, the parties had agreed to a means o f amending their contract which did not require an act o f positive accep- tance by tl1e consumer.43 By wa y of contrast, a court in Quebec held in 2 005 that continued use of an online system (here, myPaySystems Services) was not good acceptance of a contrac- tual amendment requiringarbitration.44 To side- step such controversy regarding enforceability, e- vend ors should consider avoiding browse- wrap agreements altogether and req uire their customers to d o something affirmative to s ig - nify assent- such as d icking on an icon45 which

says "I accept" or "I assent:' This is particularly important in a consumer context where courts are more likely to be solicitous of the customer than in a business-to-business scenario.46

Hyperlu1ked Terms: The Supreme Court of Canad a in Dell Computer Corp v Unio n des consom- mateurs47 has upheld the enforceability o f con- tract terms introduced via hyperlink. The court d ecided that contractual terms are enforceable provid ed they are "reasonably a ccessible" and this accessibility can be provided by a hyperlinked d ocument. That is, even though the terms m ay not be on the ordering page itself, it is sufficient that the terms are accessible via a hyperlink.48

Critical Analysis: The enforceability of terms in click-wrap agreements depends on notifica- tion prior to assent. What steps can a business take in preparing and presenting an agreement to ensure that the terms wjll be found to be enforceable? Do you tl1 ink that browse-wrap agreements should be enforceable? Why or why not? As a businessperson, how confident would you be at this point concerning the enforceability of a browse-wrap contract in Canada?

Liquidated da mages clause

Liquidated Damages Clause

A term of a contract that specifies how much one party must pay to the other in the event of breach

Penalty c lause A term which 1s not enforceabl e because 1t sets an exorbitant amount that one party m ust pay to the o:her in event of breach.

A liquidated damages clause sets out- in advance--what one party must pay to the otl1er in the event of breach. Through such clauses, tl1e parties themselves d ecide before a breach has even happened what that breach would be worth by way of compensation. Provided that the clause is a genuine pre-estimate o f the d amages tl1at the innocent party will suffer, i t is enforceable.49 The clause will not be enforceable, however, if it sets an exorbitant amount as a remed y for the inno- cent party. If so, tl1e clause is a penalty clause- it intend s to punish, not com- pensate- and a court will simply disregard it in assessing damages for the breach in question. As a general rule, contract law is only interested in compensating the

42 K.,11tz v flogerS Cable Jnc. t2ll02J 58 OR 13d) 299, 2002 Canlll 49415 (ON SCJ. 43 Mo•gan b Sa\Jl9ra1r\. wpra llOtC 27 ,c,l 10- ll. Note. 1v.Y>...-eve1, 11"~1 consu1r1<:'!r p1oti?Clie:ln te;, !Mton rriay restriet

$1.JC n o f\l()ter()\ amenof'r'lents 44 A.spencetI.cam Jnc v P~;.'systerra Corporation, !20051 .}Q no 1573 (CS). 45 F"or further diS<:>.JSslon. se(! Derek Hll -aic:k.·\'Yrap-O nliooCon.tiocts (i~!'le•alyConsidercd (;.nlo1ceab~~·( UY1

llmes (4 August 2008) l2 46 Jb<d. • 7 2001 sec H 2 sc R 801 48 MiCht)et Geist. ·oen C()se Sets Stan<:l.ard 101 OnUi\eCon.11.x:ts · {31 Juty2oon. 00(1~ MiC~' CeiSt <http II

w..v.t1 me Met9e1st .ca/20(11 / (11 /d(!l-<Jec IS Ott•cd.tlm n/ > 49 See McC.amtJs, SLJpttl note 12 a1 966.

183 NEL

innocent party, not punishing the party in breach. As noted in Chapter 6,Amritha had insisted on a contractual clause that Trackers pay $5000 to Coasters for every d ay it was late in delivering the tracking. Such a clause is enforceable only if it fits the definition of a liqu idated d amages clause. If it is simply a clause meant to scare or terrorize Trackers into timely performance because of the financial punishment it would face in the event of d elay, the court will simply not enforce it.

TI1ese three kinds of clauses- the linlitation of liability clause, the exemption clause, and the liquidated d amages clause- illustrate the planning function of the law. Through such clauses, a business can manage the k in d and extent o f liability it faces.

BUSINESS LAW IN PRACTICE REVISITED

1. How is the scope of Trackers's and Coasters's obligations determined?

If the parties cannot resolve a dispute concerning obligations by themselves, a judge will deternline whether there is a contract between the parties and, if so, what its content is. Every contract must cover certain essentials in ord er to be enforceable. If key terms are nlissing, the court may con clud e that the parties were still at the point o f negotiating an d had not actually entered into a contract yet. The other possibility is that the court will imply a term that one or the other party finds unsatisfac tor y or contrary to expectations.

The Coasters- Trackers contract was complete because it contained all the terms that the circumstances of the case would identify to be essential, as well as some clauses that d efined the relationsrup in more detail. For example, the contract identified the following terms:

• Parties: Coasters and Tracker s

• Price: $1 .5 million

• Delivery d ates: as specified

• Produ ct: tracking

• Quantity: 900 metres

• Quality: as per specifications and , where no specifi cations, of the best quality

• Guarantees: tracking to be free from defect for one year

• Linlitations on/exemptions of liability: liability not to exceed unit price; no liability for design defects; no liability for d efects after one year

• Insurance: vendor to insure tracking

2. Are there any ambiguous or unclear terms in the contract?

While certain aspects of the contract were somewhat ambiguous, such as the term specifying that the quality was to be of the best quality, a court would have been able to assign meaning to the term because there was a contract between the parties and expert evidence would have been available to establish what the phrase meant.

3. Are there any additional terms that Jason should have tried to include?

Jason managed to negotiate a reasonably complete contract, as noted above. He includ ed a numberof clauses to lim it the liability of Trackers, wruch was prudent,

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but he should have gone further and includ ed a clause expressly eliminating appli- cation of the Sale of Goods Act. This term would have ensured that the Act would have no application in a contractual dispute with Coasters sometime d own the road. I twas wise from Trackers"s perspective to include, as it did, an entire contract clause, as this would have helped forestall any arguments from Coasters that there were additional warranties or guarantees not expressly recited in the contract .

Jason probably should have included a price-variation clause to deal with the problems that arose when the price o f steel rose dramatically. In addition, an arbitration or mediation clause m ight have proven useful to deal with conflicts, although, as it turns out, the parties negotiated their own resolution to the pricing dispute that arose.

4. Does the contract relieve the parties from responsibility for inade- quate performance?

The contract limited Trackers's liability for d efective tracking for one year and to an amount not exceeding the unit price. Trackers had no liability for problems in the design o f the tracking.

Coasters' s obligation to pay the purchase price was not qualified by the express terms o f the contract. Of course, if Trackers had failed to deliver, Coasters would not have had to pay. If Trackers had d elivered seriously d efective good s, Coasters would have had the option to refuse delivery. If the d efect had been less signif- icant, Coasters probably would have remitted payment in a reduced amount, to reflect the track's lesser value or the cost o f repairing the defects in the tracking. Clauses to this effect are not necessary and probably do not help in establishing certainty, in any event. Whether the tracking was seriously defective or only some- what so would have been not a question o f fact but a matter for d ebate, which no clause in a contract can resolve. If the parties cannot resolve that q uestion infor- mally, it will be d etermined by a judge in an action by Trackers against Coasters for the purchase price set out in the contract.

CHAPTER SUMMARY

The nature, scope, and extent of the obligations of the parties to a contract are known as the terms of the contract. TI1e terms may be express, as when they have been specifically mentioned and agreed upon by the parties, or they may be implied. Since the court has considerable discretion to imply a term or not, parties are best advised to make their agreement as clear and as explicit as possible.

How courts will resolve a contractual dispute over terms is an open question, as is any matter that proceeds to litigation. An important evidential rule that guides a judge is known as the parol evidence rule. It prevents the introd uction of evidence that varies or adds to the terms of a written contract when the con- tract is clear and intended to be the sole source of the parties' obligations. Entire contract clauses a re used to propel a court to apply the parol evid ence rule in any given case.

An important planning fu nction o f contract law lies in the fact that it permits parties to manage the risk of future uncertainties. Additionally, it permits them to establish, in ad vance, the extent of responsibility for breach through limitation clauses and exemption clauses. Furthermore, parties can bargain for what will be payable in the event o f b reach. Such a term will be enforceable, provided the amount is a genuine pre-estimate of damages and not a penalty.

NEL 185

Courts may refu se to apply a clause that disadvantages a consumer if the busi- ness in q uestion failed to take reasonable steps to ensure that the consumer was alerted to the clause in question in circumstances where it appears the consUlller has not assented. Courts are less likely to assist the commercial or ind ustrial cus- tomer, however, on the basis that soprusticated business interests should be left to take care of themselves.

CHAPTER STUDY

Key Terms and Concepts condition precedent (p. 168)

condition subsequent (p. 168)

contractual quantum meruit (p. 163)

entire contract clause (p. 162)

exemption clause (p. 1 71)

express term (p. 156)

implied term (p. 158)

limitation of liability clause (p. 171)

liquidated damages clause (p. 17 4)

parol evidence rule (p. 165)

penalty clause (p.174)

rules of construction (p. 157)

Questions for Review 1. What i s the differen ce between an express and

an implied term?

2 . What are two major rules of construction used by the courts in interpreting a contract?

3. Who d ecides the content o f a contract and on what basis?

4 . What are four sources that the court can rely on to imply terms?

5 . Why are express terms preferable to implied terms?

6. How d oes the do ctrine o f business efficacy affect the interpretation of implied terms?

7. How d o the courts deal with ambiguities in the contract?

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8. What is the expression used to d escr ibe an implied legal promise to pay a reasonable price for goods or services?

9. What are three ways that a party can control its exposure to liability for breach of contract?

10. What is a limitation of liability clause?

11. How is a limitation of liability clause different from an exemption clause?

12. Why are conditional agreements important?

13. What is the parol evidence rule?

14. What is a separate or collateral agreement?

15. What is an entire contract clause?

16. What assumptions d o the courts make about how contract terms relate to changing circumstances?

17. What is the difference between a dick-wrap agreement and a browse-wrap agreement?

18. What is a liquidated damages clause?

Questions for Critical Thinking 1 . Entering a contract can create a great deal of

r isk for tl1e parties. What are examples of these r isks, and how can they be managed?

2. Discuss how the law seeks to analogize elec- tronic contracts to hard-copy. paper contracts. Are these efforts successful?

3. The Supreme Court of Canada in Bhasin stated tl1at there is a new duty of honesty in contrac- tual performance. What is thi s duty and how m ight it interfere with freed om o f contract?

4. Why does contract law refuse to enforce a pen- alty clause? Why are penalty clauses inherently objectionable?

5. Is it fair to conclude that the party who is forced to rely on an implied term for assistance, rather than an express one, has done a poor job nego- tiating the contract in question?

6. When one party signs a contract containing an exclusion clause, that party may later argue that it is not bound by that exclusion clause because he or she did not see it or realize it was there. The Ontario Court of Appeal in Fraser Jewellers, supra note 33, makes it difficult to succeed with such an argument in a commercial setting (i.e., busi- ness to business), stating that "in the absence of fraud or other improper conduct inducing the plaintiff to enter the contract, the onus must rest upon the plaintiff to review the document and satisfy itself of its advantages and disadvan- tages before signing it" at para 32. Do you think that this test is too strict and that courts should be more flexible in deciding whether to apply an exclusion clause? Why or not?

Situations for Discussion 1 . ABC Ltd owned a shopping mall whose main

tenant, Drugstore World, agreed to relocate to a competing mall owned by XYZ Ltd. Drugstore World consented to do so because of generous inducements offered by 'JNZ Ltd. These induce- ments included XYZ Ltd agreeing to take over Drugstore World's lease with ABC Ltd. !n this way, XYZ Ltd became a tenant of ABC Ltd- its main competitor. Under the agreement between these two mall owners, XYZ Ltd was obligated to use "best efforts" to fill the space but seemed to be taking few steps to do so. In response, ABC Ltd brought a number of possible subtenants toXYZ Ltd's attention butXYZ Ltd rejected them all. ABC Ltd is convinced that the XYZ Ltd rejected these potential subtenants for one, sin- gle, strategic reason- to make ABC Ltd's mall less attractive and busy by keeping the space vacant. [f this is correct, is ABC Ltd's conduct in breach of the duty of honesty explained in Bhasin v Hrynew as discussed earlier in this chapter?50

50 S!)soo 1n pa11,. on (..imcwt>y RcJ.•ty I.Id v Anon f J()}d:ttq.t. Ltd 11991l 106 NSR l2d) l~Q. 1991 (..)nUI 'J.707 lNS SCJ aff'd on NHOVl*\H {110unch U9'J2) U2 NSR !<!OJ 180 l<Y.J2 CaoLll l620 INS <..AJ

2. Louise purchased land from Reggie subject to the condition that subdivision approval be secured. Unfortunately, the contract between them does not specify who is to try to get the subdivision approval. Louise begged Reggie to seek the approval, noting that only the vendor has the information necessa.ry to make the application successfully. Reggie, who had changed his mind about selling the property altogether, is triumphant: "Where does it say in the contract that l have to do anything about making an application for subdivision? Next time, try to be more clear. And in the mean- time, our contract is off." Is Reggie obligated to try to secure the subdivision approval? If so, on what basis?"

3. Kristin signed a user agreement with Hagel's Cable [nc. (Hagel's), upon installation of high- speed Internet service in her home. Lncluded in the agreement was a provision that the agreement could be amended at any time, and that customers would be notified of changes on Hagel's website, by email, or through reg- ular mail. Hage l's later added a clause to the agreement that any right to commence or participate in a class action suit was waived. The agreement, including the new clause, was posted on its customer support website, and a notice was posted on the main website that the agreement had been amended. Kristin has con- tinued using the service since this time. How- ever, she now wants to join a class action suit that is alleging a number of breac.hes of the agreement.52 Will the clause in the amended user's agreement prevent her from bringing such an action? Did she receive adequate notice of the amended term? Does the fact that the user agreement relates to lnternet services make a difference in whether the notice was adequate? How is this situation similar to the Rudder v Microso~ Corp. case discussed in this chapter?

4. Jason and Floe booked a two-week vacation in the Caribbean with The Nation's Vacations [nc. (Nation), having reviewed Nation's brochure regarding destinations there. The brochure also

51 ~sed u\ oor1,, on: Dyntllr'llC 11t1tt.t,p011 Ltd vol< DoM;iJnq ud 11978: 2 SCR 1072, 1978 CanLll 215 lSCCJ

52 B<'lsed,inpart.ol'lKt1n1tzvl?o9crsCc)bl~Jnc su(Ni> notc'42

187 NEL

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contained an exclusion of liability clause, which stated:

Please review with care the tenns and con- ditions below as they govern your purchase of travel services from Nation. Your booking with Nation constitutes acceptance of these Terms & Conditions.

LIABILITY

Liability for suppliers: Nation makes arrange- ments with third-party suppliers who provide travel services such as flights , accom- modation, and car rentals. Nation endeav- ours to choose the most reputable suppliers but is not responsible for their acts and omissions. Disappointed customers must sue those third party suppliers directly for any loss or damages.

Nat ion assumes no responsibility for any claim. loss, damage, cost, or expense arising out of personal injury, accident or death, loss, damage, inconvenience, loss of enjoy- ment, or upset caused by Nation's third party s uppliers.

The brochure itself was designed to open to the page quoted above when flipping through the brochure from back to front. It was in easy-to- read font and with the emphasis inclicated above. Though Jason and Flo~ had spent about 90 minutes reading over the brochure before booking their vacation package, they say that they clid not know about the exclusion clause . Moreover, Jason, a construc tion firm manager, says that he does not even know what an exclusion clause is, so reading it would have been pointless in any event.

When Jason and Floe arrived at the Caribbean resort, they were immediately clisappointed. Though the resort was a four- s tar resort as advertised by Nation, Jason and Flo~ say that when they went to eat dinner in the resort's buffet restaurant, they found the conditions to be unhygienic because, among other matters, several small, tropical

188

birds were walking around on the floor of the restaurant, having gained access through open doors. At a later point, a cat strolled into the restaurant and, they say, defecated in the comer- though the resort disputes this. Jason and Floe also claim that the bathroom in their suite was unhygienic and the staff were uniformly unfriendly, even hostile. Jason and Floe hot.ly refused management's offer of a free room upgrade and d emanded to be flown home immediately. The resort made those arrangements. Jason and Floe left the next day. Jason and Floe have now sued Nation for breach of contract, seeking, among other matters, reimbursement for their flights to and from the resort as well as ground transportation and accommodation costs.53 Nation says it delivered the requested travel services contracted for and in any event has successfully limited its liability through the exclusion clause. What do you think a judge will say?

5. The British performer DJ Duke Dumont walked offstage at an Edmonton venue called Union Hall and refused to continue his show after at least on e member of the audience starting spit- ting at him and throwing drinks. Do you think that Dumont's refusal to complete his perfor- mance is a breach of contract with the concert promoters? Or do you think that there is at least an implied term permitting him to cut his performance short in such circumstances? Explain.

Soun:e: Go1dof\ K~nL '81.l ·\hOJ Duke Oumonl Abruplry (nd{ld Cdmon· tOr\ShOwAlt~1 C1aw<:1 Spol on l um· tdmontonJournaJ(21 ~pl(!mtx-1 2016), ontin'2 <htto//edrnontonJOl.1rn1lt.Com/cntert.ainmcnl/music/ br 1tis l'l'"d;...., bl\J plty·~ Od<ld ·CO mont on· sholN ..:ii tcr <: 10\'KI• spat~O"· h ·m>.

6. The decision of Wiebe v Bobsien, discussed earlier in this chapter, went on to appeal and at that level, the dissenting jud ge would have found for the vendor. According to the dissent, the conditional agreement was unenforceable because its scope was too uncertain. The clissent stated:

I think this case falls in that category of incurable uncertainly. What term should be implied? A term requiring the purchaser to

53 baseo. ·r\ oort. Or) C!tilfb v T01Jtt1m Ltd Pdtttwtsh.p, 2010 ONSC 834

make all reasonable efforts to sell his house sounds alright ... [b ut] it leaves unresolved the question of whether he must sell at the

price he can g e t, on the market, in the time allotted, or whether he is entitled to insist that the sale can only take place at a price he considers reasonable and is willing to accept.

I think that what the parties usually intend by this type of clause is the second alterna- tive. That is, that the purchaser is only com- mitted to sell his own house if he gets the price he has in mind. The reason is that in

the residential housing market the purchaser is likely to be unfamiliar with the market, but he is almost sure to know how much cash he has and what size of mortgage he can count

on being able to service.

. .. The way to deal with this problem in the real estate market is for the form of subject clause to state the price and the essential terms upon which the purchaser must sell his own house.

Then a court would have no trouble in implying a term that the purchaser must make aU rea- sonable efforts to sell at that price and on those terms. And the court could assess whether the purchaser had made reasonable ef!Orts to do so.

Do you think that the dissent is asking for too much precision and detail in a subject to clause? Why or why not?

7. Lucy Smith became interested in enrolling as a member in Trident Ltd's online discount service for goods and services in exchange for a monthly membership fee. She decided

to join up and linked to the enrollment page. The message on the enrollment page prom ised "up to" $20 off on select purd1ases including "10% to 40% savings at over 10 000 Partici- pating Restaurants." 1he form required Lucy to enter her city of birth, credit card number, and contact information, as well as to create a password. Text on the enrollment page also stated that by entering one's "City of Birth" and password and dicking the "YES" button, the purchaser acknowledges that he or she agrees to Trident's "Terms & Conditions." Lucy fille d in the form completely and then clicked on the "YES" button. Within a few minutes, Lucy received an email from Trident outlining additional terms and conditions of her agree- ment with Trident, including a provision which prohibited Lucy from joining any class actions against Trident. Is Lucy bound by this new clause? When was her contract with Trident Ltd co mp le te ? 34

8. Trackers is three days late in delivering the tracking to Coasters. Amritha now wants to rely on the clause in the contract that Trackers will pay $5000 for each day that the tracking is late, and she is claiming that Trackers owes Coasters $1 5000. However, Trackers points out that Amritha has not been inconvenienced by the late delivery, because construction on the roller coaster had already been delayed by two weeks. It has been a week and a half s ince Trackers was able to deliver the tracking, and Coasters has still been unable to use it. Is Amritha entitled to rely on the clause and collect the $1 5000? Do you need any additional information to make your decision?

54 B.lSE?ll in Dart.. on Sehnabel v Trlleghnl COip., 2012 WL 3871366 12d Cir. 'l September, 2012).

189 NEL

BUSINESS LAW IN PRACTICE

Martha Smith bought a fitness dub in downtown Toronto and renamed it "Martha's Gym." She invested $50000 of her own money and financed the remainder through a business loan from the local bank. Martha tried to attract a large clientele to the facility, but the volume of business fai led to meet her expectations. She began to run short of cash and fell behind in her monthly loan payments to the bank. Eventually, the bank called the loan, which had an outstanding balance of $20000. The bank told Martha that unless she paid off the entire balance in two weeks, it would start seizing assets from the fi tness club.

Martha convinced her elderly parents, Mr. and Mrs. Smi th, to help her by borrowing $40 000 from the same bank. She explained that through such a cash infusion, she would be able to retire her own loan with the bank and use the balance as operating capital for her business. Martha assured her parents that the problems at the fitness club were temporary and that by hi ring a new trainer, she would be able to quickly turn the business around.

Martha and her parents went to meet Kevin Jones, the branch manager, who had handled Mr. and Mrs. Sm ith's banking for over 35 years. Kevin said that he would give the Smiths an acceptable interest rate on the loan- namely, 8%- but insisted that the loan be secured by a mortgage on their home. Since the Smiths had no other means of paying back the loan and the house was their only asset, they were nervous about the proposal, which they did not fully understand . However, they did not want Martha to go through the humiliation of having her fi tness eq uipment seized and sold at auction.

For his part, Kevin was tremendously relieved that the Smiths had come in to see !Um. Kevin was the one who had approved Martha's ill-fated business loan in the fi rst place, and he had failed to ensure that it was properly secured. He saw this as an opportunity to correct his own error and get Martha's loan off hi s books altogether.

Kevin had the mortgage documents prepared and strongly encour- aged the Smiths to sign, saying that this would protect Martha's assets from seizure. He also told them that to a large extent, signing the mortgage was just a formality and that he was confid ent that nothing would come of it.

In the end, the Smi ths decided to put tl1eir trust in Kevin that he would not let them enter into a contract that could bring about their

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OBJECTIVES After studying this chapter. you should have an under- standing of

• w hy enforcem ent of contracts is the norm

• the exceptional circumstances in w hich contracts are not enforced

• w hich contracts must be in wri ting and w hy

fi nancial n rin. They simply s igned the mortgage. Immediately, $2 0000 went to the bank to pay the outstanding balance on Martha's loan. The remain ing $ 20 000 was paid directly to Martha (see Figure 8 .1 above).

Martha's business continued to operate until the additional capital was completely expended. Its prospects failed to improve, as Martha was still unable to attract cus- tomers and the new trainer qu it . Eventually, neither Martha nor her parents could make the payments on the mortgage, and the bank began to foreclose on the Smiths' home. Mr. and Mrs. Smith are in shock- they never believed that it would come to this. 1

FIGURE 8.1 Martha's and Her Parents' Financial Arrangements With the Bank

Martha owes $20 000 to the bank

Bank lends $40 000 to the Smiths. secured by a mortgage

Smiths pay $20 000 Smiths pay $20 000 to Martha to the bank

Through the loan to Martha"s parents. Martha"s loan to the bank is fully paid off. The bank is still owed $40 000. but il has a more reliable debtor now. namely the Smiths. As well. this new loan is secured since if the mortgage payments are not made. the bank can foreclose on-that is, sell-the Smiths' house.

1. ma Kevin marripulate or pressure the Smiths into s igning the mortgage? If so, what legal remedies do the Smiths have?

2 . Did Mr. and Mrs. Smith enter into the contract on the basis of mistake or m isrepresentation? If so, what legal remedies do they have?

3. How could Kevin have managed this transaction better?

The Importance of Enforcing Contracts Once negotiators reach an agreement that appears to contain their consensus on the essential elements o f a bargain, a contract is formed . The law then focuses on enforcing t11at agreement in order to preserve the integrity, reliability, and predictability of contractual relationships. Were it otherwise, the business world would be unable to predict with any certainty which a greements would be bin ding.

Atthe same time, the Canadian legalsystem recognizes the injustice of enforcing contracts without any provision for exceptional circumstances. Accordingly, the law end eavours to adlleve a balance between two competing goals. On the one hand , it must prevent people from pulling out of deals because they have found better opportunities elsewhere or have fai led to conduct diligent negotiations. On the other hand, it must remedy s ituations where an apparently valid contract fails to reflect the real agreement o f both parties or is fundamentally unjust.

l Tt'tis Sr.JSi~ss Lavi in P1ac1 IC<l se<:r\a10 1s oased on M0111son v Coost Fmi'lnC.e Ltd U965J 55 V<NI~ 251, 1965 Conlll 493 IBCCA) on<l Lloyds Bank vBundy.1197413 All rR 757 ICA).

191 NEL

This chapter presents a number oflegal doctrines- d eveloped through common law and statute- that are exceptions to the general r ule that a contract , once formed, is enforceable. It categorizes these d octrines on the basis of there being

an une qual relationship between the two parties.

• mis representation or important mistakes conce rning the contract. • a defect wjthin the contract itself.

If the aggrieved party can bring itself wjthin one of the doctrines discussed in this chapter, the.re are two possible outcomes. In certain circumstances, he may elect whether to keep the contract in force or have it brought to an end. Where this option is available, it is said to be a voidable contract. For example, when someone signs a contra ct under d uress, it is that person's choice whether to abide by the contract or seek to have it set aside by a jud ge. In other, more lim ited instances, the legal problem is so serious that the aggrieved party has no choice in the matter: a court must d eclare the contract to be null and void. In other word s, because of some tremend ously substantial d efect- such as the illegality that und erlies the "hi t man" contract- the contract is confild ered never to have existed at all and, for that reason, to be o f no fo rce or effect. This is known as a void contract.

Contracts Based on Unequal Relationships Legal Capacity In general, the law assumes that in dividuals and properly constituted organiza- tions have the legal capacity to fo rm contracts. Contract law also emphasizes the importance of consent and voluntariness. Because they may be unable to give true consent to their agreements, certain k ind s o f people- namely, child ren and those with mental incapacities- are given the benefit of special legal protection.

Minors The age of majority is the age at whi ch a person is recognized as an ad ult for legal purposes. Those under the age of majority (minors or in fants) are in a ver y different position concerning their ability to enter contracts than are those who have attained the age of majority. To protect m inors from the enforcement o f con tracts that may not be in their best interests, the general rule is that minors are not obligated by the contracts they make.

However, filnce the goal of the law in this area is to protect the underaged, m inors have the option to fulfi ll their contractual commitments and can enforce a contract against the other party should that party be in breach. In this way, con tracts wjth a minor are usually voidable, at the option of the minor alone.2

The age of majority- which de fines who is not a mi nor- is wjthin provincial control and is set at 1 8or 1 9 years of age, d epending on the province.' It is the age at which a person becomes an adult for legal purposes. For example, Ontario's Age of Majority a nd Accountability Act' sets the age o f majority at 18.

Because minors may have to provide for their own welfare in certain circumstances, there are exceptions to the general common law rule of immunity from liability.

2 ll IS beyond 1he scope o r LhlS cMp1(!1 to discuss w~the1 1he1e is a ca1eqory ol void miners conL1.x:1s. ror disc:ussiOn see GHL rridma!\. The Law Of CoritliJa 1n C/ln/Xia, 61h ec tToronto ThOrnsor\ Ca1s,,..etl 20ll) at 150 and fd1ov.·i~.

3 Jbld a1140 4 RSO 1990, c A7

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Voidable contract

A con;rac ha 1n certain circu mstances. an a ggneved party can choose to keep 1n force or bnng to an end

Void contract

A contract 1nvolv1ng a defect so su bstantial ~hat i~ is of no force or effect.

Legal capacity The ab1h ty to make bindin g <:on:racts

Age of majority

The ag e at which a person becon-.es an ad ult for legal purposes

BUSINESS

Minors are obligated by contracts for essentials, known in law as "necessaries", and are required to pay a reasonable price for them. What amounts to a necessary in a given case is legally determined in relation to two questions:

1. Is the item being acquired necessary to this m inor?5

2 . Does this m inor already have an ad equate supply of the item?•

OF THE LAW

DEALING WITH MINORS In the employment context, in order fo r the employment contract to be enforceable against the minor, the employer must be able to prove that the minor is receiving a significant benefit. Other wise, the minor can simply aband on the contract, a t the minor's sole option.

Although there may be sound business reasons for entering into a contract with a mino r, there is considerably more risk of non·performance and u nenforceability than when contracting with an adult. If the contract is for any signific ant value, a contractor should consider ei ther contracting with the parent or guardian instead of the m inor, or requir ing an adult to cosign or guarantee the performance of the minor.

Critical An11lym: What a re the justifi cations for treating infants differently in the contractual a rena than adults?

While food, shelter, and clothing are the most common categories of neces· sari es, the two-step test must still be satisfied in ord er for the supplier to be able to enforce the specific contract. Suppliers should also be aware that even when the contract is one for necessaries, problems o f enforcement can arise. Suppliers may be faced w ith the presumption that a minor who lives with a parent or guardian is already adequately provided for and has no outstanding needs.7

Contracts known as benefici al contracts o f service are also binding if they are considered largely for the benefit o f the m inor. For example, an employment contract with a m inor is enforceable if the employer can show that the contract involves a signifi cant element of training and career d evelopment, such as one would expect in a program required to enter or progress through a t rad e or pro- fession. Enforceability in this context means that the employer can be awarded d amages for breach o f contract.

The common law generally provid es that when a minor reaches the age o f majority, there is no impact on contracts formed when underage. They remain unenforceable against the minor unless they involve necessaries or benefici al ser- vice contracts. Only if the person- now of legal age- expressly adopts o r ratifies the agreement d oes it become enforceable. An important exception to this r ule is where the agreement is of a permanent o r continuous nature, such as a

5 Coo1ls ar<? enl!lted to cons;da 11¥! infanl s socoecooomc stattJs 1!l det~1rn1n1ng toe ansv.-a1 to lfl:s (!llestbn: Sea fo1 ex.amP'e. Oner.bra>' v Dan1e1S, !1975] SJ No 98 !OiSl CO.

6 f 11dmal\ supra note 2 at 143. Thiscom!'r'K'>n\<w110\e has tieencOdilieo 1n ~eof goodsk?gtS\ait.on 1n Can.ada. ro1 E'.!X()m::i&:!. section 4 of the A~oeria ·s Sale Of U:Jods Ac:, RSA 2000, c S·2 stat~s, 41.2) 'If/hen oocessanes aie soki a:\O detwered to a mnor or to a person v100 by re<:ison o( rne'lt.at i!)Capt)City 01 orunkenoess 1S; 1ncom~ten11ocon11act.. the m11Y.>r 01 oerson must pay a 10MoM~ or;e~ tor ll~m

{3) In tn:s sec1cn.. ·niec:essarie$· ~;,!\$ ~Ods suitab4e to the conditiOn i:\ He of the m inor 01 oti'\er person aoo lO the m 1nors or persorfSaCt!Jal reouiremen1sat tile 11meol 1~ salea!'Y.I datNCry.

7 s~e O~d Percy, ihe Present law ol lnJ;,nts" ContrOCLS" l(dl'l'lO!UOn 11\sl•ltJ IG ol law Reseaich and Re!.:>11'1"1, 1975) at 5

193 NEL

partnership agreement. In such a case, the minor, upon attain ing the age o f majority, must reject (repudiate) this obligation, even if it is for non-necessaries. If he fails to do so, liability will be imposed from the time the minor becomes of age.8

In all Canadian jurisdictions except British Columbia, the common law governs the contractual capacity of minors.' In British Columbia, a different set of rules applies, as set out in the Infan ts Act. '° This legislation provid es even more protec- tion for the in fant dlan is present at common law, since generally, even contracts for necessities and beneficial contracts of service are unenforceable at the election o f the minor pursuant to this Act. 11 However, a court has a number of powers und er the legislation and can orde r, for example, that compensation be paid by or to any of the parties to the contract.

Mental Incapacity In order for a contract to be formed freely and voluntarily by both parties, both must be able to understand the nature and consequences of their agreement. If people were mentally impaired through illness or intoxication by akohol or d rugs, such that they were unable to und erstand the consequences of their actions, and the other party was aware of their state, they may be able to avoid the contract 12 at their option. To the extent that the other party has u nfairly exploited the party who is lacking capacity, there are additional ground s for attacking the contract's validity- namely, d uress, undue influence, and unconscionability. All three are considered below.

The fac t that Martha's parents are elderly does not, of itself, mean that they lack mental capacity to enter into financial transactions. Rather, before Martha's parents can avoid paying the mortgage on this ground , a court will have to be satisfied that their advanced age has affected their sanity or mental competence- an unlikely outcome on the facts o f this scenario. They may be old and overly trusting, but not legally incompetent.

Duress Contracts that are made as a result of one of the pa rties being threatened with physical harm are obviously not enforcea ble. The p resence o f this extreme form o f du ress indicates that the threatened party did not freely consent to the terms o f the contract and, in fac t , was the victim of a crime. Duress is now a broad er concept and in dudes economic duress.

In the more difficult cases- those more likely to arise in commercial d ealings- econom ic duress takes the form of one party fi nancially pressuring the other. For example, a company might threaten to break a contract that it knows is crucial to the other side w"lless the other side gives certain financial concessions or payments

B Stephanie BerrlShai b O.wid Percy, Contracts. Cb.ses arid Mare11t1.1s. 9th 00 fT010:\ to· Car$Y.<el, 2014) at 742 9 r11dman,suprJ 001e 2at140-141 and fot law1ng

JO Soo Part 3of1~ Jnf~us Act, RSSC 1996,c 223 11 See the Jnf;,nis A.ct, 1b.'d, v1hleh s~tes

s 19!ll Sob;«t to lhis Part, a contract maae by a personv1h0wasaninfa11a11he time l hecon11acl \¥as mace IS una'lforceabte ag,li!'t$1 him 01 her untess •l IS !al a con.tr a:: I sp..."'Crf!ed \Jnder aoo1t'K'!1 enactment to be enlo1CE!aO!E! a9ains1an1nlanl {b) aU;1m~ ey lhe infanlon his or 0011ea::hing the age of ma)only, (c) performed or oaiaatty perfor!'r'ed by the infant within one year aft'2r ~is or her att.);n;ng the age ot !'ncl)Or ly, 01 {d} OOl repud0t(?<1bythe1nlan1 v11th1no~ year alter his or ner 1ea.::h1!\g the ~eol maj011ty.

12J A contr<Y-l lMl is onenlo1ceactt! ag<HlSl an 1nlan1 under suosectiOn U) IS enro1ceatiia tty an inlani aga1nst an adult pa1ly 10 t hecon11acl 10 lhe Sl)rne extent as I lhe infarit v..ar<.'!a..,aoutt at t!"'..e t ime the conua::t \.,•as tn!)6e

12 Frbman.. su{Na note 2 at 159. and £dv11n Pee, TieJtel The l.)w of Cont1act, 14th ed {LoOOon: SWE?et b Maxwal 2015) at 668. See too Bank of Nov• ScO!;a v Kelly. U973) 5 Nftd & PCIR l 1973 C.nlll 1289 IPC SCTD)

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Economic duress ,.he threa~ o~ economic harm that coerces the will of the other party and rPsults 111 a contract

Undue Influence

Unfair man1pula'1on that compromises someone's free will or choice

in return."' Under the traditional test, these concessions will be unenforceable if it is shown that the coercion went beyond ordinary commercial pressure to a force or a coercion o f will tl1at prevented ilie other side from giving true consent to ilie proposal. '4 Courts have more recently suggested that a party's lack of a "practical"15

or "realistic"" alternative can count as evid ence o f economic duress in the proper case.

When d uress is established, the co n tract is voidable at ilie option of the party who was subject to the duress.

There is no possibility iliat Martha's parents can rely on ilie do ctrine of duress to avoid their obligations und er the mortgage. Though ilie bank was going to seize Ma rilia's fi tness club equipment and o ffer it fo r public sale, fuis "threat" did not amount to d uress. Cer tainly, her parents may have been very upset and wor ried by ilie situation, but this would not force iliem to borrow $40000 from ilie bank. Furthermore, ilie bank is fully witllln its legal rights to seize property when a loan has fallen into arrears.

Undue Influence Since the basic premise of contract formation is iliat boili parties have chosen to enter into the contract, surrounding circumstances that put in question the ability of one of the parties to exercise free will or choice l7 are o f great concern. If iliese factors are sufficiently strong, ilien the contract is voidable at the option o f ilie party whose free will was lost because of ilie undue influence of the oilier con- tracting party.

Undue influence traditionally operates in two circumstances:

actual pressure. Sometimes a transaction- commercial or oilierwise- arises because one party has exerted unfair influence on ilie oilier. In such a case, the party who seeks relief from the contract must show that the influence existed, was exercised, and resulted in ilie agreement in q uestion.'" If an elderly person is pressured into signing over an estate to caregivers in return for care, such a transaction could be set aside for und ue influence.

presumed pressure based on a special relationship. Sometimes the relationship tl1at already exists between tl1e parties gives rise to a presumption that tl1e ensuing agreement was brought about by one party's unfair man ipulation of ilie oilier. For example, when ilie contract is formed between family member s or between a lawyer and client or a do ctor and patient, for example, the court is entitled to assume that undue influence has been exerted. Oilier kinds o f relationships- as between a banker and a customer, for example- d o not import iliis presumption. When ilie presumption is in place, however, it then falls to ilie more powerfu l party to p rove that no undue influence was presen t. l9

There is a chance that the eld erly Mr. an d Mrs. Smiili would succeed in having ilie $40 000 mortgage set aside as having been procured by und ue influence,

13 Th:Swas lletd toamouru 1oau1~ss in.North<)ce.!Nl Sh;pp.V1gC0LtdvHyutlda1 Construcuon Co Lrd, U978J3 Al £R 1170 KlB).

14 The l fi>:'h l()l\all case II\ toe ~rea IS P:JO On v Lau YIU Lotlg, !19791 3 Al en 6S lPCJ. 15 NAV Cani'Jd/1 v Cret1tet fredenc:on /JJtP.,"Jll Authont}1 Jnc, 2008 NSCA 2S. 22:> NBR 2~ NBn l2d) 238. 16 S!oU v Me111 Artvesrrr>ent Cap U988J, 630~ {2d) 545, 1988Canlll 1Y2 (ON C .li,) 17 Ben- ISM & Percy supn> ~te Sat 700 .. 701. 18 Pe£i, supt;) r.ote 12 a t 506 19 ro1 recent a 1scosson ol ondoe 1nft!;encE!, see &lcct.•11 v Pllbtteti, 2012 ONSC 6624 a1 para ! 39 a!'Y.l lc:Oov1 1ng,

afrd 20l4 ONCA 432, 120141 OJ 2561

NEL 195

either actual or presumed. The Smiths could argue that they entered into the mortgage w ith the bank only because the bank manager insistently preyed on their overwhelming need to help tl1eir daughter. If so, they could then win on the grounds of actual pressure. An argument could also be advanced on the grounds of presumed pressure. Though courts will not orrunarily presume that a bank has undue influence over its customers, the Smiths may succeed by proving that they placed themselves entirely in the hands of their long-stanrung bank manager and had received no qualified outside gllidance.1° It would then fall to the bank to show that the mortgage was freely and independently entered into by the Smiths! '

One way of proving that the contract was freely chosen is to arrange for the weaker party- such as the Smiths- to get independent legal advice concerning the transaction before it is entered into. The lawyer providing that advice will also produce what is called a "certificate of independent legal advice", which is then appended to the mortgage or other document in question. In the certifica te, the lawyer attests to a number of matters, indurung that:

he or she has explained the proposed transaction to the weaker party.

the weaker party appears to understand the proposed transaction.

the weaker party is proceeding with the transaction on a free and informed basis.

Bank of Montreal v Duguid (2000), 47 OR (3d) 737 (CA), (2000] OJ No 1356 (QL), leave to appeal to sec granted, (2000) scce 2238; notice of discontinuance filed (2001) SCCB 1416

THE BUSINESS CONTEXT: When a bank lends money to a customer, it wants to ensure that, in the event of default, the customer has provided sufficient collateral to cover any shortfall. If the customer does not have satisfactory collateral, the bank may refuse to make the loan unless a third party ei ther cosigns or guarantees the loan. This s ituation can pose serious risks for the third party, given its responsibility that loan payments must be made.

FACTUAL BACKGROUND: In 1 989 Mr. Duguid and a business partner applied to the Bank of Montreal for a loan to financ e their investment in a condominium project. The bank said that it would make the loan only if Mrs. Duguid would cosign it.

Mr. Dugllidapproachedhiswife, areal estate agent, who did sign the loan. Contrary to the bank's usual policy in such matters, its repre- sentative fai led to recommend to Mrs. Duguid tl1at she secure independent legal advice prior to signing. In short order, the loan went into default, Mr. Duguid declared bankruptcy, and the bank sued Mrs. Duguid for the amount outstanding on the loan, namely $87 000 plus interest.

THE LEGAL QUESTION: Did Mrs. Dugllid cosign the loan as a result of her husband's undue influence?

RESOLUTION: Though the bank itself did not exert undue influence, any undue influence exerted by the husband would release the wife from her obligation under the loan if the bank knew or should have known about the undue influence and did nothing about i t . Because Mr. Duguid was in a close, personal relation- shipwith the other debtor- namely, hiswife- the bank had a duty to make inquiries since the loan was clearly to the wife's disadvantage. If

20 Tnis argument rS based o n Lloyds Sank Ud v Bundy. Y.JPfil 001e 1 21 Peel suprt1note 12 a l 516 aoo folow1ng as v..el as BuccNJi tO NS(J, SLJpttl note 19 a1 para 141.

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there was any und ue influence, this fai lure by the bank would lead to the wHe's loan being set aside.

A majority of the Ontario Court of Appeal said, however, that there was no und ue influ- ence. Only if the wife could demonstrate that she reposed "trust and confid ence" in her husband concer ning fin ancial matters would there be a presumption of und ue influence. As a real estate agent, she knew the r isks of her husband's investment, and there was no potential for d omination. On this basis, undue influence could not be presumed. Even if it could be presumed, the bank had rebutted that presumption, given Mrs. Duguid's knowledge- able background. On this basis, the loan was enforceable against her.

The dissenting ju dge would have set the loan as id e based on und ue influence. The dissent said that while Mrs. Duguid did not repose trust and confidence in her husband in the classic sense, she did fear "destroying the relationship between her self and her

Unconscionability

husband " should she refuse to cosign. Her background as a real estate agent was simply irrelevant to this more emotional q uestion. Given that Mrs. Duguid agreed to the loan d uring a low ebb in her marriage and that she signed in order to maintain "some level of tranquility" in tl1e household, a presump- tion o f und ue influence had been established . This presumption was not rebutted by the bank sin ce it knew that the t ransact ion was to the w ife's disadvantage and tlrnt there was a substantial r isk tha t her husban d would pressure her to sign. Sin ce the bank faile d to ad vise her to get in dependent legal ad vice, Mrs. Duguid's loan should be set aside d ue to und ue influence.

CRITICAL ANALYSIS: Do you think that the dissent was correct to assess Mrs. Duguid's emotional r easons for cosigning the loan? Or d o you prefer the majority's focus on Mrs. Duguid's relatively sophi sticated background as a real estate agent?

Unconscionable contract

Where one party stands in a position of being able to take advantage of someone and causes that person to enter into an unfair or improvident agreement, an unconscionable contract is the result. According to the Supreme Court of Canada, proof of unconscionability involves a two-step process:

An un air contract forrned when one party takes advantage of 'he weakness of a nether

proof of inequality in the positions of the parties.

• proof of an improvident bargain or proof of exploitation.21

If the transaction is sufficiently divergent from community stand ards of com- mercial morality, this is a "strong indication of exploitation."23 At this point, the

22 N:'J1be1g v ~nnb, !199212 $C:R 226 al 22B, 1992 C"..anUI 65 tSCC)!Ncvt.'<?tgl. Tt'lOugl\ lhl$ case involved OOl)oOOmmereiclt l.Y.:l.S. cou1LS Mve conscert'!d N0tt;.g-g's analysis ol un....~~ci0f\c'lbl1ty ,n a comme1cat <"I.bet ramifd context$~, tor eYAm;')4e, Bucc»JI, Sf..(Xtt oot~ 21 at para 153 and Waxf'l'.W? v V/.)xman (20021 25 SU~ (3d) l IOnt Sup Ct -kl~. 2ll02 ConLll 49644 [ON SCJ. vaned as to dam<19'5 l2004J. 44 BLR l3dJ 165 tON ('.A) 2004 Canlll 39040, ~ave 10 apoeal 1erti~d. f2004J SCCA No 2911teieonside1ati0n ctk)\•..ed {20041 6 BL~ !4th) 167 (CA).Asv~l.Just:ce Abe~ in ne1COOCt1111ngdecisiOninOouezvft1cebOok,k'tc,2017 $CC 33, f201 7J SCJ No 33 at Po'ra U S. !)0$1ted a 1es1 consistent v111n thiS one btJL v1 thoot c111ng NorOOrg soec1r.ca-... y NOi<! too 1hat cefl<')·n ap~late cou1LS Mve 1eg~roed urK:onscioMbk!tyas in\1dvlog a tou1--sl<:o 1es1-see Ci)/() v 0<1r1Ct1 Lile Insurance Co. 2005 ABCA 437, 263 DLR (4th) 368:, aM nrus v VINJ.9...., f Cod<e Cn:e1pti!eS, 2007 ONCA 5?3 at re•a 3a 284 D LR !4thJ 734~s lctbv1S 1. () 91osst,t unf() 1and1mo1ovident transaction; 2. victims \ack of independent 4ega4: advlc:(! 01 other SUita~ advice, l ove1w~miog ,mt;al.1nce ;n l);)r9a1niog po.>.<e1 causec byvietim·s ignorance of business, il:Le1w::y, 1goo1~oce ol tne l()')3uage of toe 1>a19aio, b(ind"X'?SS, det)fness. lniess. s(!n1trty, or s1rnAar <l1Sc'>01tity. an.o 4 . other Po'rtys k.nOW109ty tak;ng advani.age or this vutne1abUy Tt\1s 1es1 has t>eencr1t1Ci?ed :nDownerv Pitcher 2011 NU:A13 at pa1as9-10, as too strietaoo is not (ol:)v.~ in Newtound'.and This test has OO!\et004ess ooen recentty co'lfrrmd t>y 100 Onta1i0 Court of Aooaat in Phoenix Jntf'f/lel!Ve Des:gn Jttc v AJ:e11mcsi JI fund LP. 20180Nl.A 98 at re•;is 38-40.

23 t>kube1g, supr;, note 22

NEL 197

court will presume unconscionability. It then falls to the stronger party to show that the contract was, in fact, fair.

Inequality in the Positions of the Parties The required inequality may result because one party is unsophisticated, is poorly educated, lacks language facility, or has lower economic standing than the stronger party. Parties to a contract are generally never on strictly equal bargaining terms; therefore, disparity between them is, on its own, insufficient to upset a contract.

Since the Smiths are inexperienced and unsophisticated senior citizens who received no independent legal advice prior to signing the mortgage, this element could arguably be established, particularly if a court were sympathetic to their plight.

An Improvident Bargain The party seeking to have the contract set asjde must also be able to demonstrate that its terms greatly advantaged one party over the other. In short, tllere must be proof of substantial unfairness.

In the case of the Smiths' mortgage to the bank, the rate of interest was set at 8% and, from that perspective, was reasonable. However, there is a strong argument that the transaction was nonetheless a very unfair bargain for them. Through the mortgage, the Smiths put at risk their only substantial asset, for a loan they could never repay from their own resources. In fact, while the bank and Martha stood to gain enormously from the transaction, the Smiths stood to lose some of their assets for absolutely no return.

People seeking to avoid a contract owing to mental incapacity, duress, undue influence, or unconscionability must do so as promptly as possjble or risk losing their case.

Why shm1/d controcts that appear normal on the surface be subject IJJ dtallenge on the basis of the relations between the parties or the surrotmding circumstances?

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Downer v Pitcher 2017 N LCA 13

THE BUSINESS CONTEXT: As discussed earlier in the text, parties in a lawsuit may decide to settle their disagreement out of court in o rder to avoid the uncertafoty and expense o f litigation as well as insurance premium increases, as the case may be. If the parties enter into a contract to settle, the contract is enforceable according to the ordinary principles of contract law, including that of unconscionability.

FACTUAL BACKGROUND: Roger Downer rear-end ed a taxicab which was owned and operated by Elizabeth Pitcher. Rather than taking the matter to court, Downer agreed to p a y for the cost to repair Pit cher's cab as well as $300 to compensate her fo r loss o f income while the cab was under repai r. In return, Pit cher signed a d ocument titled "Full and Final Release" which had been prepared by Downer's acquaintance- who also was a lawyer. P it cher had no legal ad vice prior to signing the release. This document purported to release Downer fo r all liability, including personal injury to Pit cher. Pi t cher, however, thought that the release only r elated to her claims fo r vehicle repair and lost in come. Although Pit cher felt fi ne at the t ime o f signing the release, she later showed symp- toms o f a soft tissue injury and sued Downer fo r d amages associated with this injury.

THli LliGAL QUliSTION: Is the release a full defence to Pitcher's claim, or should the release be set aside on the basis of unconscionability?

RliSOLUTION. The Newfoundland cour t o f appeal reversed the trial jud ge and enforced the release. Though Pitcher's bargain turned out to be "improvident or foolish" at para 64, it was still enforceable.

While the court offe red a detailed analysis of unconscionability and the test to apply, its key focus was on the two steps d escribed just above. In particular, the appellate court said that there was no proof o f inequality o f bar- gaining power, even though the trial judge had described Pit cher as "meek and unsophisti- cated ", at para 64. This is because Pitcher did not suffer a "special or signifi cant disad van- tage" such that she was incapable of looking out for her own interests, at para 64. She simply should have read the release before signing it and, ind eed, had experience in this area as part of a previous car accident, at para 64. As the court stated: "In these circumstances, the ordinary common law policies o f promoting san ct ity of contract and permitting self- interested bargaining are not displaced by any equity based on unconscionability" at para 68.

CRITICAL ANALYSIS: Should the court show more concern for those described as "meek and unsophisticated"? What are the costs of doing so?

Note that some provinces have enacted consumer protection legislation which includes unconscionability as a stand ard against which to assess tl1e fai rness of a consumer transaction.14

Misrepresentations and Important Mistakes Misrepresentation of Relevant Facts Parties involved in negotiating a contract are usually not obligated to volunteer information. The basic principle or r ule is that both parties are to look out for their own interests and if they want infor mation, they should ask for it.

24 SGe, 101 gx.arn~e. On1anO"s Conwrr1et ProteclKJn A.ct, 2002, SO 2002, c30. ror d!!l:tJSSOn OI CO!lStJ!'ml p1otecttoo \egislatiOn. 9 ane1aty'. see Chapter 23

199 NEL

Som etimes parties d o owe a d uty to disclose in formation without being prompted, however. Consider the follow scenarios:

one party provides only partial infi>rmation to the other side. This may amount to a rrusrepresentation, sin ce once information is offered, it must not be rrusleading or in complete.

one party actively conceals the truth. For example, if the vendor of a building takes steps to conceal a crack in the foundation, this must be disclosed or it will amount to a rrusrepresentation. one party neglects to correct an earlier assertion that, when stated, was correct but now no longer is so. If a physician selling his practice gives initial in formation regarding its value that later becomes inaccurate, the physician must go back and disclose this new fact to the prospective purchaser.

the parties are in a relationship requiring utmost good fa ith. Insurance law provides an example of this. The person applying for insurance coverage has a duty to disclose all in formation that would be relevant to the insurer who is assessing the r isk o f accepting the application. 25

a statute imposes a positive obligation todisdose information. For example, and as discussed in Chapter 16, legislation requires directors of a corporation to disclose their interest in certain k in ds of contracts involving the cor poration they serve.26

The difference between a statement mad e in the contract and one that is made prior to entering into the contract is crucial in this area of law.17 If tl1e statement is made in the contract, it is a prorruse or a term of the contract. If it proves to be untrue, a breach of contract h as occurred. However, if the statement is made prio r to entering into the contract but is not a term, it still can have legal consequences. A statement that meets the conditions set out below is known in law as an actionable misrepresentation.

Contract law allows the party who has relied on a rrusrepresentation to have the contract cancelled . This can cellation is called rescission and involves putting the parties back into their p re-contractual positions. Because rescission is an e qu itable remedy, the court requ ires the per son seeking such assistance to act promptly in bringing the complaint forward.

Where rescission is not possible, such as when one party has substantially a ltered the subject matter of the contract , the courts will endeavour to d o what is practically just so that the innocent party receives some redress, including mon- etary compensation.28

Ingredients of an Actionable Misrepresentation The law provid es that a negotiating party must answer in quiries a ccurately an d that a ny information volunteere d must be correct. Whether or not a statement is a m isrepresentation that allows the other party a remedy d epend s on its

25 Tile r1rst lou1 ex.lmp4es ,n t hiS ~rl of tne 1ex.1a1e baSed in case tawaoo are la<.<?n ffom.)o hn t-'ICCarnus. ~ Law Of Cartlr.1'cts, 2d ed tToionto l1w1n Law 2012) a l 34 200 343. Note 11\ut t he comnlOo ~duty to d i.rr-to.se into1rT\ll ion is a.so ri:!OO~led in tegisiaton gove1m~;i 11'\Sll1ance con11acts . $~ tor £x.lrnpte,. Jnsur/NleeAct, RSO 1990. c I 8, s 148.

26 See. forex..am~. diSctJSSiOn ol too ~U-de.at1og cont1acl in CMpter 16. 0 11ecto1s. must d i scbse 1he:r 1n1erE!st !n ce~in km.Os or co1para1e contr~cts

21 Consumer prolectof\ 5egistaLio n ,n, some Ju11SdiCtons, hOv..ever specifies 11\al pre-con1rac t\Jat 1ep1eSl!!nlal10l'5 are part of too cont1a::1 Too diSt:octiOn be1v..een pre-contra:l!.Jat represeni.auons aoo 1e1ms of tne CO'ltr.oct. w hi\e 1mpor1an1 in the comrn.2reial conl'="!Xl. :s 4ess 1mpo1tant v1~n a btJS1ness ded.-s \Yith a con.o;um~1

28 See fo< example, Kup<.hal< v Dayson Holdings Lid, 119651 S3 WWR 65 tSCOJ

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Misrepresentation

A al se statement of fact that causes someone to enter a contract

Rescission The remedy that resul ts 1n the parties being returned ro their pre contractual positions

nature and effect. To count as a m isrepresentation, it must be proven that the statement is

false.

clear and unambiguous.

material to the contract; that is, it must be significant to the decision of whether or not to enter into the contract.

one that actually induces the aggrieved party to enter into the contract.

concerned with a fact and not an opinion, unless the speaker claims to have special knowledge or expertise in relation to an opinion.

Categories of Actionable Misrepresentations The law further divides misrepresentations into three categories:

fraudulent misrepresentation. The speaker has a deliberate intent to mislead or makes the statement recklessly without knowing or believing that it is true.

negligent misrepresentation . The speaker makes the statement carelessly or negligently.

innocent misrepresentation. The speaker has not been fraudulent or negligent, but has misrepresented a fact. By process of elimination, tl1e misrepresentation is merely innocent.

When Kevin told the Smiths that signing the mortgage was a formality, this statement amounted to a misrepresentation, since a mortgage is in fact a legal instrument with far-readUng consequences, the most serious being that the bank could foreclose on the Smiths' house. If the Smiths can prove that they relied on that representation in deciding to sign the mortgage, they will probably succeed in establishing an actionable misrepresentation. Minimally, this statement was negligent, but, given tl1e likely state of Kevin's banking knowledge, the statement migl1t even be fraudulent.

When Kevin told the Smiths he was confident that nothing would come of their signing the mortgage, this was arguably an expression of opinion- not a statement of fact- and therefore not actionable. A court might find, however, that since Kevin is an expert in the area of mortgages and other banking matters, his statement was one of fact, and order a remedy on that basis. While a court would be unlikely to find this statement to be a fraudulent misrepresentation, given the sparse facts, it may well find it to be negligent.

Remedies for Misrepresentation Besides entitling courts to rescind or set aside a contract, certain kinds of misrepre- sentations are torts, which provide for a remedy in damages. If the misrepresentation is fraudulent or negligently made, dan1ages in tort can be awarded in addition to the remedy of rescission provided by contract law. Where the misrepresentation is neither fraudulent nor negligent, an action is still available to set the contract aside based on innocent misrepresentation (see Figure 8.2). Negligence and fraud (or deceit) are discussed further in Chapter 12.

Upon the Smiths demonstrating an innocent misrepresentation, the court can order that their contract with the bank be set aside. If the Smiths can go on to prove that the bank- through Kevin- is responsible for the tort of negligence or fraud, tl1ey are entitled to damages as well.

NEL 201

FIGURE 8.2 Remedies for Misrepresentation

Type of Misrepresentation

Fraudulent Negligent Innocent

Remedy Rescission i.n contract Damages in tort

Rescission in contract ..... Given the cost of litigation- and the fa ct that the innocent party may fail to

prove her case on the balance of probabilities that an actionable misrepresen- tation had been mad e- prevention is the best recommen dation. It is prudent to insist that important terms be an express part of a written contract , so as to achieve the goal of dari ty between the parties. It is generally easier to prove breach of a written term than to establish that an oral statement mad e during contractual negotiations amounts to a m isrepresentation in law. If the other party balks at recording an important representation as an express, written term, the customer would be best advised to d o business elsewhere.

Mistake The doctrine of legal mistake is one of the most difficult aspects o f contract law. In the course of its development by the courts, the law of mistake has become so complex and confu sing that it presents a major challenge even to seasoned lawyers and judges. In practice, legal mistake is rarely proven, but when it is, the court is entitled to set tl1e contract aside as a remedy.

The central point is tha t legal mistake is much narrower than the everyday idea of a mistake. A simple oversight or error by one negotiating party does not constitute a legal mistake and provid es no basis for avoiding a contract. As pre- viously noted, negotiators are expected to look after themselves and to exercise appropriate caution before making legal commitments. Compare tl1e following two examples.

Example 1: Kerry intends to make an offer to sell her car for $11 000 and in error sends a written o ffer to Sean for $1 0 000. Sean accepts her offer. Example 2: Kerry makes a written offer to sell her car fo r $1100 ratherthan $11 000, and Sean promptly accepts. There is no reason to believe that the car, worth approximately $11000, should be sold at a substantially lower price. Moreover, there is nothing in the relationship that would suggest that Kerry would give Sean a break in price.

In both cases, Kerry has mad e a m istake according to the common under- standing of that word. However, in all likelihood, only in Example 2 would this be interpreted at law as a mistake wor thy o f a remed y. The error Kerry has made in Example 1 is not one that would surprise or otherwise alert Sean. This could be exactly the price for which Kerry intends to sell her car. In contrast, in Example 2, Sean could not reasonably expect that the price would be so low, especially if Kerry and Sean have had earlier discussions about the possible price range. Kerry has made an error, and any reasonable person in Sean's position would realize that. In the latter example, there can be no true agreement for $1100. The law will not permit Sean to "snap up" Kerry's offer.

A legal mistake may also occur if both parties have mad e the same error (known as common mistake). If Kerry's car appears to be old and relatively worthless, and

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Mistake

An error made by one or both parties tha; seriously undermines a contract

Common mistake

Both parties to the agreement share the sa rrie fu nda men ta I mistake

Rectificat ion

A remedy available where parties have made a mistake 1n recording their agreemem and based on establishing the speci 1c terms actually agreed to

she and Sean negotiate on that basis for a relatively low price, their agreement is based on a common mistake if the car turns out to be a valuable antique. Only if the error is such that the car purchased is a totally different thing from what the parties thought it was will the contract be set aside on the basis of mistake. For example, if the difference is between low-grade transportation (what the parties thought the car was) and a classic car to be displayed and never driven (what the car actually is), a mistakeinlaw could possibly be established. To d1e extent that the error is simply a mistaken assumption about the quality of the car (i.e., in terms of value), however, no legal mistake has occurred, and the purchaser is entitled to retain what may appear to be a windfall. Needless to say, such distinctions can be sub de.

Courts will fix errors in contract in a certain number o f limited circumstances. For example, when parties have made a common mistake in recording thejr agree- ment, courts will correct the contract in specific circumstances through the remedy of rectification. According to the Supreme Court of Canada, the party seeking rectification must "identify the terms which were omitted or recorded incorrectly" and provide evid ence of the definite terms that the parties "had spe- cifically agreed to" at the time the contract was form ed.29 What the courts will not permit is an attempt by parties "to go back in time and re-engineer a concluded transaction."30

Under the Business Law in Practice scenario, Martha's parents may have s igned the mortgage under the rrustaken belief that Martha's business problems were temporary and reversible. This is not a legal mistake, however, and there is no pos- sibility that the mortgage would be set aside on the basis of this misapprehension.

The following case helps illustrate the very limited assistance offered by the law of mistake to the party labouring under an error- even a large one.

The Queen (Ont) v Ron Engineering, (1981) 1SCR1U, 1981 Canlll 17 (SCC)

FACTUAL BACKGROUND: Ron Eng ineering subm itted a tend er on a project for a price of $2 748000 along w ith a certified d eposit cheque for $150 000 as the tend ering rules required. The tendering rules- contained in the Information for Tend erers- stipulated that tend ers could be withdrawn up to the offici al closing time, after which they would be irrevocable. The rules also provid ed t11at the d eposit was fo r fe ited by the successful contractor if the successful contractor refused to proceed with the project.

THEB USINESS CONTEXT: As noted in Chapter 6, owners commonly secure competitive b ids to build large projects through a call for ten- d ers. In response, contractors (also known as tend e rers) subm it tend ers that set out a p rice for the work to be done. Though this is a fac t -specific matter, the tend ering rules can require the contractors to submit a tend er deposit that is forfeited by the con tractor who is chosen if he r efuses to undertake the job. It is therefore important that the tender price be accurately tabulated before the tend er is sub- mitted to the owner sin ce it can be difficult to withdraw after the fact, at least not without risking the d eposit.

Tend ers closed at 3:00 P.M. and, soon there- after, Ron Engineering realized t11at, due to a simple miscalculation, it had submi tted a bid that was $750000 less than it had intended to submit. Though this error was detected by Ron Engineering and explained to the owner w ithin 72 minutes of dosing, t11e owner insisted t11at

29 Ct1trf}dt1 (Altottle)' Genet ml v faumont 1-lotels Inc, 2016 SCC 56. 12016} 2 SCR 720 a1 ~,~ 32. 3() S:Oll nC>tNagell. ~J01E?m.2 Courl o l Canada Tak.~s ~esl11ClNe Apo10t>:h to RecllflCalOf\. La .. ij<;'ts Week.Y

117 Maren 201n.

203 NEL

Ron Engineering proceed with the project or forfe it its deposit.

THE LEGAL QUESTION: Does the law of mistake provide Ron Engineeringwith a route o f escape, or is the company obligated to either perform or forfeit its deposit? Is it too la te for Ron Engi- neering to withdraw its tender?

RESOLUTION: The Supreme Court o f Canad a ruled that tend erers in the position of Ron Engineering could not withdraw tend ers after the offici al dosing time. Upon submission of its tend er, Ron was in a p relim ina r y contract with the owner. Thls preliminar y contract (known as Contract A) required the owner to respect the rules on how to evaluate tenders and required tende rers not to withdraw their tend ers after the o ffici al closing t ime. Only the successful tend erer would enter into the larger contract to perfo rm the work in ques- tion (known as Contract B).

Ron Engineering unsuccessfu lly argued that the law of mistake prevented Contract A

from ever co ming into existence. According to the court, since Ron Engineering intend ed to submit the ver y tend er submitted, including the named p rice, there was no mistake in any legal sense. Further more, even though the tender was $750 000 less tl1an it should have been, thls error was not so large as to sug- gest to the other side that there had been a m iscalculation. Unless there was somethlng seriously a miss w ith the tend er- such as an entire page missing- Contract A would come into existence. Since no such circumstan ces existed here, Ron Engineering lost its d eposit. The court insisted that such strictness was essential to protecting the integrity of the ten- d ering process.

CRITICAL ANALYSIS: Is the law o f mistake too harsh? What would the consequences be if a party could escape its contractual obligations simply because it had mad e a mathematical er ror?

An argument that is often mad e, though seldom successfu lly, concerns signed d ocuments. The signer may misund erstand the type or nature of the do cument. Perhaps the signer thlnks he is signing a guarantee of a debt, but the documen t is actually a mortgage on his resid ence. Or the document is a transfer of land, and the signer thought he was signing an option to sell the property. The argument is "I never intend ed to sign this type of contract." In practice, this argument tends to succeed only when there is a good reason for the signer's failure to more closely examine the d ocument before signing- as when the signer is poorly educated, illiterate, or other- wise dependent on the creator of the document (the other party) for an explanation of what it is. Simple carelessness in signing a document without attention to what it is or to what its consequences might be is not enough to avoid enforceability."

Contracts Based on Defects Illegality Und er the classical mod el o f illegality, even a freely chosen contract will be unen- forceable if it

• is contrary to a specific statute.

• violates public policy.

These contracts are void and o f no effect unless the court d ecides that the o ffending portions of tl1e contract can be d eleted, or severed, and the remaining

31 ror an exceplion to tl'\!S st.-') tem~nt.. see the d1r,:usson 1n Ch.-1p1e1 7 concE!mil\g Tlld!.:n Rent~A·CtlrCo v C!MdennNig 11978), 83 DLR (3d) 400. 19780.nlll 1446 (ON CA)

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Illegal contract A contract tha canno: be enforced becau se 1t 1s conrrarv (O leg1sl~:ion or pub~c policy

Pu bllc policy

-he community', common sense and common conscience

portions saved. In such a case, only some of the contract will remain in effect and be enforceable. What a court will not do, however, is re-d raft the offending portions to make them comply with the law.

Contracts that are illegal may or may not be criminal. In this context, an illegal contract is simply one that violates statute law or public policy.32

Illegal by Statute Numerous k ind s of contracts are made illegal by legislation. Examples includ e the following:

the Criminal Codi" forb ids loans at a rate of interest considered "criminal"- d efined as a rate exceeding 60% per year. The courts may or may not invalidate the entire transaction, depending on whether it is possible to sever the clauses d ealing with the criminal rate of interest from the rest of the contract.

the fed eral Competition Act34 invalidates a range of commercial transactions that und uly restrict competition. For example, resale price maintenance contracts are prohibited because, through them, m anufa cturers attempt to influence retail prices in the stores by keeping them high. Entering into such contracts can lead to criminal sanctions.

Ontario's Real Estate and Business Brokers Act35 provides that an unlicensed realtor cannot maintain an action fo r services rendered.

Business enterprises should take care to meet their statutory and regulatory obligations lest they be faced with a challenge to the legality of a contract they have entered into. Increasingly, however, the consequences of statutory illegality depend on all the circumstances of the case.36 As one leading text in this area of law states, "If every statutory illegality, however trivial in the course of performance of a con- tract, invalidated the agreement, the result would be an unjust and haphazard allo- cation of loss without regard to any rational principles."37 This statement signals a more flexible perspective, which may fully eclipse the strict, traditional approach that says that illegal contracts are automatically unenforceable.

Contrary to Public Policy At common law, contracts a re contra ry to public policy when they injure the public interest. For exan1ple, an employer may wish to restrict the activities o f employees to prevent them from joining the competition or beco ming the com- petition. Or someone wishing to acquire a business may want to ensure that the vend or cannot simply set up shop d own the street and immediately begin com- peting with the new owner. The motivation fo r such clauses is under standable since both the employer and business acquirer, as the case may be, want to protect their own best interests. Clauses which restrict someone's business activities in this way are known as restrictive covenants or covenants in restraint of trade. If d rafted too broadly, they are unenforceable as being contrary to public policy.

32 SGe S1epl)()011<'! Be°'"lshai & O<w1d R P..:?rey, supra no1e 8 al 7SL 33 Crm<rtal Code. RSC 1985. c C·46. s 347. 34 Corrpe11r.onAc1, RSC 1985. c C· 34 35 Real Cs:arearrd Busir.ess BrOl<ers A.er, 2002. $0 2002, c 30, $ct') C, s 9 36 Set:! Su»v Mi.1tSte10! N;)tlon~ Rever11 .• -e, U998J 1 re 549 tC!i.Jat par<l43and 48v100~ histOriC~al\cltySiswa!.

app1ov0d tty too Sup1erne Court of C,an.-')ja in Tt1111spor' N01th llma-iC.an fx~ss Inc v Nevi Sdu1~s F.VlancmJ Corp. 2004 SCC 7, 120041 1 SCR 249 ar r>a<a 20

31 SM ¥/adda1"1!., The Law o!Calt13Cls, 61h ed ITOrOOlO; Cal\c"Jda La..,, Book, 2010J at 420.

NEL 205

In short, restrictive covenants may und uly interfere with the other sid e's ability to earn a livelihood, and they red uce competition witllln a sector."' In 2009, the Supreme Court of Canad a in Shafron v KRG Insurance Brokers expressly reaffirmed that r estrictive covenants in the sale o f a business are subject to less scrutiny because the business owner is typically p aid for goodwill.39 In the employment context, by way of contrast, the employee receives no such recompense, and there is typically a power imbalance between employee and employer.40

Two main kinds ofrestrictive covenants are found in this area. A non- solicitation clause simply forbids the employee (or business vendor) from contacting the busi- ness's customers. A non-competition clause forbids competition itself and is there- fore much more intrusive.

In the case d escribed i1U1Uediately below in more detail, the Supreme Court of Canada has confir med that non-competition clauses are enforceable if they are "reasonable between the parties and with reference to the public interest."41 This, in turn, can lead to a complex analysis but will generally includ e an assessment of whether the employer has a proprietary interest she is entitled to protect42 and an assessment of reasonableness of the clause in relation to:

how large a geographic area is covered by the clause.

the perio d of time d uring which the covenant pur ports to be in force.

the extent of the activity which the clause purports to limit.43

Once the reasonableness of a restrictive covenant has been established, it is enforceable unless it runs contrary to the public interest.

Non-solicitation clause A c l ause forb1dd1ng contact w1tl1 the bu siness's customers

Non-competition clause A clause forbidding compet1t1on

Eisley v 3 G Collins Insurance Agencies Ltd, [1978) 2 SCR 916, 1978 Canlll 7 (SCC)

THE BUSINESS CONTEXT: The purchaser of a business often wants to prevent the vendor from competing against him for a specified period of time in ord er to prevent the vendor from set- ting up a similar business across the street. If the purchaser hires the vendor to work at the busi- ness, the employment contract may also contain a non-competition covenant for a related reason.

FACTUAL BACKGROUND: Eisley and Collins entered into a purchase and sale agreement whereby Collins purch ased Elsley 's general insurance business in Niagara Falls. This agree-

ment contained a non-competition covenant which stipulated that Eisley was restricted from carrying on or engaging in the business of a general insurance company w ithin a cer- tain geograph ic area for a specific period of time. By a separate employment agreement, Eisley worked as a ma nager for Collins. Th is ag reement also contained a non-competition covenant covering the same geogra phic area, whereby Eisley could not compete with Collins for a period of five years after he ceased to work fo r Collins. After 1 7 years, Eisley resigned and opened h is own general insurance business, whi ch took some of Collins's customers.

THE LEGAL QUESTION: Is the non-competition clause in Elsley's employment contract valid?

38 Doemer v El!iss tNld U>uif>l!n !nduwies Inc. U980J 2 SCR 865 at 873, 1980 CanLll 50 (SCC) 39 Sht1f10t1 v KRC Jnsurance BrOketS, 2009 SCC 6, !200911SCR157 al pa1as 2Q .. 2J. ror a rocen1 SuprE?me C.olirt

of C.anacia ~ndors ;ng lhiS anatysis, ~e Pttyene v Cujy 2013 SCC 45. 120131 3 SCR 95 40 Shafran .. 'b.'d al paras 22- 23. 41 fls.'ey v JG Co»:ns lnsuwioe A(Jencies Ud, 1!9781 2 SCR 916 Ol 92l 1978 C.nLll 7 tSCC) 42 ro1 mo1e gen.er~ dlSCuSSIOr\ soo Pe1e1 Neumann b JelheySock, eTexr Ott Wrongful Dismissal and

£'rl')~meni t.1Y1 tca'\lll a:'ld La~st~1 Hou~). Soo 100, for e~mP6e, flhd>ergm v. C1eston Ve:eru"ii'Ny Oink: Lid, 2014 BCCA 97, 2014 BCCA 97 (CanLll)

43 ShAfran. su(>fA note 39 at p.tt1a 26, summa112:1ng £ISi~, SU(Xa 001e 41

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RESOLUTION: The non-competition clause is enforceable. The court concluded that Collins had a proprietary interest to protect as he had paid Eisley to acquire his business and placed him in control of that trad e connection as well as Collins's trad e connect ions; tllat tlle dura- tion of tlle restriction and its geographical area w ithin which Eisley was forb idden to compete were not too broad; and that the restriction was reasonably necessar y to pro- tect tlle employer. Based on the clauses being reasonable, the court went on to assess public polic y, concluding that the area was already well serviced by insurance agents. As the court

stated: "There was nothing to suggest that the people o f Niagara Falls would suffer through the loss, for a limited perio d, of the services of Eisley in the general i nsurance business."44

Accordingly, the plai ntiff was entitled to an injunction to enforce the competition clause agai nst Eisley and also secured d amages for breach of the clause. 45

CRITICAL ANALYSIS: Do you agree that non-competition clauses in employment con- tracts should be less likely to be enforced than similar clauses in sale-of-business agreements? What about Elsley's r ight to earn a living?

The Supreme Court of Canad a in Shafron has also confirmed that courts are not to re-draft overly broad non-competition clauses by "reading them down" until they become reasonable- that is, legal and enforceable.•• Rather, such clauses are simply and utterly unenforceable. A central policy objective is to prevent employers from intentionally drafting broad clauses with the expectation that the courts will simply red uce their scope as appropriate. This could lead to employees who never make it to court, being bound by an unreasonable non-competition clause.47 The Court also agreed that judges may remove part of an impugned provision to "cure" it , but only sparingly and "only in cases where the part being removed is clearly severable, trivial and not part of the main purport of the restrictive covenant:•• Finally, the Supreme Court also ruled that vaguely or ambiguously d rafted clauses are also unenforceable, generally speaking, because it is difficult to prove that the clause is reasonable when its meaning is in fa ct unclear.••

The Supreme Court of Canada in Payette v Guay'° recently offered analysis on non-solicitation clauses. Like non-competition clauses, they too must be reason- able but beyond this, a "d etermination that a non-solicitation clause is reasonable and lawful d oes not generally require a territorial limitation."SL This is, in part, because "in the context of the modern economy, and in particular of new technol- ogies, customers are no longer limited geographically, whim means that territorial limitations in non-solicitation have generally become obsolete.""

Writing as a Requirement As a general rule, contracts d o not have to be in writing in order to be enforceable. A party to an oral contract must find other means to prove its existence, sum as

44 E!stey, supta note 41 at 9~ 45 ror extlmples or h0v1\owe1 courts Mve retied onooHtShhfronand fls'ey, s~ePayene.supra note 39, MJson

v Chem-Trend Umitai Pt1r!n<:t!ilt(>, l20Ul ONCA 344.106 OR (3.1) 72 and B611on Cani'Jd<J f!'ICcYp<xau?d v TCC Jntern;)!KX'f<I! Jnc.12009} 13CSC 596 (canUO, ;,frd 2009 BCCA 577. 279 BCAC 142.

40 Suprano1e39at peiras33.36. 47 Jbtd a1 pa1a 40. 48 Jmd at pa1a 36. 49 Ibid 50 Sup.>• r>0te 39. 51 Jbid at pa1a '!2 52 Jbid at pa1<l 73

NEL 207

the calling of Mtnesses. Sometimes, however, a contract must be evidenced in writing due to the Statute of Frauds.

The Statute of Frauds was imported to Canada from England. Except in Mani- toba53 and New Brunswick,54 where it has been completely repealed, the Statute of Frauds applies to differing extents in all common law provinces.

The purpose of the Statute of Frauds is to prevent fraud and perjury by requiring written proof of certain kinds of contracts. The four categories discussed below are the most relevant to business. A contract falling into these categories must have its essential terms contained in a document or documents signed by the party against whom the contract is to be enforced. Several documents can be combined to meet the requirement if each of the docwnents can be connected wjth the others. If the writing requirement cannot be met, however, the contract is generally unenforceable.

Contracts of Guarantee A guarantee is a promise to pay the d ebt o f someone else, should that person d efault on the obligation. A guarantee must generally be evidenced in writing.55

The province of Alberta has gone even fur ther than the Statute of Frauds by requir ing additional formalities from non-corporate guarantors, including the requirement that the written guarantee be accompanied by a lawyer's certificate. In this certificate, the lawyer attests that the guarantor is aware of the contents o f the guarantee and understands it.56

Contracts Not to Be Performed Within a Year The rationale for requiring a written record for these kinds of contracts is the difficulty of proving promises that were possibly made in the distant past. Since the arbitrary cutoff of one year is bound to be unfair in some cases, the courts have been known to interpret the Statute of Frauds in such a way as to avoid an injustice.

The requirement of writing for this kind of contract has been repealed in sev- e ral jurisdictions, such as Ontario, 57 Br itish Columbia, Manitoba, and New Brunoock.

Contracts Dealing With Land Contracts concerning land - including leases and sales- generally must be evidenced in writing in order to be enforceable:'" Nevertheless, in the interest of fairness, the courts have also created an exception to the absolute requirement for writing in the case of "part performance." If the person attempting to enforce an oral agreement for purchase and sale ofland has performed acts in relation to the land that could be explained by the existence of an agreement, that performanc e may be accepted in place of a written agreement.59

53 MAci roR~tll rheS!t1tuteofFrauds,CCSMcr1ss 54 An Act ro Repe;,J rne Statute of Fra~'d.t SNB 2014, c 47. Soo 100 L<!gistaliv~ ServiCes S1aocn. New Biur\Swic::K

l.&\Y Refo1m Note #33, Oe<:em~1 2012,0111: ,ne <http /fv ... ,..,., ... 2.9nb.ca/con1ent/dam/9rlb/Depa11rnenl!dt)Q· P9/ PDr/af\o'l..a'""Relo1rn/Notes33pc:ll> and No1e 32 at <hllP //\vww2.9nb.ca/con1enl.'dam/9nttDepa11ments/ ag• pg/PD r /e nil.aw Reform/Nor es 3 2. Pd f>

55 Th ts rule does not apply in Manlloba aoo New BrunS\YiCk.. 56 See Iha Guarantees Ackno~v!edgmcnr Act, RSA 2000, c C-U as amended. B11t1sh Cotumbia Ms 9xtended l~

w111ing 1e(!ui1emen1 to indemn.1.es ov1i09 to lhe L1Y1 and £'.qu1:y Act, RSac 1996, c 253, s 59t6). Si Stt111.1teof fril/.;ds, RSO 1990, c S·l9, s4, amendeo l)y Sratu:e LawAmendmMt Act. SO 1994,c 2i,.s 55 58 £ven in Man:toba-whcm.'! t~ Statute of frtJuds Ms been r!!~oo-coortS haw been koown to 1nstsl !Mt

cont1t)ClS ae~l n.g v11lhtaoo bt:! inv111l ing. pa1tiCtJlaity v1hen 1ne otter is made in v1r11tng, as '" .krt-08'1 ftrves:ments Lrd v N.?frhv~sr farms trd, 11978] l "NltVR 200, H)77 CanUl 1658 tMB CA). See too Ma:,Jlll~Sr<'!¢'tet>sonCo Ltd v Woo 11989), 59 DLR (41!\) 146. 1989 Cant.II 5285 IMB CA).

59 H tS bey'ond t'le scope of ll'us text to dlSCtJSS 1~ varying l~SlS for part ~ffOrrT'aoce lhal exist at common iav1

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TECHNOLOGY AND THE LAW

ELECTRONIC SIGNATURES

Contracts are generally enforceable, no matter what for m they take, but there are impor tant exceptions. For example, signa ture requirements exist in statutes such as the Statute of Frauds.

As noted in Girouard v Dru et 2012 NBCA 40, 348 DLR (4th) 4, it is generally accepted that the purpose of a signature is (1) "to identify the person who is signing; that is to say, to identify the source and authenticity of the document" and (2) "to establish the signatory's approval of the document's contents" at para 27. In the context of written contracts, courts have avoided being unduly technical. As Stephanie Ben-Ishai and David Percy summarize the matter, a marl< made by the person signing is sufficient if intended as authentication of the document; as well, mere initialling of the document can suffice.w

In relation to electronic con tracts, legislators across the country have offered guidance as to what fulfills a signature requirement. Ontario's Electronic Commerce Act, 2 000, for example, provid es that, with some signific ant exceptions, •a legal require- ment that a document be signed is satisfied by an electronic signature." Section 1 (1) defines an "elec- tronic signature" as "electronic information that a person creates or adopts in order to sign a docu- ment and that is in, attached to, or associated with the document." Most Canadian jurisdictions have accepted electronic signatures according to statu- tory rules of varying strictness.

While case law in the area is still limited, there are nonethel ess several helpful cases in place.

How does legislation governing e lectronic signature s help create cutainty in the mll1'ket place?

For example, in Leoppky v Meston (2 008) 40 BL R (4th) 69 at para 46 (Alta QB), the Court concluded that an email with the sender's nan1e typed at the bottom counted as a signature required by the Statute of Frauds.

Given tha t intention of the signatory is of paramount concern, questions surrounding the validity of a sign ature will almost certainly have to be decided on a case-by-case basis.

Critical Analysis: Are electronic signatures more o r less reliable than the hand written variety?

So urces: Te1e$a Sc<':ISS.-') b Michael O~tu1b1d¢. fl«:tton.•c Cotr>me1ce and Jn:ernet LaY1 :n CatttJda 2d ed ITC!OnlO CCH, 2012). Oonciee MotJIOI\. ·i:·Signature~ A1e ~ast,, bul Man.<qe l he Risi(, L1wy«s Weekly l31 May2013) 13

The mortgage given by the Smiths to the bank must comply with the Statute of Frauds, since it concerns an interest in land. That is, through the mor tgage, the ba nk acquires the right to sell the land and apply the proceeds against the Smiths' loan, should they default on payments. The mortgage prepared by the bank appears to meet the requirements of the Statute of Frauds because the agreement is a written contract and has been signed by the Smiths.

Contracts for the Sale of Goods All provinces have a version of the Sale of Goods Act , and most61 contain a provi- sion that contracts fo r the sale o f good s above a specified amount must be in

60 ik!l\--ISha1 b P(!rcy, supm oote 8 al 269 ... 270 61 Tn.aexceplons :!\C~de New Brun$\'l!Ck, Man.,10~. OnU)1i0, and Br111shCotum1:>~. ~e loo GHL r1dman. Sb.•e

Of Goods /n Cattadh 6 thed !Toronto C.ais...-ett 2013J at41.

NEL 209

writing to be enforceable by the courts. The amount is generally set at between $30 and $50, not adjusted to reflect inflation. Thus, it would appear that most sales of goods are caught by the Act. Since written contracts are generally not produced for routine transactions, it is fortunate that sale of goods legislation also contains very broad exceptions that limit the application of the rule. For example, if partial payment is made by the buyer, or if the buyer accepts all or part of the goods, no written evidence is required for the contract to be enforceable.

Even without Sr.atute of Frauds requirements, creating a record of an agreement is generally a prudent business decision. Personnel may change and memories may fade, and genuine disagreement as to the terms of a contract can result. Through a well recorded written document, such disagreements- and perhaps the expense of litigation- can be avoided.

That said, businesses and individuals must strike a reasonable balance between the comfort of complete records and the time and effort required to produce them, particularly in small transactions.

NEL

BUSINESS AND LEGISLATION

INTERNET CONTRACTS

Even where a contract is not caug ht by Statute of Frauds requiremen ts such that it must be in writing, other legislation may non etheless require the business in question to produce a written copy of the contract. That is, govern- ments may decide it is in the best interests of consumers to give them additional protection and safeguards when entering into certain kinds of transactions.

As Scassa and Deturbide note, provinces including Manitoba, Alberta, Saskatchewan, Nova Scotia, Newfoundland and Labrador, Ontario, and British Columbia have passed legislation reflecting, in varying degrees, the consumer protection measures of the Internet Sales Con- tmct Harmonization Template. The template was released by a group called the Consumer Mea- sures Committee, and endorsed by all federal, provincial, and territorial ministers responsible for consumer affairs. The template and its var- ious counterparts apply to consumer purchases of goods and services over the lnternet and req uire sellers to clearly d isclose certain information to the buyer before an online contract is formed . The in formation to be disclosed includes the sell- er's business name and address (including email address), a fa ir and accurate description of the goods and services, all costs (including taxes and

210

shipping), deliver y arrangements, a nd return policies. All of this informati on must be acces- sible such that it can be printed and retained by the consumer, and it must be dearly and promi- nently displayed. Consumers must also be given an opportunity to accept or decline the terms of the agreement a nd to correct errors before the contract is formed.

Legislation across the country is not always consistent with the template- some have fewe.r requirements, while provinces like Ontario have more. Ontario's Consumer Protection Act, for example, requires a supplier to deliver to a consumer who has entered into an Internet agreement a copy of that agreement. If the supplier fails to do so within a specified time, the consumer may cancel the agreement and it becomes u nenforceable.

Requiring that the supplier provide a written contract to the co nsumer makes the consumer better able to confirm what rights and liabili- ties exist under the contract. The consumer is also able to co nfirm whether the written agree- ment reflects the consumer's understanding of the contract .

Sour ces: Teres.'li Scassa b Mic:M)( OC'hJ1Dldt'!. ClccttonJC C:onvncrcr Md Niterflel UY1 1n C.}n11dA 2d cd !Toronto C<:H 20121 at 42 S...~ atso s 39UJ and$ 4012) of 100 Consum<>t P101ocuon A.cl, 2002. SO 2002,c 30, Sc!\ A Rosru1clle0 al'W':I , ... 11 11e>n oy tv\•tC!diltl I 1gd

Managing the Risks of Unenforceability When contracts are ente.red into, a business runs the risk that they may ultimately be unenforceable. Since a contract is only as good as the process leading up to its formation, businesses should train their employees carefully in how to negotiate contracts. Matters to be concerned about include:

are the parties to the contract under any legal incapacities?

has one party taken unfair advantage of the other?

has one party misled the other?

has a substantial mistake been made?

is the contract contrary to legislation or in violation of public policy?

is the contract required to be in writing?

An affirmative response to any of tl1e foregoing may signal a possible problem if suing becomes necessary. Securing a d eal at any cost may end up producing no deal at all.

BUSINESS LAW IN PRACTICE REVISITED

1. Did Kevin manipulate or pressure the Smiths into signing the mortgage? If so, what legal remedies do the Smiths have?

While tl1e Smiths have tl1e capacity to contract and were not subject to duress by Kevin, the mortgage transaction is probably unconscionable. There was inequality between the parties- namely the bank and the Smiths- because the Smiths were inexperienced senior citizens who had received no prior independent legal advice. As well, the transaction was very unfair, since the Smiths were risking their only substantial asset for a loan they could never repay on their own. In short, only the bank and Martha would benefit from the transaction, while the Smiths stood to lose everything. On this basis, both of the steps necessary to establish unconscio- nability have been met, and a court will set the mortgage aside unless the bank can somehow show that the transaction was fair.

The mortgage transaction is also liable to be set aside at common law on the grounds that it was signed on the basis o f undue influence. There is a good argument that the Smiths did not freely enter into the mortgage but did so only because Kevin preyed on their deep need to help their daughter. As well, it appears that the Smiths put their entire trust in Kevin, which is another basis for a court to find undue influence.

2. Did Mr. and Mrs. Smith enter into the contract on the basis of mistake or misrepresentation? If so. what legal remedies do they have?

The Smiths could argue that they did not understand what they were signing and that the whole thing was a "mistake." This may be true from their point of view, but they did sign the mortgage d ocument. The law ordinarily expects people not to sign d ocuments unless they understand them . Accordingly, the mortgage is unlikely to be set aside on the grounds of m istake.

There is a very strong argument, however, that Kevin misrepresented the nature of the transaction by telling the Smiths that signing the mortgage was just a formality and that likely nothing would come of it . While it could be argued that this state- ment was merely an opinion, this defence is unlikely to succeed since the words were spoken by a banker who should know better. While it also could be argued that the

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Smiths did not rely on Kevin's statement- in other words, that they knew very well that their house could be foreclosed upon if Martha failed to make the payments- a judge is much more likely to take the Smiths' side. There is an excellent chance that the mortgage would be set aside on the basis of Kevin's misrepresentation.

3. How could Kevin have managed this transaction better?

Since the essence of a contract is the free and voluntary adoption of obligations, Kevin should never have asked the Smiths to s ign the mortgage until they had secured independ ent legal advice.

Furthermore, it would probably have been better for Kevin not to have been involved in the transaction at all, and instead to have sent the Smiths elsewhere. Most of the legal problems in this scenario arose because Kevin was trying to get a bad loan he had given to Martha off his books. This motivation may have inter- fered with his judgment in how to handle the Smiths from the outset.

CHAPTER SUMMARY

A broad range of doctrines are available to cancel all or part of a contract, but they apply only in relatively unusual or extreme circumstances. Moreover, courts are justifia bly d emanding in what parties must prove in order to be released from their obligations. Courts expect parties to negotiate carefully and d eliberately to ensure that any commitment they make accurately reflects their intentions. If the deal merely turns out to be less desirable than expected, the doctrines in this chapter are unlikely to apply.

With limited exceptions, contracts made by minors are not enforceable against them. At common law, unless the contract is for a necessary, or amounts to a beneficial contract of service, it is unenforceable at the election of the minor. In British Columbia, minors have even more protection through legislation. Persons suffering from a mental impairm ent also do not generally have the capacity to contract when tlley are incapable of understanding the transaction.

The doctrine of duress permits a court to set aside a contract when one of the parties was subjected to such coercion that true consent to the contract was never given. The doctrine of undue influence permits the san1e outcome if one party, short of issuing threats, has unfairly influenced or manipulated someone else into entering into a contract. Unconscionability also considers the unequal relationship between the two contracting parties. If both inequality between the parties and an improv- ident bargain can be established, the contract can be rescinded by the court. If the transaction is sufficiently divergent from community standards of conduct, this may signal the presence of exploitation and lead to a finding of unconscionability.

Misrepresentation concerns the parties' knowledge of the circumstances underlying a contract. If one party misrepresents a relevant fact and thereby induces the other s ide to enter into the contract, the innocent party can seek to have the contract set aside or rescinded. If the misrepresentation also counts as a tor t, the innocent party is entitled to damages as well.

A party who has entered into a contract based on wrong informat ion can try to have the contract set aside on the basis of mistake, but this strategy will rarely be successful because mistake is an exceedingly narrow legal do ctrine.

Contracts that are illegal because they violate a statute or are at odds with public policy can also be rescinded. Courts are increasingly looking at all of the circumstances surrounding contracts and will not automatically set them aside.

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The S tatute of Frauds, in its various forms, seeks to prevent fraud and perjury by requiring written proof of certain kinds of contracts. With the use of electronic and Internet contracts becoming more and more common, modern legislation also seeks to address the same types of problems in the new environment o f techno- logical commerce.

CHAPTER STUDY

Key Terms and Concepts age of majority (p.183)

common mistake (p. 193)

economic duress (p. 185)

illegal contract (p. 196)

le gal capacity (p. 183)

misrepresentation (p. 191)

mistake (p. 193)

non-competition clause (p. 197)

non-solicitation clause (p.197)

publicpolicy(p.196)

rectification (p. 194)

rescission (p. 191)

unconscionable contract (p. 188)

undue influence (p. 186)

void contract (p. 183)

voidable contract (p. 183)

Questions for Review 1 . Explain the difference between a void contract

and a voidable contract.

2. Who has the legal capacity to form contracts?

3. What must be proven by someon e seeking to avoid a contract b ased on men tal impairmen t?

4. Describe the d octrine of undue influence.

5. What is d uress? How d oes it relate to the idea o f consent?

6. Give an example of economic d uress.

7. What is a n u nconscionable transaction?

8. What is a misrepresentation?

9. How does the concept of a legal mistake differ from its ordinary meaning?

1 0. Name one statute that makes certain kinds of contracts illegal.

11. What is the role of public policy in contract enforcement?

12. How a re non-competition covenants used in employment contracts?

1 3. How d oes the Statute of Frauds affect contracts?

1 4. What fo ur types of contracts relevant to business law are required to be in writing?

1 5. How might the fac t that a contract is electronic affect its e nforceability?

1 6. ls a n el ectronic contract subject to the san1e basic prin ciples as a traditional contract?

1 7. Who is a minor?

18. Are contracts with minors b inding?

Questions for Critical Thinking 1. Why would an employer want to include a

non-competition clause in its contract with a n employee? What are the d angers of such a clause?

2 . What fac tors should a business consider in devel oping a policy on do cumentation o f commercial relationships? Should it insist that all contracts be in writing, or is more flexibility in order?

3. Which doctrines discussed in this chapter would be likely to arise i n a business context? Why?

4. How can a business use a r isk management plan in order to reduce the chances that it will enter into an unenforceable contract?

5. The law of mistake will rarely provide a defence for someone seeking to avoid a contract Is the law of mistake too strict and inflexible? Why or why not?

6. Before the weaker party can rely on a defence of mental incapacity through illness or

213 NEL

intoxication, he or she must prove that the other party was aware of such an impairment. Is this requirement a reasonable one? If a person d oes not have the capacity to contract, should that not be the end o f the matter?

Situations for Discussion 1. Through her lawyer, Ms. Tanya, a commercial

landlord , sent a letter to her tenant, Ms. Desie, who ran a bridal shop out of the premises. Tanya's lawyer demand ed all back rent and stated that if the rent owed was not received by the deadline specified, Tanya would lock her tenant out of the business premises. Desie had no money to pay the back rent and therefore did not make the specified d eadline. In fact, Desie sent in no money at all. The landlord changed the locks. Soon thereafter, the parties came together in settlement whereby Desie agreed to provide a promissory note in the amount owed in addition to Tanya's legal fees in relation to this matter.

Subsequently, Desie alleged that Tanya's lawyer had forced her to settle and sign the promissory note in question. Desie S<lld that she felt that she had no choice but to sign because otherwise, she would not have been allowed back into the rental premises. Desie says that the agreement should be unenforceable due to the lawyer's d uress.62 Did the conduct of the lawyer an10unt to duress? What constitutes duress?

2. Madeline was 35 years old when she was seriously injured in a car accident caused by tl1e other driver. She was hospitalized for over a month. An insurance adjuster (an employee of the insurer of the culpable driver) visited Madeline ather home upon her release from the hospital with the hope of getting her to agree to settle her case out of court for a set amount of money. Though the adjuster knew Madeline would almost certainly win her case in court and be award ed d amages at least in the amount of$ 250000, he offered only $50 000, assuring her that he had her best interests at heart and it was time to "wrap things up." Madeline felt confused during the conversation as she was on strong painkillers to help deal with the terrible

62 Ba~d on Tab& v Pans Boutique& Bridal /tte, k;obPM!s BoulJqu-eJ. 20100NCAJ57.

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headaches she suffered as a result of the accident She reaHywas not quite sure what was going on. Madeline asked for a minute to think about what he had S<lld because she was feeling unwell, but the adjuster was adamant. Madeline then took the pen that the adjuster handed her and signed the agreement. Madeline now realizes that she has made a terrible deal.

What d octrines in this chapter are relevant to the situation? Do you think Madeline is bound ?

3. Ms. Stewart bought a business operating in rented space in a shopping mall. Shortly after she took over the business, the land lord pressured her to sign a lease that made her responsible for the arrears in rent of the previous tenant. The landlord secured Ms. Stewart's agreement by exerting tremendous pressure on her. For example, he called in the sheriff to execute a distress for rent when, atthat time, she was in arrears only for the month of January. The landlord told Ms. Stewart that if she did not pay the former tenant's arrears, "she would be the one to suffer." The landlord knew that Ms. Stewart was unsophisticated in business dealings and that she had signed the lease without seeking advice.63

Is she obligated by the lease?

4. Leona was interested in purchasing property that she intended to use for her family's expanding brickyard business. She spoke with the owner, who had recently inherited the property from his elderly aunt. Leona asked if there were any restrictions on the land preventing it from being used as a brickyard . The owner replied, "Not that I am aware of." Though this was literally true, the owner failed to explain that he had never checked whether the land was subject to any restrictions. Leona purchased the land and has found out that it cannot be used as a brickyard. Can she have tl1e contract rescin ded based on mi srepresentation? Why or why not?"'

5. Derek was a minority shareholder and employee of Bridge Decks Ltd (Bridge), a corporation that provided concrete work on new bridges. When Bridge sold all its assets to Concrete- Works-R-Us Ltd, Derek and Bridge agreed to

63 ~ed. in ~rt, on Slew.wt vCan<Jda !JfeAssu1tN"lce C..o tl9941. 132 NSR {2d) 324 \CA), 1994 C.nlll 4053 \NS CA).

64 Sasad on NownghtN'n P:nant Snck and Tile Co v Butler U886L 16 0 60 778 (CA)

a non-competition clause with the purchasers which, among other matters, restricted them from competing with Concrete-Works- R-Us Ltd in any jurisdiction in Canada . This meant that the covenant's geographical restriction even included Manitoba--a province that neither Derek nor Bridge had ever worked in- though they had provided bridge work in a town very dose to the border between Saskatchewan and Manitoba . The restrictive covenant also prohibited competition by Derek and Bridge in the area of concrete work or "bridge construction or rehabilitation of any kind."

Is the non-competition clause Derek agreed to enforcea ble when measured against the fac tors identifi ed by the Supreme Court of Canad a in Eisley (discussed earlier in th.is chapter)? Does it make any difference that the non-competition clause in Derek's case is related

to an asset-sale transaction as opposed to an employment contract ?"'

6. Gus started working as a labourer on Dick's farm as a young man A few years later, Gus in dicated that he planned to go elsewhere but Dick did not want to see that happen, especially as illness had left him unable to run the farm unassisted. Dick s aid he would leave his entire farming operation to Gus in his will if Gus stayed. Gus did stay and over the next two decad es took over all aspects of the farm, becoming its very effective manager. Gus made decisions about crops and equipment to purchase. H e also rebuilt granaries, tore down broken barns and began a Hereford cattle business on the land. Dick a dmired all of Gus's ingenuity and hard work. When Dick eventually did rue, he u nfortunately had forgotten to change his will to leave his farming operation to Gus as promised. Can Gus enforce h is contract with Dick or does the Statute of Frauds pose an obstacle? Can Gus rely on h is conduct in running the farm as a way to get around the Statute of Frauds problem ?66

7. John Tonelli was an exceptionally talented young hockey player who, in 1973 attheage of16, entered into a two-year contract with the Toronto Marlboros Major Junior A hockey dub, a team in the Ontario Major Junior A Hockey League. The

65 Based on Ma~in v ConCte.lte USL Umited P;,anersh}(>, 2013 ONCA 72 2013 ONCA 72 tCanll O.

66 Bas<.'d on Thompson vCuan>nty Tru.~t Co, !1974j SCR 1023.1973 <:anlll 161 ISCCJ.

league had an agreement with the National Hockey League ( NHL) that prevented the d rafting of und erage players and that called for tl1e paym ent of certain fees once a player was drafted at the end of his junior career. However, a similar agreement could not be read1ed with the World Hockey Association (WHA). John- like all other

junior hockey players of his time- was forced to sign a new contract as a conru ti on of continuing to play in the junior league. This new contract essentially bound him to play three years longer than his earlier contract with the Toronto Marlboros; in addition, it imposed monetary penalties if he s igned with a professional team with.in that time frame or with.in a period of three years a fter he ceased to be eligible to play in the junior league. As soon as he turned 1 8 (the age of majority), John abandoned the contract w ith the Toronto Marlboros and signed with the Houston Aeros, a professional team. The Marlboros sued him for bread1 of contract .67 Is John's contract enforceable against him? lf yes, does this seem fair, and from whose point of view? lf no, is it fair that John can sign a contract and then ignore his obligations under it?

8. Julie Langille d ecided to sell her large recreational vehicle (RV). Considerable portions of the RV floor had suffered termite d amage and th.is, in turn, had led to some rotting. Be fore dealing with any potential buyers, Julie de cided to purchase several small a rea rugs and place them tluoughout the RV, including over all the a reas that had termite d amage. "I'm entitled to do any kind of interior red ecorating that I see fit. If a buyer is too stupid to look under the rugs to see what's going on, well that's not my problem." she thought to herself. Soon thereafter, Reginald Rother purchased the trailer from Julie. At no time d uring negotiations did Julie disclose the termi te damage, nor did Reginald make any in qu iries. Julie did say, however, that she loved the RV an d that it had never given her a moment's worry. Reginald has recently found the termite d amage and is appalled. Can Reginald m ccessfully sue Julie? On what basis?

67 B<lsed, if') patt,, on Toronto f.lltNIOOro /<AaJOf Jun.or ·A· Hockey CkJb v Tonew 11979), 96 DLR (!O) 135. 1979 <:onLll 1969 tON CAI

NEL 215

BUSINESS LAW IN PRACTICE

Janet and Alphonso Owen entered into a contract with Charles Conlin to construct their family home in Vancouver, BC. Conlin inspired a lot of confidence. He told the Owens that he understood the importance of building the family home with great care and attention. "It's where you're going to live, for goodness' sake", he stated. "Your home is an extension of you. Don't worr y about any- thing. My work is second to none." For her part, Janet was particu- larly excited about a see-through fireplace that would be installed in the centre portion of the proposed house. A see-through fireplace opens onto two rooms: in this case, the living room and dining room.

Pursuant to the contract, Conlin, known as the "Contractor", had a number of obligations, in duding the following:

12. The Contractor covenants to construct in accordance with t he relevant sections of t he British Columbia Building Code.

13. The Contractor covenant s to construct in accordance with plans and specifications attached to this Contract.

20. The Contractor covenants to complete construction on or before 30 J une 2009.

The plans and specifications were d uly attached to the contract and included a provision for the see-through fireplace that Janet loved so much.

The Owens covenanted to pay a total of $500000 and pro- vide advances on a regular basis. Over time, the Owens advanced $300 OOOto Conlin and looked forward to the day when they would be able to move in. Their excitement about their new home con- struction eventually turned to disappointment when Conlin failed to complete construction according to s chedule. The Owens gave several extensions, but when Conlin missed the last deadline, the Owens went to talk to him at the job site. Upon arrival at the site, Alphonso noted that the house was only half-built and did not even look structurally sound (the centre of the living room ceiling drooped in an alarming fashion). He asked Conlin for an explanation and a progress report. Conlin became absolutely enraged, stating, "You're complaining about things here just to grind me down on my price. Well, at least my wife isn't ugly like yours is." This was the last straw.

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OBJECTIVES After studying this chapter. you should have an under- standing of

• the termination of a contract by performance

• the termination of a contract by agreement

• the termination of a contract by frustration

• the termination of a contract by breach

the methods of enforcing contracts

• the concept of privi ty

• remedies for breach of contract

" 4"" .;;.-, .. .. - ~ ,

VI hat kinds of issues mn a c.o nstruction contma raise in relation t.o tlte te rmination and enforcement of contracts?

The Owens ordered Conlin and his crew to leave the property. They took posses- sion of the house and promptly changed the locks.

About two weeks later, the Owens' luck changed fo r the better. A well-known house-building expert, Mr. Holmstead, agreed to assist the Owens. The Owens hired Holm stead to fi x the problems and firush the house.

In addition to creating structural problems, Conlin's employees had defec- tively constructed the see-through fireplace. When in use, it fi lled the entire living area with smoke d ue to tlle fai lure of tlle chimney to draw. Holmstead took the view that, in order fo r it to properly fu nction as a fireplace, parts of it would have to be dismantled and rebuilt. When consulted on this, Conlin took the position that the problem could easily be solved by simply bricking in one side of the fireplace, since thi s would create the d raw n eeded to carry the smoke up and out of tlle chimney. "My solution will cost about $200", said ConHn. "Your so-called solution will cost at least $5000. It's insane." Notwith- standing, the Owens decided to have Holmstead rebuild the fireplace and deal with Conlin later.

All in all, the Owens p aid $300 000 to Holmstead, who fi xed and completed the house to high standards.

In the meantime, Janet has been suffering considerable distress. H er disappointment in Conlin's work became overwhelming, and every day seemed to get harder. Though n ot clinically depr essed, Janet found herself bursting into tears and waking up in the m iddle of the night, wor ryjng about the house.

1. Can the Owens demonstrate all the steps in an action for breach of contract against Conlin?

2. Are the Owens themselves in breach of contract for refu sing to permit Conlin to complete the contract?

3. Did the Owens properly mitigate their damages?

4. What damages can the Owens receive?

217 NEL

~ ~ ~ IE' a ] ~ i

Termination of Contracts: An Overview When parties enter into a con tract , there a re several ways in which it can be brought to an end - known, in law, as "termination":

through performance. When both parties fulfi ll their contractual obligations to each other, they have performed the contract. This is generally the ideal way of concluding a contractual relationship.

through agreement. Parties are always free to voluntarily bring their contract to an end. Both parties could agree to simply walk away from their agreement, or one party could pay a sum to the other side by way of settlement in exchange for agreeing to end the contract.

through frustration . The d octrine of fr ustration applies when, after the formation of a contract, an important, unforeseen event occurs- such as the destruction of the subject matter of the contract or the d eatll/ incapacity of one of the contracting parties. When a contract is fr ustrated, it is brought to an end.

through breach. A breach of contract, when it is particularly serious, can release the innocent party from having to continue with the contract if that is his wish. Less signific ant breaches generally entitle such a party to damages only.

What follows is a discussion of these four method s o f term ination and an out- line of the remedies available for b reach of contract.

Termination Through Performance What amounts to term ination by per formance depend s on the nature of the contract , as in the following examples:

a contract to provid e an audit of a corporation is performed when the audit is competently completed and the auditor's a ccount for service rendered is paid in full.

a contract to buy and sell a house is perfo rmed when the purd1ase price is paid and title to the property is transferred to the buyer.

a contract to provide a custom-designed generator is complete when a generator conforming to contract specifications is delivered and the purchase price is paid.

In short, a contract is performed when all of i ts implied and express prom ises have been fulfilled. When a contract is termi nated through performance, this d oes not necessarily mean the end of the commercial relationship between the parties, however. They may continue to d o business with each other by means of new, continuing, and overlapping contracts.

Performance by Others The law easily distinguishes between those who have the contractual obligation to perform and those who may actually d o the necessary work. When a corpo- ration enters into a contract to provide goods or services, for exan1ple, it must by necessity work through employees/agents. Even when the contracting party is an individ ual, employees may still have an important role. In both cases, the

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Vicarious performance

Performance of contractua l obliga:1ons through others

Novatlon

Tho subst1 ut1on of parties in a contract or the repl acement of one contra ct with an mher

employee/agent is ordinarily not a party to the contract. Expressed in legal terms, such an employee/agent lacks privity of contract and therefore cannot sue or be sued on the contract , though t11ere may be liability in tort. Pr ivity is discussed in more d etail later in this chapter. Agency is discussed in Chapter 13.

It is permissible to use employees to vicariously perform a contract in question, as long as personal performance by the particular contracting individual is no tan express or implied term of a contract . For example, if a client engages an accoun- tant and makes it clear that only that particular accountant is to do the work, vicarious performance through other accountants is not permitted . If there is no such term, the accountant is free to d elegate the work to others in the firm while remaining contractually responsible for the tim ing and quality of the work.

In the case of Conlin and the Owens, there was nothing in the contract requiring Conlin to perform the contract unassisted. In fac t , it would appear that the Owens fully und erstood that Conlin would use staff members to help him. For this reason, Conlin is not in breach of contract simply because he did not perform every aspect of the contract himself. He is, however, in breach of contract because his employees fai led to properly perfor m aspects of the contract: the structural d efects mean that the house was not built to Cod e and the fireplace was not con- structed in accordance with plans and specifications since it could not draw air properly. The law holds Conlin responsible for his employees' incompetence. This is known as vicarious liability and is discussed further in Chapters 10 and 20.

Termination by Agreement By Agreement Between Parties Parties may enter into an agreement that becomes unfavoura ble for one or both of them. In response, they may d ecide to

enter in to a whole new contract. This is known as novation. Provid ed both parties benefit from this arrangement, the agreemen t will be enfo rceable by the court as a new contract. For example, if the Owens subsequently d ecide that they want to buy an entirely more luxurious home than they have contracted for from Conlin, they and Conlin are free to negotiate a new contract and cancel the old one.

vary certain terms of the contract. If the Owens decide that they would like upgraded bathroom fixtures installed instead of the ones provided for in the plans and specifications, they can seek a varia tion of contract . Traditionally, as discussed in Chapter 6, the party benefiting from the varia tion (the Owens) must provid e consid eration to the other side (Conlin). In a case like this, the typical consideration would be an increase in the contract price, reflecting the additional cost of acquiring and installing the upgraded bathroom fix tures. Note, however, as discussed in Chapter 6, that the New Brunswick Court of Appeal and the British Columbia Court of Appeal.' for example, have shown a willingness to enforce contractual variations that are not suppor ted by consid eration in certain circumstances.

e nd the contract. The parties may decide to simply termi nate the contract, with both parties agreeing not to enforce their rights or with one party paying the other to bring his obligations to an end .

l See NAV Can/Ida vC1et1ter Fu :denctot1 Alfport Authotlly Jnc, 200B NBCA 2B, 229 NBR t2d) 238 and Rosas v Toa. 2018 SCCA 191

219 NEL

substitute a party. The law perrruts a more linlited form of novation whereby one party's rights and obligations are transfer red to someone else. In short, a new party is substituted, and the old party simply drops out of the contract altogether. For example, if Conlin cliscovered that he had double-booked himself and could not in fac t build the Owens' house, he might be able to recommend someone else who would "step into his contractual shoes." This new contractor would not only assume all of Conlin's obligations but also be entitled to payment by the Owens. However, everyone- the Owens, Conlin, and the new proposed contractor- must agree to this substitution in order for it to be effective. Of course, if the Owens are unl1appy with Conlin's proposal, they are free to insist on performance by him and sue for breach o f contract if he fails to perform.2

An agreement between the parties is almost always the best way of dealing with events that make the contract clisadvantageous in some respect. By taking such a route, the parties are able to avoid the expense and uncertainty of litigation.

Transfer of Contractual Rights A party who wants to end his involvement in a particular contract has the option- in certain circumstances- to transfer it to someone else. This transfer does not terminate the contract but does have the effect o f eliminating the transferor's role in it. In short, while contractual duties or obligations cannot be transferred to someone else without agreement by the oilier side, contractual r ights can be transferred without any such pemlission being required.

This means that Conlin cannot unilaterally transfer to another contractor his obligation to build the Owens' home. The Owens have contracted for performance by Conlin and his employees. They cannot be forced to deal with a new contractor altogether. However, Conlin can transfer his right to be paid for the builcling job to someone else.

In law, when one party tra nsfers a contractual right to someone else, this is known as an assignment (see Figure 9.1) . The person who is now or will be

FIGURE 9.1 The Steps in Assignment

Step One: Creditor-Debtor Relationship C (creditor) - o (debtor) Contract is entered between C and D, whereby D owes money to C for services rendered.

Step Two: Assignor- Assignee Relationship C {assignor)- A (assignee) Contract is entered between C and A, whereby C assigns the debt he is owed byD.

Step Three: Assignee- Debtor Relationship A (assignee)-0 {debtor) A gives notice to D. D is now obli gated to pay debt direc tty to A.

2 11 theycnoose lhis rou l<?. L~ Ov.t!ns stl Mvea duty 10 m1tigat~.as discussed tate1 ,n 1h:s Cl\aOter

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Assignment

,..he trans rer of a ngh~ by an ass1 gnor to an assignee

Frustration

-erm1nat1on o a contra ct upon the occurrence of an unforeseen catastrophic event which mal<es comractual performance 1mposs1ble or prevents the contract from being performed 1n a manner at all s1m1l ar to what the parties env1s1oned when they entered tl1e contract

entitled to payment from a contract is known as a creditor. The party who is obli- gated to make the payment is known as a d ebtor.

The law of assignment of rights permits ilie creditor (ilie assignor) to assign the right to collect to another person (the assignee) wiiliout ilie agreement of ilie debtor. However, to be effective, ilie d ebtor must have notice o f ilie assign- ment so that she knows to pay ilie assignee rather tllan the creditor. The assignee is entitled to collect ilie d ebt d espite not being involved in ilie creation of the contract iliat produced the debt. Conversely, after rece iving notice o f ilie assignment, the debtor can perfor m her obligation only by paying ilie assignee. If the same d ebt is assigned to more ilian one assignee, normally ilie assignee who first notifies the d ebtor is entitled to payment.3 Expressed in legal lan- guage, ilie rnle is that ilie assignees who take in good fai ili rank in ilie o rde r that they have given notice to ilie d ebtor. Thi s means iliat a later assignee may end up collecting from the d ebtor ahead o f an earlier assignee simply by being ilie fi rst to g ive notice to the d ebtor. In ilie meantime, ilie disappointed assignees can sue ilie assignor for bread1 of the contract of assignment; how- ever, d o ing so is usually pointless if the assignor has disappeared or has no resources to pay d amages.

The advantage of an assignment fo r a creditor such as Conlin is iliat he can "sell" rights for cash now and let ilie assignee worry about collecting from ilie Owens. Of course, Conlin will pay a price fo r tlli s advantage by accepting less tllan ilie fac e value of ilie debt from the assignee. This discount will reflect tile cost o f early receipt, as well as the risk that the debtor cannot or will not pay.

Addit ionally, the assignee's right to payment is no g reater than the right possessed by ilie assignor. This means, for exa mple, that if Conlin breaches his contract wiili the Owens and becomes entitled to less ilian the full contract price, Conlin's assignee is likewise entitled to less. The objective is to ensure that ilie d ebtor- in this case, ilie Owens- is not disad vantaged by ilie assignment.•

Termination by Frustration The do ctrine of frnstration considers whether events subsequent to creation of ilie contract provide a legal excuse for non-perfor mance. That is, frustration ter- minates a contract upon the occurrence of an "unforeseen catastrophic event that makes tile contract impossible, or prevents the contract from being performed in a manner at all similar" to what ilie parties envisioned when iliey entered ilie contract.' Unlike ilie do ctrine of mistake- which relates to severely erroneous assumptions concerning existing or past circumstances surrounding a contract at its for mation- frustration d eals with events iliat occur after ilie contract has been formed.6 Like mistake, however, ilie defence of frustration is intentionally difficult to establish, given that the purpose of contract law is to enforce volun- tarily chosen agreements.

3 Cd\Y1n ~t 7ie1tel . The Law of Contm~t. 14th ed tLoOOori Sv~et a"\d Mro<.v.-el, 2015) at 809 aoo GHL f!'ridmal\, The L~w of Cotftract 1n Can/J.:'i~. 6lh <:d 1Toron10 Toomsoo Reu1e1s Caooda ltd, 20ll) ~1 049.

4 /b.d at 650 Note tha t ,n, ce1""'in JUnSOic:tons. I here ls atso \egis\atlOn r(!fated to ass9nm.t? nl!. Thesi'! are discuss~c by f!'ridman, ibid at 652 a:'ld foUowing.

5 Bruce MacDougall, Jnttoduction to Conlf.1Cts 3d SJ IMadthclm lextSNeit:s 2016) al 291 6 l'-'01 disc:uss'Ol\Of mistake, seeChaptei- 8.

22 1 NEL

There are at least four factors that govern whether an event frustrates the contract jn question or not. The event must:

be unforeseen;7

not arise due to the fault of the parties;•

make the purpose of the contract ejther "impossible or drastically more difficult to achieve";• and

not be a risk the occurrence of which was contractually allocated to either of theparties.10

In such circumstances, both parties are excused from the contract and it comes to an end. Neither side is liable to the other for breach.

Case law establishes that the death of an employee terminates the contract of employment by frustration." Likewise, the enactment of legislation which pro- hibits performance also terminates the contract in question.12 The case of Taylorv Caldwell, discussed below, provides another example of the doctrine of frustration.

Taylor v Caldwell (1863), 122 ER 309 (CA)

THE BUSINESS CONTEXT: A common situation that gives rise to frustration occurs when the subject matter of the contract is destroyed, as discussed below.

FACTUAL BACKGROUND: Taylor rented from Caldwell the Surrey Gardens and Music Hall for four days to be used for a series of con- certs. Prior to the scheduled concerts, the music hall was destroyed by a fire for which neither party could be faulted, and all of the concerts had to be cancelled. Taylor sued for his expenses related to advertising and other preparations, which were now wasted.

THE LEGAL QUESTION: Was Caldwell in breach of contract for failing to supply the music hall as promised?

RESOLUTION: Since the parties had not expressly or implicitly dealt with who would bear the risk of the music hall being destroyed by fire, tl1e court had to decide whether tl1e contract had been frustrated or not. It rea- soned that the existence of the music hall was essential to performance of the contract, or, put another way, its destruction defeated the main purpose of tl1e contract. On tlus basis, the contract had been frustrated, and Taylor's action failed.

CRITICAL ANALYSIS: Why did the court not simply decide that the owner of the music hall was liable when he failed to supply the prom- ised venue, no matter how extenuating the circumstances?

Sometimes events that would disrupt contractual performance are expressly dealt with in the contract through a force majeure or other dause. 13 That is, rather than leaving it to a judge to decide whether the occurrence of a given event amounts to frustration, the parties contractually define for themselves- in advance- what events would frustrate the contract or otherwise bring it to an end.

7 Ma.":Oou9all supta 001e 5 al 292 B 1""1. 9 Ibid.

JO Jonn McC<lmtJs, TheL11Y10f Con1t'1'Cl'S.. 2o ed 1To1ont<> l1win la, .... 2012Jat 612 .. 613 11 lbKI <ll 606. 12 Ibid 31 606-607. 13 lb.d at 633

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INTERNATIONAL PERSPECTIVE

FORCE MAJEURECLAUSES The commercial objective of parties to a contract sometimes can be d efeated by circumstances beyond their control. Unforeseen events, both natural and human-mad e, may o ccur that make perform an ce onerous o r even impossible. The r isk of unforeseen events is particularly great in international transactions. Storms, eartl1quakes, and fi res may d estroy the subject matter of the contract. Wars, blockades, and embargoes may prevent the performance of the contract . Hyper- inflation, currency d evaluation, and changes in government regulation may create hardship for the parties to the contract.

Legal systems, for the most part, recognize that the occurrence o f some unforeseen events may be a valid excuse for non-performance. This notion fi nd s expression in various do ctrines, such as commercial impracticality, impossibility, and frustration. The challenge for traders is that, although legal systems recogn ize this kind of d efence, there are varying rules gover ning when non-performance is excused w ithout liability on the part o f the non-performing party. It is diffi- cult to predict precisely which events will release a party from contractual obligations. Addition- ally, exemption from performance is normally restricted to situations where it is impossible to perform- hardship o r additional expense involved in per form ance is usually not an excuse. For these reasons, it is common business practice

in both d omestic and international contracts to include force majeure clauses.

A force majeure clause deals with the risk of unforeseen events. It allows a party to delay or terminate a contract in the event of unexpected, disruptive events such as the following:

fire, flood, tornad o, or other nat- ural disaster. war, invasion, blockade, or other mili- t a ry action.

strike, labour slowdown, walkout, or other labour problems.

inconvertibility of currency, hyperinfla- tion, currency d evaluation, or other mone- t a ry changes.

rationing o f raw materials, d enial of import or expor t licences, or other gov- ernmental action.

Critical Analysis: What is the problem with d rafting a clause that is very simple, such as, "In the event o f a force majeure, the affected party may terminate its obligations un der the contract"? Similarly, what is the problem with d rafting a very specific clause that lists the events that allow a party to terminate the contract?

Souroas: Mary Jo NlchotSO!l & Atyssa Sriertey, Leg.I)} Aspects o/ k'lta<• n<)t!On~ Bus:ness. 3d ed lT01on10 Cmond Mon19ome•y PuOfk.:at ions. 201SJ . .lonn Mccarrus, The Law of Contr.11C:s, 2d ed (To•onto l1v.'1!'l La ..... 20J2Jat6:S.3aoo ldk1w '.ng

Many circumstances that may appear to fr ustrate a contract d o not amount to frustration in law. For example, if Conlin fi nds that construction material has unexpectedly tripled in price, and thus he will suffer a substantial loss on the contract, this circumstance would not amount to frustration. It has become fi nan- cially disad vantageous to perfor m the contract, but it is still possible to d o so. Similarly, if Conlin contracts to provid e a certain kind o f building material and no other, and that material proves to be unavailable at any price, that part of the contract has not been frustrated ei ther. Conlin has simply mad e a prom ise that he cannot keep and is in breach. As a final exa mple, if Conlin is unable to perform the contract because he has fired all his employees at the last minute, the contract may have become impossible to perform , but owing only to Conlin's own conduct Self-ind uced impossibility does not count as frustration in law.

NEL 223

In those rare cases in which a contract is terminated by frustration - as when the contract expressly states that the goods to be supplied must come from a par- ticular source, which failsl4 - the consequences for the parties are often unsatisfac- tory. At the moment frustration occurs, any further obligations und er the contract cease. If neither party has performed, they are left where they were before the con- tract was formed. If one party has begun to perform and incurred costs, there is no easy way to compensate that party, the reason being that, by definition, the contract has ended through the fault of neither party. Shifting the loss to the other would be no more just than leaving it where it lies. There are complicated and uneven d evelopments in the common law and in the statutes of some provinces that attempt to address these problems, but these are beyond the scope o f this book.15

Enforcement of Contracts When one party fails to perform its contractual obligations, it is in breach of contract and subject to a lawsuit. To succeed in its action for breach of contract, the plaintiff (the person who in itiates the lawsuit) is obligated to d emonstrate the following elements to the court's satisfaction, that is, on the balance of probabilities:

privity of contract. The plaintiff has to establish that there is a contract between the parties.

breach of contract. The plaintiff must prove that the other party (the defend ant) has failed to keep one or more promises or terms of the contract.

entitlement toa remedy. The plaintiff must demonstrate that it is entitled to the remedy claimed or is otherwise deserving of the court's assistance.

As noted in Chapter 4, the balance of probabilities means that the plaintiff must prove there is a better than 50% chance that the circumstances of the con- tract are as it contends they are and , furthermore, that these circumstances entitle it to receive what is claimed .

Privity of Contract Privity is a critical ingredient to enforcing a contract. It means that, generally speaking, only those who are parties toa contract can enforce the rights and obli- gations it contains.16

Because a strict application of the doctrine of privity can lead to serious injus- tices, courts have recently shown a willingness to allow third parties to rely on contractual clauses placed in the contract for their benefi t. For example, a con- tract between a business and a customer may have an exclusion clause protecting employees from liability in the event that the customer suffers a loss. Under a classical approach to privity, employees would not be permitted to rely on such clauses as a d efence to any action brought by a disgruntled customer because they are not parties to the contract- only their employer and the customer are. In the following case, however, the Supreme Court o f Canada refused to apply privity in this way, choosing instead to create a limited exception to its application.

14 Hawellvfr>u(Mnd 11876t 1 OBD 25S ICAJ. Sile. too, McCamus. !J.Jpt/1 001.:: !Oat 621 and totov11og 15 for a dis-::ussiOI\ of sttilute t<)v1 aoptying to frust1aliOI\ sae McCarnJS, Jb.'d al 637 t)nd fotowing 16 TOOri.'! a1ea num~r or Vl<'!jS Ul \'lhCh somco!'\€ \VOO is not a pa11y 1oa contract li:';a!5ed a ti'Md pa1lyJ rray

acquire an ~n(orceab4e oeoer11,, but 1niS cnap1er discusses o~ one of ll~rn, in 1he (!mpt~yn-ent context.

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Balance of probabilities

Proof that there 1s a better than 50% chance that tl1e circumstances of the contract are as ~he plaintiff contends

London Drugs Ltd v Kuehne b Nagel International Ltd, (1992) 3 SCR 299, (1993) 1WWR1

THEBUSINBSS CONTEXT: Businesses may try to protect their employees from being successfully sued by including clauses in their contracts with customers that shelter employees from liability.

FACTUALBACKGROUND: Kuehne & Nagel Inter- national Lt d (K&N) stored a variety of mer- chandise for London Drugs, including a large transformer. A term in the storage agreement limited K&N's liability on any one item to $40. Owing to the negligence of two K&N employees, the transformer was dropped while it was being moved and sustained over $33 000 of damage. London Drugs brought an action for the full amount of damages against both the employees and K&N. It was acknowledged that K&N's lia- bility was limited to $40.

THE LEGAL QUESTION: Can the employees rely on the clause limiting liability to $40?

RESOLUTION: The trial judge agreed that the negligent employees could be sued by the cus- tomer. Expressed in more technical legal lan- guage, the court applied the rulethat employees are liable for torts they commit in the course of carrying out the services their employer has con- tracted to provide. Because the K&N employees were negligent in their attempt to lift the trans- former, tl1ey were liable for the f ull extent of London Drugs' damages. The employees could not rely on the clause limiting recovery to $40 because this clause was found in a contract to which they were not a party. Put another way, the employees lacked privity to the contract between London Drugs and K&N.

In response to the harshness that the strict doctrine of p rivity creates in this kind of sit- uation, the Supreme Court of Canada created

an exception to its application. As Justice Iacobucci explains,

This c ourt has recognized ... that in appro- priate c ircumstances. courts have not only the power but the duty to make incremental changes to the common l aw to see th at it reflects the emerging needs and valu es o f our society .... lt is my vi ew that the present appeal is an appropriate situation for making such an incremental change to the doctrine o f privity o f contract in order to allow the . (emp loyees! to b en efi t from the li m it a- ti on o f li ability c lause . . .. I am of th e view that employees may o btain such a benefi t if the f ollowing requirements are sati sfied : (1) the limi tation o f liability cl ause must. either expressly o r impli edly. extend i ts benefit to the employees (or employee) seeking to rely o n it: an d (2) the employees (or em ployee) seeking the benefit o f the lim itatio n o f liability clause must have been acting in the course of their em ployment and mu st have been performing the very services provided f or in the contract between their empl oyer and the plaintiff (customer) w hen the l oss occurred.

The court went on to hold that the employees could rely on the limitation of liability clause. This is because the clause in question did extend its protection to the employees and, when the transformer was damaged, i t was due to the negligence of the employees while doing the very thing contracted for, as employees. Though the negligence of the employees caused London Drugs' damages in the amount of $33 955.41, it was entitled to recover only $40 from the employees."

CRITICAL ANALYSIS: Do you agree with Justice Iacobucci's decision? Should employees be able to rely on a clause in a contract to which they are not parties? How could employees protect themselves if they were not permitted to rely on sum a clause?

11 Tnose who a1\,? nol pa11y 10 a contract con~1n1!')Q exc.,Json clauses s~;td 001 <l!; tomatc<'ity asst1me that 1hey c.')f\ 1ety on thOse ctauses not\Y1thS1a:lding t~ 001con-e in London Drugs. In J-fak.1;,ne PtOducts Jncv Ututed P<Ncel Serv!Ce, 119991 OJ No 28Sl 103 OTC 306 lStJpC l Jus), for examO(a, the 04a1nl!ff con11actoo with UPS 10 d{jw<:1 1ndust1iat s<.'!w;rlg ne0':1!es to B111tsh Co1umbia. The conll<>-:: t con~ined a t1m11.a1on or f1abl1ty ciat;se bu t 11\ere \'-'as oo StiPtllahon that anyone other 1han UPS emp«oyees w::>u1d OiScha19e UPS cont1actu<i obfigatiO!\S uPS·s subCOn1rac101-v1r.o w~s lr~nsportiog a UPS 11<)~~: con""'if')1nQ too p.-'X:kage-fa~Od 10 delil/ei due to a lire 1n the tra~er Tt'K? .s1;!X:Ontra:: tor v1as iound fa tie ror over $40 000 because t!'K': court rel-used to ~lov.' 11 to shelter tJndt?r 1ne e>etusiOI\ d.luse in the UPS00 Hakjane contract.

NEL 225

The Owens could easily establish a critical element in a successful breach of contract action against Conlin- namely, privity o f contract. Conlin and the Owens entered into a contract whereby Conlin would supply certain goods and services to the Owens in exchange for payment.

The Owens may well have an action against Conlin's employees, but only for the tort of negligence (discussed in d etail in Chapter 11). There is no action in contract against the employees, however, because there is no contract between them and the Owens. The contract is only between the Owens and Conlin.

Statutory Modifications of the Doctrine The common law of privity has also been moclified by statute in two important areas: consumer purchases and insurance. In certain juris dictions such as Saskatchewan, consumer protection legislation provides that a lack of privity is no d efence to an act ion brought und er the act for breach of warranty brought against a manufac turer, for example. LS Similarly, insurance legislation across the country permits the benefici ary und er a life insurance contract to sue the insurer even though the benefici ary is not a party to the contract (i.e., even though the beneficiary lacks privity).

Breach of Contract Classification of the Breach Virtually every breach of contract gives the innocent party the right to a remed y. When determining what that remedy should be, the courts will first consider whether the term breached can be classified as a condition or a warranty.

A contractual term will be classifi ed as a condition or warranty only if that is the parties' contractual intention. Courts will consider all the circumstances surrounding the contract, including the language chosen by the parties in the contract i tself, i n making this determination.

A condition is an important term that, if breached, gives the innocent party the r ight not only to sue for d amages, but also to treat the contract as end ed. This latter right means that, if she so chooses, the non-d efaulting party can consider herself to be freed from the balance of the contract and to have no further obliga- tions under it. For example, it is an implied term of the contract between the Owens and Conlin that Conlin will be reliable. His multiple breaches of contract and insulting behaviour strongly suggest that he will not properly per form the contract in the future. On this basis, it could be argued that Conlin has breached a conclition of the agreement and the Owens a re not obligated to continue in the contract with him.19

A term classified as a warranty is a promise ofless significance or importance. When a warranty is breached , the innocent party is entitled to d amages only. Viewed in isolation, Conlin's failure to build the fireplace properly is likely to be regard ed as a breach o f warranty. entitling the Owens to d amages only.

Even after tl1e parties' intentions have been assessed , some terms cannot easily be classified as warranties or conclitions; tins is known in law as an innomina te term. In such circumstances, the court must look at exactly what has happened

18 The Consumer PtotoctKJn fN?d SuSJMSS Pracuces Act, SS 2014, c C· 30 2, s 26 See 100 Consum.?r P1oduct Vlt1'1t<tnl)' and Ltab:Jily Act, SNB ! :>78, c C ·l Bl , s 23.

19 This analysis is 0<ise::1 on McCam.Js,supr.> note 10 al 672andcas~sc:it~c lnere in

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Condition

An important term that 1f breached gives the innocent party the right to term1na te rhe contract and cl aim damages

Warranty

A minor term that. 1f breached gives the innocent party the right o claim damages onl y

lnnominate term

A 'erm tl1a: can no( easily be class1f1ed as either a cond1t1on or a warranty.

in light of the breach before d eciding whether the innocent party is entitled to terminate (or repudiate) the contract. For example, it is a term of the contract that the house be built to Code. It would be difficult to classify such a term as ei ther a condition or a warranty o f the contract. The contract is unclear on this point and the term is one that could be breached in la rge and small ways. If Conlin fa iled to install shingles on the roof that were Code approved , this is likely a breach of a warranty-like term, giving rise to a claim fo r damages only. On the other extreme, Conlin's fai lure to provid e a structurally sound home would be a breach of a condition-like term, allowing the Owens to end the contract on the spot, as they have d one. Provided that the plaintiffs can establish just one breach of condition or condition-like i nnominate term, they a re entitled to end the contract.

Note, however, that if the Owens end the contract on the erroneous assump- tion that such a serious form of breach has o ccurred, they themselves will be in breach of contract and subject to a lawsuit by Conlin.

Parties are free to classify a term in advance within the contract itself by setting out the consequen ces of breach. The court will generally respect this classification if it has been done clea rly.20

Exemption and Limitation of Liability Clause As already noted, parties are free to include a clause in their contract that limits or exclud es liability for breach. However, some clauses can appear to be tremen- dously unfair, in which case courts have declined to enforc e them. To help provid e direction in this important matter, the Supreme Court o f Canada has set out a series of tests whi ch courts are to follow in d eterm in ing whether the clause at issue is enforceable or not. Thi s case is d escribed in the box immediately below.

Tercon Contractors Ltd v British Columbia (Transportation and Highways), 2010 sec 4 , (20101 1SCR69

THE BUSINESS CONTEXT: Owners who put a project out to tender often includ e a contrac- tual term to lim it or even exclude liability so as to permit wide latitude in de cision-making and provid e a d efence in any action for breach of contract. Whether the clause will have its intended effect depends very much on the fac ts of the case.

FACTUAL BACKGROUND : Tercon, an unsuc- cessful bidder on a large highway project, sued

the government of British Columbia because it chose an ineligible bidder for the job and even tried to hide that ineligibility, contrar y to the ter ms o f Contract A.'ll Tercon also said that this breach o f Contract A entitled it to damages in the amount of profit i twould have earned had it been awarded Contract B.

By way of d efen ce, the gover nment relied on an exclusion clause (specifically called a "no claims clause") that stated:

Except as expressly permitted ... no Proponent (bidder! shall have any claim for any comp en - sation o f any kind whatsoever. as a result o f participating ... and by subm itting a proposal each propo nent shall be deemed to have agreed that it has no c laim.

20 V/.'Ckman Machine iool Sa-es Udv Schu!ot;t, fl974 JAC 235 lH U. 21 ro1 dlSCUSSiOn !n lh1s text 1e9a101ng the diflerence belwet!n Con11<Y.:l A and Conl l<X: l B, .see dlSCussiO n ol The

0...-een /OmJ v Ron Cng,;ee,;ng Lid. !I98U 1 SCR lll, 1981 CanLll V iSCCJ in <:t,,..pter 6

NEL 227

According to the government, the effect of the exclusion clause was to make any breach of the contract not actionable. Note that, unlike in Tilden Rent-a-Car v Glendenning'2 (discussed in Chapter 7), which went to whether the exdu· sion clause was even part of the contract, the concern in Ten:on was the effectiveness of an exclusion clause which was otherwise an uncon· tested part of the contract.

1'HE LE<,.U QUE. TION Does the exclusion clause provide the government with a defence to Tercon's action?

RESOLUTION The court was unanimous in holding that the enforceability of an exclu- sion clause is determined by considering the answers to three issues or enquiries. As the court states:

The first Issue ... is whether as a matter of inte rpretatio n the exclus io n clause even applies to the circ umstances established in evidence. This will depend o n the Court's assessment of the intention of the parties as expressed In the contract. If the exclusion clause does not apply, there is obviously no need to proceed fu rthe r with this analysis. If the exclusion clause applies. the second issue Is whether the exclusio n clause was unconscionable at the time the contract was made. ·as might a rise from situations of unequal bargaining power between the par- ties· (Hunter. at p. 462). This second issue has to do with contract formation. not breach.

If the exclusion clause is held to be valid and applicable. the Court may tr1dertake a third enquioy. narnetywhetherthe Court should rev· ertheless refuse to erlorce the valid exclusion clause because ol the existence ol an over· riding public policy. proof ol which lies on the party seeking to avoid enforcement of the clause. that outweighs the very strong public Interest in the enforcement of contracts. (emphasis added!

22 11978). 83 DLR 13dl 400. 1978C.nLll144 6 iON CAl

NEL

228

The court also confirmed that: Conduct approaching serious criminality or egregious fraud are but examples of welt-accepted and · substantially incon- testable· considerations of public policy that may override the countervailing public policy that favours freedom of contract. Where this type of misconduct is reflected in the breach of contract alt of the clrcum· stances should be examined very carefully by the court.

On these facts, the Supreme Court of Canada agreed that the government breached Contract A by choosing an ineligible bidder. A slim majority found in favour of the plain· tiff because it concluded that the exclusion clause did not apply to the facts at hand. As the majority stated, clear language would be necessary to exclude damages resulting from the government permitt ing an ineligible bidder to participate and to exclude the gov· ernment's implied duty to conduct itself fairly in relation to all bidders. As the majority stated: "I cannot conclude that the parties, through the words found in this exclusion clause, intended to waive compensation for conduct like that of the Province in this case that strikes at the heart of the integrity and business efficacy of the tendering process which it undertook."

Because the clause did not apply to the breach in question, Tercon had won and it was not necessary for the majority to consider the other two issues. Instead, it affirmed the trial judge's decision awardingTercon over $3 million for loss of profit.

CRITICAL ANAL¥SIS . Do you think that the Supreme Court of Canada's three- issue analysis injects too much uncertainty into contract law? Should parties be bound by whatever clause they agree to?

ETHICAL CONSIDERATIONS

IS IT UNETHICAL TO BREACH A CONTRACT?

Contract law generally does not punish a contract breaker but rather compensates the innocent party for any loss associated with the breach. According to famous jurist Oliver Wendell Holmes:

The duty to keep a contract at c ommon law means a prediction that you must pay damages if you do not keep it - and nothing else .... If y ou commit (tel a contract. you are liable to pay a compensatory sum unless the promised event comes to pass, and that is all the difference. But such a mode o f looking at t he matter stinks in t he nostrils of those w ho think it advantageous to get as much ethics into the law as they can.

Th.is is known as the "bad man" theory of breach and coincides with the concept of eco- nomic breach. Economic breach means that the potential contract breaker measures the cost of breach against the anticipated gains. If the pro· jected benefi ts exceed the probable costs, the breach is efficient. The difficulty with this strictly economic perspective on the question of breach is that it purposely ignores or marginalizes the ethical implications of breaking a promise.

What, then, is the role of ethics in the realm of contract law? It must have at least a limited role,

Timing of the Breach

according to Robert Larmer, s ince morality i s essential for a functioning business environment:

(Ulnless those in business recognize t he o bli - gation to keep promises and honour contracts. business could not exist. This is not to suggest that business people never break contracts. but if such behavio ur ever became general, busi - ness would be impossible. Just as telling a lie is advantageous o nly if most people generally tell t he t ruth. shady business practices are advanta- geous o nly if most business people recognize the existence of moral o bligations. Immorality in business is essentially parasitic because it tends to destroy the moral enviro nment which makes its very existence possible.

Critical Analysis: Should contract law start punishing those who breach contracts more regu- larly because such conduct amounts to a betrayal of trust and may lead to the market being under- mined? Is it practical to ask the law to enforc e a moral code or is Holmes's approach prefer- able? What non-legal penalties might a contract breaker face?

Sources: Rober! Larmer. !rh.'CS in the V/01kpiace_ Sdocred Rebd:ngs Jn Bus.tness ( !hies, 2d ed tBatmonl CA WMsv..orth Thomso~ Lea1n:ng 2002J. Orver Wendel Holmes. "The Pai n of l he Law· U897J 10 J-J<Nv L Rev 4 5'

Anticipatory breach

A breach that occurs before the date for performance

A breach of contract can occur at the time specified for performance-as, for example, when one party fai ls to d eliver machinery on the date recited in the contract. A breach can also occur in advance of the date named for performanc e- as, for example, when one party advises the other, in advance of the d elivery date, that no d elivery will be fo rthcoming. This is known as an anticipatory breach. Anticipatory breaches are actionable because each party to a contract is entitled to a continuous expectation that the other will perform during the entire period between the date the contract is formed and the time for performance. This means that the innocent party can sue immediately for breach of contract and is not required to wait and see if the otl1er party has a change of heart.

When the anticipatory breach is suffici ently serious, the innocent party is not just entitled to damages; she can also treat the contract as at an end . This option puts the innocent party in somewhat of a dilemma, filnce she will not know for sure whether the contract can legally be treated as at an end unless and until the matter is litigated- an event tl1at will occur months or, more likely, years later.

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Entitlement to a Remedy The fina l step in an action for breach of contract is for the phllntiff to satisfy a court that he is entitled to a remedy. In the usual case, damages- or monetary compensation- are awarded, but in specialized circumstances, a plaintiff is enti- tled to an equitable remedy.

The Measure of Damages There are several ways of measuringthephllntiff'sloss. The most common way is to award expectation damages, which provide the plaintiff with the monetary equivalent of performance.

Expressed in legal language, the phllntiffs, in this case the Owens, are entitled to compensation that puts them , as much as possible, in d1e financial position they would have been in had the d efendant , Conlin, performed his obligations under the contract. Subject to the principles discussed in this chapter, the Owens should at least be able to recover from Conlin any amount to complete the house over and above what they had committed to pay Conlin. Though they paid Holmstead $300000 to complete the job, they cannot recover that whole sum. Had the contract been properly performed by Conlin, the Owens would have spent $500 000 on their home. As it is, they had to spend $600000. They are only entitled to recover tlle difference (i.e., $100000) because the house promised by Conlin would not have come to them for free. The costs the Owens would have had to pay to Conlin for the house must be deducted in this case.

Whether the context is a claim for pecuniary (tangible) or non-pecuniary (intangible) loss, the purpose of damages in contract law is to compensate a phlln- tiff. As the Supreme Court of Canada confirms in Whiten v Pilot Insurance Co, punitive damages are exceptional and are only awarded against tlle d efendant for "malicious, oppressive and high-hand ed" misconduct that "offends the court's sense of d ecency." 23 In addition, the phllntiff must show that the d efendant has committed an independent actionable wrong- for example, two breaches of con- tract. Though this requirement is long established, its rationale is less than clear.

Pecuniary and Non - Pecuniary Damages As they will be discussed in detail in Chapter 1 0, damages in tort can be pecuniary (for financial loss) and non-pecuniary (for loss of enjoyment, mental distress, and other emotional consequences). The same holds true in contract law, except that recovery for non-pecuniary damages is historically unusual. In law, a defendant is responsible only for the reasonably foreseeable damages sustained by the plain- tiff and not for absolutely every adverse consequence experienced by the innocent party after the contract has been breached.24 While pain and suffering or other emotional distress is reasonably foreseeable when one person negligently injures another in a car accident, it is not generally anticipated as being the consequence of a breach of contract.

Test for Remoteness The kinds of damages recoverable in contract law are determined by the test for remoteness, which was established in the still-leading

23 Whitenv PNot Jnsur.tnce Co, 2002$CC 18at ~·a 34 2002 SCC lB ro1 lu 1the1 dlSCu SSiO!l Ol t'le VW?nenca.se. soe Ch.lpt~r 28.

24 H L" l:>ey'Ood t~ Y.:Ope of this took. to d i scu ss \Yhether t~ lest 101 1emo1eness iS st• iC1e1 in co~11act than it tS t!l lOrt

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Damages

1'V\onetary compensation for breach of contract or o:her actionable wrong

Expectation damages

Damages tha: pro vi de the plaintiff with the monetary eq u1valem of con:rac:ual performance.

Punitive damages

An award to the pl a1naff to punish the def en dam for malicious. oppressive. and h1 gh • handed conduct

d ecision of Hadley v Baxendale.25 That test states that the d amages claimed are recoverable provided

the d amages could have been anticipated, having "arisen naturally" from the breach, or

the damages- although perhaps difficult to anticipate in the ordinary case- are reasonably foreseeable because the unusual circumstances were communicated to the d efendant at the time the contract was being formed .

Any claim for d amages in contract must pass one of the remoteness tests set out above; otherwise, it is simply not recoverable. The policy rationale of such a rule is the need to ensure that defendants d o not face unlimited liability for the conseq uences of a breach and to allow them, by being informed of special circum- stances, the option of turning down the job, charging a higher price to compensate for the increased risk, or perhaps, purchasing the necessary insurance.

BUSINESS APPLICATION OF THE LAW

BREACH OF CONTRACT AND REASONABLE FORESEEABILITY

Gabriella Nagy of Toronto is suing Rogers W ire- less for $600000 for breach of contract, an10ng other actions. She alleges that Rogers, at her husband's request, terminated her personal cell phone account and rebundled it with the fami- ly's TV. home phone, an d Internet bill. The bill was then listed in her husband's name. Nagy's husband discovered that Nagy was having an extramarital affair after reviewing her cell phone records, which showed that she had been calling one number with particular fre quency. When the husband called that number, the man who answered said that he had recently ended a three- week affair with Gabriella Nagy. Nagy's husband immediately left her, and she fell into a d epres- sion and lost her job.

One of Nagy's reported contentions is that Rogers b reached its contract with her by making changes to her account without her consent and that it is therefore responsible for the events that followed. Rogers contends that Nagy's lawsuit for damages has no legal basis. In its statement of d efence, Rogers asserts that it is "not responsible for the plaintiff's affair or its consequences."

25 11854). 9 E.<cn 341

Gabriella Nagy, shown in disguise, is suing Rogers Wireles~

Critic.al Anal1sis: Has Rogers breached its contract with Nagy by bundling her cell phone account without her permission? Assuming this is breach of contract, is the nature of Nagy's dam- ages reasonably foreseeable? What other prob- lems might Nagy have in proving all the elements of her action for breach of contract?

Source: Pat I lewtll. V/o~n Aleg ng Roges txoosed Har Aflair Says OtnetS Have Had Pr1wcy Sreachecr The G.bbe atld fi/lail tpub- liS~100 16 J unie 2010, a:"ld updatoo 26 tllb1ch 20171 on11ne <hllps// WW\"I .1 hegtobeand ma it.co mf ()e, ... s/nat ;o M t/v1oman•atle91n9 • roge I S•E!Xj'.)OS(!d •he r•a f fa r•SilyS•Ol he !S• Mv" • h.Y.l ·O• Nl!JCy · 01eac hed/ <ltlidQ.11322205/>.

231 NEL

Recovery of Non-Pecuniary Damages As already noted, recovery for non-pecuniary damages- such as for mental distress- is traditionally viewed with suspicion in contract law. This traditional approach has been challenged, however, by the Supreme Court of Canad a in the case discussed just below.

Fidler v Sun Life Assurance Company of Canada, 2006 SCC 30, [2006) 2 SCR 3

THE BUSINESS CONTEXT: When a supplier o f goods or services fails to meet contractual obligations, the customer may experience frus - tration and distress. Depending on the kind of contract involved, the customer may be entitled to damages for enduring such upset, thereby d riving up the size of the d amage award.

FACTUAL BACKGROUND: Ms. Fidler worked as a receptionist at a bank in British Columbia. She was covered by a long-term disability policy that would provide her with an assured income should she become ill and unable to work. Ms. Fidler began to receive benefi ts when she was diagnosed with chronic fatigue synd rome and fibromyalgia. The insurer later cut her off from payments, citing vid eo surveillance that d etailed activity proving that she could work. [n the face of medical evidence that Fidler could not, in fact, work, the insurer refused to rein- state her benefits. Fidler sued the insurer for breach of contract. Just before trial, the insurer agreed to reinstate benefits, leaving only a few issues to be d etermined at trial, including the one d escribed below.

THE LEGAL QUESTION: Was the plaintiff enti- tled to recover d amages for mental distress caused by the defendant's wrongful denial of benefi ts?

RESOLUTION: The Supreme Court of Canad a rejected the traditional notion that damages for mental distress should be tightly controlled and exceptional. On the contrary, the court should simply ask, "What did the contract promise?" and provide d amages on that basis. More specif- ically, the plaintiff seeking recovery for mental distress must show:

1. that the object of the contract was to secure a psychological benefit tl"lat brings mental distress upon breach within the reasonable contemplation of the parties (i.e., the test in Hadley v Baxendale cited above); and

2. that the degree of mental suffering caused by the breach was of a d egree sufficient to warrant compensation.

The court ruled that- as disability insur- ance contracts are to protect the holder from financial and emotional stress and insecurity- mental distress d amages should be recoverable. On this basis, Fi dler was able to bring herself within the first step of the test above. And because Fidler's distress was of a sufficient d egree, she met the second part of the test. The court affir med tl1e trial jud ge's award of $20 000 for mental distress.

CRITICAL ANALYSIS: Do you agree that d am- ages for mental distress should be recoverable? Do you think that a plaintiff who is left feeling angry or frustrated by a breach would pass the test for recovery stated in Fidler, or is something more pronounced required?

Based on this case, it would seem that Janet Owen has a particularly strong claim for mental distress d amages. A contract to construct a home- given its personal nature- has as one o f its objects the provision of a psychological benefit that brings mental distress upon breach within the reasonable contemplation of the parties. Second, since Janet has been very upset because of Conlin's breach

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and is even having trouble sleeping, it would seem that the d egree o f mental suffering caused by the breach is of a d egree suffici ent to warrant compensation.

Recovery of Pecuniary Damages Those who have suffered a breach of con- tract can recover all tlleir resulting pecuniary (or monetary) losses unless a clause is included that limits, excludes, or fi xes liability at a set amount.26 Recovery of pecuniary damages is possible in situations such as the following:

a purchaser of a warehouse with a leaky roof can recover tlle cost of repairing the roof provided the roof was warranted to be sound.

a client who suffe rs a financial loss owing to negligent legal advice can recover those losses from the lawyer in q uestion.

a person whose goods are stolen while they are in storage can recover the cost of those items from the warehouse owner.

Similarly, because Conlin did not construct and complete tlle house properly, the Owens are entitled to recover additional d amages that flow from that breach. This is discussed in the next section of the text.

BUSINESS APPLICATION OF

LIABILITY FOR A STOLEN FORD MUSTANG

THE LAW

Kristen Cockerill entered into a weekend car rental contract with an Enterprise Rent-a-Car (Enterprise) outlet in Dartmouth, Nova Scotia, for a Ford Mustang. At the end of the rental perio d, Cockerill returned the Mustang but because it was a Sunday, the Enterprise outlet was closed. Those who return vehicles on Sunday are instructed by Enterprise to park the car on the lot and then leave the car keys in a secure d rop-box provid ed by Enterprise. This is what Cockerill did.

Cockerill was contacted by Enterprise the next d ay: it had the keys, but where was the Mustang? Police soon established that the car had been stolen from Enterprise's lot sometime before the rental company opened for business on the Mond ay.

Soon thereafter, Cockerill received a bill from Enterprise for $47000, which was tlle replacement cost of the vehicle. Needless to say, Cockerill was taken aback and very worried about receiving a bill of this size. She checked with her insuran ce company which said that neither she

Krist.en Cockerill

nor it should have any legal responsibility for the loss because the car was not in her control when it was stolen. Enterprise took another view, relying on a contractual term which Cockerill d escribed as follows: "It is in the fi ne print of the contract that I am responsible for the vehicle until they receive it."

Enterprise also said that if Cockerill's insurer did not pay the $47000, it would charge that amount to her credit card .

233 NEL

I v m v

After CBC contacted Enterprise for further response, Ned Maniscalco of Enterprise emailed CBC noting as follows: "Sometimes customers mistakenly believe if they didn't personally cause or witness any damage that they are not responsible. Thi s is one of the most common misconceptions", he said. "In fact, customers are financially responsible for any damage or theft that occurs d uring a rental transaction, regard- less of fault or negligence- just as if they owned the rental verucle themselves." He also pointed out that tlle d rop-box where Kristen left her keys has a prominent sign reminding customers that "the verucle remains their responsibility until it can be checked in by an employee."

Soon af ter this, Cockerill learned that Enterprise would not be forcing her to pay the $47000. She was also o ffered an apology by the company. Cockerill told CBC that "It's been extremely stressful, actually, just not knowing where things are going to go, the financial piece

hanging over my family. It's been quite stressful. But I'm happy to see it come to an end."

Critf.clll Anal)'l'la: Enterprise's legal analysis may well be correct that the rental contract made Kristen responsible for the car when it was stolen and, on that basis, was entitled to $47000 a~ its contractual remedy. But what price did Enter- prise pay by insisting on its strict contractual rights? What should it have d one differently in handling tills dispute with Cockerill?

Sources: Btair RhO.-'.!es, 'Enterprise Wlt;"9 to Work '\f/ll ll Woman on 1-bok. fo1 $47K Musta!\g·, CBC N12Y1S 13 J<lntJ<uy 2014J, ont1ne < hllp ./ /v1ww .c be .ca/news/cantJdti/novtJ -sco titJ/e n te1p1 ise ·wll~ 10-v.<0rk.~wth•w:>rnan-on-r.oo!t·I01•47k~m.;st.an9-l2483207>

1'«!-p10duca:i by perm1ss\On of CBC L'c:ensing. CSC N(;"!ws. ~tden (n1e1p1iSe Rental Musiang Has V/oma~ racing $47K Slf 13 ~r'kJtlry 2014) ont!ne. <'lllp//vtv~-111::.bec.alnews/can.adaloov~scotia_/sto~ ... •enter puse· rent at •l'l"IUS w. ng~ Ms ··wo ma n· foc i l\Q~47k.· oll 1. 2482 2 73 >, CBC Ne\..,S "Ki isteo CockerlPNon·1 Ha.,1e to Pay lor Std.en $4'1K R<?nt<#. Cai· (7 JarwJary 2014) on11!'K'!: <http://vr-11w.cbe.r.a/~\'IS/cariooal nova· sco1ia/k.risten·cocke1 ,, . vK"Jn •t ·have -to· P<'lY· f 01•stoten·47 k •rent.)1-<:ar·l248i'727>. R!!oroduced by pe1m1sson or CSC Licens•r-.g

Duty to Mitigate Everyone who suffers a breach of contract has a duty to mitigate. Tills means that they must take reasonable steps to minimize losses that might arise from the breach, as in the following examples:

Duty to mitigate

The obl1gat1on o .ake reasonable steps to m1n1m1ze the l osses resulting from a breach of contraci or other wrong

a landlord whose tenant breaches a lease by moving out before the expiry of its term has a duty to mitigate by trying to find a replacement tenant.

a disappointed vendor whose purchaser fails to complete a real estate transaction has a duty to mitigate by trying to find a replacement purchaser.

Employment law provides anotl1er example. Consider tlle employee making $120000 a year on a contract that permits the employer to terminate the contract by giving the employee reasonable notice. Assume, further, that the employee is dismissed without cause (i.e., the employee was performing competently) and with no notice at all. Upon thjs breach o f contract by the employer, the employee's d uty to mitigate is triggered and she must take reasonable steps to fi nd replace- ment employment. If the employee was entitled to six months' notice of term ina- tion by way of reasonable notice and finds replacement employment at the same level of compensation after four months, she is entitled to d amages equivalent to four months' salary or $40 000. If she fai ls to mitigate- by, for example, refusing to look for replacement employment at all- a court will reduce her d amages by $60000, since the loss of that amount is more attributable to her than to her former employer.

By the same token, any reasonable costs associated with the mitigation are recoverable from the party in breach. An employee could, in addition to damages related to salary loss, also recover reasonable expenses related to the job search.

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In the Owens' case, mitigation took the form of hiring Holmstead to finish and repair the house for $300 000. Assuming that this is reasonable, the Owens will be able to recover $1 00 000 from Conlin. This is because the Owens have had to pay an extra $100 000 for their house over and above what they had committed to pay Conlin. The calculation is based on the following analysis: The Owens were going to spend $500 000 on the house but have paid Conlin $300000 and Holmstead $300000 for a total of $600000. Since this extra cost of $100000 to obtain their bargain flows from Conlin's breach of contract, it is recoverable. Note that even the $5000 to rebuild the see-through fireplace (which is includ ed in Holm stead's $300 000 bill) is recoverable. A court will almost certainly agree thatthe Owens are entitled to the price of rebuilding the fireplace even though this amount is much higher than Conlin's solution of s imply bricking in one of the fireplace walls. In short, the Owens had contracted for a see-through fireplace and are entitled to it.

Equitable Remedies

In those relatively rare situations in which damages would be an inadequate remedy for bread1 of contract , the court may exercise its discretion to grant one of the equitable remedies discussed below.

Specific Performance An order by the court for the equitable remedy of specific performance means that instead of awarding compensation forfailing to perform, the court orders the party who breached to do exactly what the contract obligated him to do. This remedy is available only when the item in question is unique and cannot be replaced by money. The classic situation for specific per- formance is a contract for the sale of land, where the particular piece of land cov- ered by the contract is essential to tl1e buyer's plans, perhaps as part of a major d evelopment project. Without the remaining piece, the project cannot proceed, so damages would fail to provide a complete remed y.

;

, ...

.... ··· ,. ..

Shott Id the co11rt enforce contracts as they relate to aesthetics and matters of taste, or should contractors be giwn the discretion to folltiw dteaper alternaaws?

NEL 235

Because specific performance i s an equi table remed y, a court can refu se to o rder it , at its cliscretion, as in the following circumstances:

improper behaviour by the plaintiff. Any improper motive or conduct on the part o f the plain tiff may clisqualify them from being granted such special assistance. Rules governing equity, like "He who seeks equity must d o equity" or "She who comes to equity must come with dean hand s", mean that only the d eserving plaintiff will succeed. delay. Failure by the plaintiff to bring a claim promptly can be ground s for denying the plaintiff an equitable remed y. 27

impossibility. A court will not order a defend ant to d o something that is impossible, such as convey land that the d efendant does not own.28

severe hardship. If specific performance would cause a severe hard ship to the parties, or to a third party, a court may refuse to ord er it.

employment contracts. A court will not, orclinarily, ord er specific performance o f an employment contract , because being forced to work fo r someone else against the employee's wishes would interfere too much with the employee's personal freedom.

Injunction If a contract contains promi ses not to engage in specified activi- ties, clisregarclingthosepromises by engaging in the prohibited acts is a breach of contract. While an award o f d amages is of some help, additionally, the plaintiff would want a court order requiring the offender to refrain from continued viola- tion of the contract. For example, if the vendor of a business agrees not to com- pete with the new owner and the relevant clauses are reasonable restrictions (see Chapter 8), d amages alone are an inadeq uate remed y for breach because they fail to p revent the vendor from competing. Only an ord er to cease do ing business will provide the buyer with a complete remed y.

Like an o rder of specific perfor mance, an injunction is an equitable remedy and is subject to the court's discretion. However, it is commonly ord ered to restrain a party from breaching a promise not to d o something, as noted above. There are occasions where a court will not order an injunction, however, as when the plaintiff d oes not have "clean hands" (i.e., is und eserving) or delays in b ringing the matter before the court.

Courts also have the juriscliction to order an injunction for a limited period of time. This type of injunction, known as an interlocutory injunction, requires someone to stop doing something until the whole dispute can be resolved through a trial.

Rescission It may be appropriate, in some cases, to restore the parties to the situation they were in before the contract was fo rmed , rather than use compen- sation to put the innocent party in tl1e position it would have been in had the contract been completed. For example, many of the doctrines in Chapter 8 for avoicling contracts provide rescission as the contractual remedy.

As with other equitable remeclies, there a re bars to receiving rescission o f a contract. For example, where parties cannot restore each other to their p re- contractual positions- because, perhaps, the subject matter of the contract has been altered- the court has the power to dowhat ispracticallyjust, including the

21 ror a discuss on ana excerpts or 1e(ev"t1f'H casa law concerning equit.aib!e remedies and .oefences 1~1e10, see S1ephanie Bc!n- tsMi b Davie! R Percy, ~ds, Co.~trac:s Cases hnd Con'.Ynen:.w.es, 9 th ~d tT01on10 Carsv..etl 20141a1 937 aOO 101ov11ng

28 Soo Castle v W.1k.vison U870J. 5 LR Ch App 534.

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Interlocutory inju nction

An order m refrain from do1n g someth1n g for a limited penod of time

Unjust enrichment

Occurs when one party has undeservedly or un1ustly secured a benefit at the other party's expense

Restltutlonary quantum merult An amount that is reasonable given ~ie benefit the pla1m1ff has conferred

power to order that the innocent party be compensated. Another bar to rescission is d elay by the plaintiff in seeking the court's assistance.

Restitutionary Remedies Sometimes a contractual claim fails not because the plaintiff is und eserving but because he cannot prove that an enforceable contract is in place. The law of resti- tution gives recourse to a plaintiff who has conferred benefits on the defend ant in reliance on a contract that cannot be enforced due, for example, to noncompli- ance with the Statute of Frauds. ,,., For example, if the plaintiff has done work for the defend ant pursuant to an unenforceable contract for the purchase of land, the plaintiff may end up being recompensed by the defendant, not und er contract but pursuant to the law of restitution.

Restitution is a complex area of law but its main objective is clear- to remedy unjust enrichment. Unjust enrichment occurs when the defend ant has und eserv- edly or unjustly secured a benefit at the plaintiff's expense. In such circumstances, the court will ordinarily order that the benefit be restored to the plaintiff or oth· erwise be accounted for by the defend ant.

In response to an unjust enrichment, the court has several options, including ord ering the d efendant to:

pay a restitutionary quantum meruit; that is, an amount that is reasonable given the benefit that the plaintiff has conferred.30

pay compensation; that is, an allowance of money to put the plaintiff in as good a position as the plaintiff was in prior to conferring the benefit. 31

Managing Risk There are several risks that a business fac es when the time comes to perform a contract. It may be that the business cannot perform at all or that when it d oes perform, it d oes so defici ently. A business can attend to these possibilities pro- actively or reactively. From a proactive perspective, the business can negotiate fo r clauses to limit or exclude liability as well as fo r a force majeure clause, as appropriate. It may be, however, that the other side is unwilling to agree to such clauses. Another proactive strategy is to ensure that employees a re competent and properly trained, since any mistakes they make in performance of the con- tract are attributable to the employer. The better the employees d o, the more likely the contract will be performed without incident. Securing proper insur- ance can also be effective, a matter will be discussed in more detail in Chapter 28.

Once the business is in breach of contract, however, matters are now in a reactive mode. The contract breaker is in an unenviable position, since it faces liability for all reasonable costs associated with its d efa ult. To reduce financial exposure and liti- gation expenses, the busine.ss should consider seeking mediation, arbitration, and other forms of compromise, including settlement offers, as alternatives to going to trial. Depending on the nature of the breach, the loss may be covered by insurance.

Those who contract for the provision of a prod uct or service should und ertake to ensure that the supplier is reputable and reliable. This way, legal conflict is perhaps avoided altogether.

When faced with a breach of contract, the innocent party must make a business d ecision- as much as a legal one-and d ecide how it should treat that fai lure.

29 See Chapt« 8. 30 Contractual! quantum rr.tetuir has a\f-i'.?M y· been oiscussed ;n Ch.-..,p1e1 7. 31 GHL r11dmal'\ "OLJtJntum f.letu}t" 11999) 3i Alra L Rev 38

237 NEL

This d ecision involves evaluating the risks of losing in court; the remedies avaH- able, including the amount of damages; the likelihood of being able to negotiate a settlement; and whether there is a valuable business relationship to preserve.

BUSINESS LAW IN PRACTICE REVISITED

1. Can the Owens demonstrate all the steps in an action for breach of contract against Conlin?

The Owens can fulfill all the steps to succeed in an action for breach of contract. They can show privity of contract between themselves and Conlin. They can show that Conlin breached the contract in multiple ways, including by failing to build the house according to Code and not providing the fi replace contracted for. Finally, the Owens can show that they are entitled to a remedy. Both have suffered pecuniary loss and, in addition, Janet has suffered non-pecuniary d amages in the form of mental distress.

2. Are the Owens themselves in breach of contract for refusing to permit Conlin to complete the contract?

Conlin's multiple breaches of contract and insulting behaviour strongly suggest that he will not properly perform the contract in the future. A court may well conclude that this amounts to a breach of a condition o f the contract- namely that he will be reliable. If the Owens can prove a breach of condition, they have the r ight to end the contract. They are therefore not in breach of contract for refusing to permit him to complete.

The term that the house must be built to Code may be hard to classify as a condition or warranty up front since the parties' intentions are not dear and the term itself can be breached in both large ways and small. On this basis, the court will look to how serious the structural defects are. ff they are serious, the breach will be of a condition-like innominate te1·m, also bringing with it the right to treat the contract as at an end.

3. Did the Owens properly mitigate their damages?

Assuming that there has been a breach of condition or condition-like in nominate term, the Owens properly mitigated their loss in hiring Holmstead to repair and complete the home. This is also based on the assumption that the extra cost was reasonable.

4. What damages can the Owens receive?

The Owens stand a good chance of receiving considerable pecuniary and non- pecuniary d amages.

Pecuniary Damages Because the Owens had to hire Holmstead to finish and repair the house for $300000, they paid an extra $100000 for their home. That is, the contract price with Conlin was $500 000. They have already paid Conlin $300000 and will be paying Holmstead another $300000. Assuming that Hohustead's fees were reasonable, the Owens will be able to recover $1 00 000 in pecuniary damages from Conlin.

Note that even the $5000 to rebuild the see-through fireplace (which is includ ed in Holmstead's $300 000 bill) is probably recoverable even though a cheaper "solution" was offered by Conlin. The Owens contracted for a see-through fireplace and therefore Conlin's idea of simply bricking in one of the fireplace walls is not acceptable. Note that the recovery of $5000 is already includ ed in the $100 000 discussed above. It cannot be claimed and recovered twice.

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Non -Pecuniary Da m a ges Janet Owen may also be able to recover damages for mental distress and suffering because Conlin's breach o f contract caused her mental rustress. A contract for home construction arguably has, as one of its objects, the provision of a psychological benefit , so the fi rst step in Fidler is met. The second step is also met since Janet has suffered mental distress to a degree suffici ent to warrant compensation. She has experienced great upset and even has had trouble sleeping.

It is difficult to preruct how much a court will award for non-pecuniary d am- ages but, based on existing case law, it is unlikely to be a large sum given the extent of her upset.

CHAPTER SUMMARY

In the vast majority of s ituations, a contract terminates or end s when the parties fully perform their obligations. Less common are situations where the contract end s because the parties find it impossible or tremend ously rufficult to perform their obligations. In such cases, prud ent business parties will have addressed such a possibility through a force majeure clause or equivalent.

A more usual and complicated situation, from a business perspective, occurs when one party breaches the contract by failing to perform or by performing inadequately.

There are several ways thata contract is terminated: by performance, by agree- ment, through fr ustration, and through breach.

When a contract is terminated by performance, the parties have fulfilled all their implied and express promises. The work necessary to achieve performance may be done by the parties personally or through their agents/employees, unless a term to the contrary is included .

Sometimes, parties terminate a contract by agreement. For example, the par- t ies may agree to end the contract entirely or to replace it with a new one. Alter- natively, the parties may vary certain terms of the contract or substitute a new party who, in turn, assumes rights and d uties under the contract.

Contract law allows one party to assign hi s r ights under a contract but not the liabilities. The law of assignment permits the creditor to assign his right to collect under a contract to another (the assignee) without the agreement of the d ebtor. Once the assignee has given notice of the assignment to the debtor, the latter can perform the obligation only by paying the assignee.

The do ctrine of frustration termi nates a contract , but only in very lim ited circumstances. It must be shown thatan unanticipated event or change in circum- stances is so substantial that performance has become functionally impossible or illegal. Provid ed the risk o f such an event has not been allocated to one party or the other, and provided the event rud not arise through either party's fault, the contract has been frustrated.

When one party fails to perform its contractual obligations, it is in breach o f contract and subject to a lawsuit. To succeed in its action for breach of contract , the innocent party must establish the existence o f a contract , breach of contract, and entitlement to a remed y.

Privity means that, with limited exceptions, only those who are parties to a contract can enforce the rights and obligations it contains.

When a party to a contract fails to keep h is promise, he has committed a breach of contract and is liable for such d amages as would restore the innocent party to the posit ion she would have been in had the contract been performed . These are

NEL 239

known as expectation d amages. If there is a valid exclusion or limitation of lia- bility clause in the contract, the d efend ant's liability will be reduced or eliminated, d epending on the circumstances.

Damages in contract are ordinarily pecuniary, but in some circumstances, the innocent party is entitled to non-pecuniary d amages for mental suffering and distress. As well, punitive damages are exceptionally available.

When one party suffers a breach of contract , he must take reasonable steps to m itigate. If the party fails to do so, the d amage award will be red uced accordingly. By the same token, any reasonable costs associated with mitigation are also recov- e rable from the party in breach.

Contract law also offers equitable remedies, such as specific performance and injunction, when d amages are an inadequate remed y. On occasion, the best solu- tion is to rescind the contract - that is, return the parties to their pre-contractual positions.

The law of restitution also provid es remedies in a contractual context because its main objective is to remedy unjust enrichment. Unjust enrichment o ccurs when the d efendant has undeser vedly or unjustly secured a benefit at the plain- tiff's expense.

Whether the innocent party takes the contract breaker to court is as much a business de cision as it is a legal one.

CHAPTER STUDY

Key Terms and Concepts anticipatory breach (p. 220)

assignment (p. 211)

balance of probabilities (p. 215)

condition (p. 217 )

damages (p. 221)

duty to mitigate (p. 225)

expectation damages (p. 221)

frustration (p. 212)

innominate term (p. 217)

interlocutory injunction (p. 227)

novation (p. 210)

punitive damages (p. 221)

restitutionary quantum meruit (p. 228)

unjust enrichment (p. 228)

vicarious performance (p. 210)

warranty (p. 217)

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Questions for Review 1. What are the four major ways that a contract

can be term inated ?

2. What is an assignment? What risks d oes the assignee of a contractual right assume?

3. What is privity o f contract?

4. How is vicarious performance used by business?

5. How is a new contract created through nova ti on?

6. When is a contract frustrated ?

7. What is a force majeure clause?

8. What elements need to be established in a successful action for b reach of contract?

9. How is the severity of a breach of contract evaluated?

10. What is the difference between a wa rranty and a condition?

11. What is the purpose of awarding damages for breach of contract?

12. When will a court award punitive damages for breach of contract?

13. When is a plaintiff entitled to damages for mental distress?

14. What is unjust enrichment?

15. What is restitutionary quantum meruit?

16. What is specific performance?

17. When will a court grant an injunction?

18. What is the remedy of rescission?

19. When can the innocent party treat the contract as at an end?

20 . How can a plaintiff avoid the application of an exclusion of liability clause?

Questions for Critical Thinking 1. A con tract is considered frustrated in limited

situations and it can be difficult to predict exactly when it will apply. How can tl1is problem be addressed proactively at the drafting stage of the contract?

2. Breach of a condition can signify the end of the contract, while breach of warranty does not. How does tile court distinguish between these two kinds of terms?

3. The privity rule is one of the basic elements of contract law. What is the purpose of the rule?

4. Contract law is intended to facilitate commercial activities and to enable businesses to conduct their affairs so that their legal obligations are certain. Do you think, after considering the material in the last five chapters, that contract law achieves its goals? Can you think of ways to improve the effectiveness of contract law?

5. The Canadian Radio television and Telecommunications Commission (the CRTC) has put in place tile Wireless Code (the Code) in order to deal with a number of cell phone issues, including customers receiving extremely Mgh bills for data roaming charges. In response to this perceived unfairness, the Code places a cap o n a customer's national and international data roaming charges in certain cases unless the customer expressly agrees to pay such

additional charges. Is it the role of a public authority to interfere with contractual freedom in this way? If a wireless custome.r fails to keep proper track of her data roaming usage and then ends up with a bill in tile thousands of dollars, is that not the fault of the customer? Why should the CRTC interfere with the market in this way?

6. Historically, it was difficult to receive damages for mental distress in a breach of contract action. To cite two objections, some courts concluded that mental distress simply was not a reasonably foreseeable consequence of breach or were concerned that permitting sum recovery would encourage plaintiffs to exaggerate the extent of their upset. How does modern contract law permitting recovery of mental distress respond to these concerns?

Situations for Discussion 1. Leonard purchased an unconstructed

condominium in a large development. The co ntract stated that delivery of the completed condo was to be on a date set by the developer before February 1, 2010. Construction proceeded on schedule except, on April 25, 2009, the whole development burned to the ground. After spending some time looking for the cause of the fire, the developer started the process of rebuilding in October 2009. lt looks like the condo will be delivered about a year later than originally anticipated. Is Leonard bound by the contract under these circumstances? Does it matter if the fire was caused by the developer's negligence?.,

2. Mr. White woke up one morning to find that the interior of Ms car had been consumed in a fire, rendering the veMcle a total writeoff. He promptly made a claim under his car insurance policy. Soon after that, the insurance company accused White of setting his own car on fire and refused to pay out the claim. When White asked the insurance company to expla in on what basis it was alleging arson, the company refused to provide an answer. Since that fi rst refusal, the local fire cMef has said there was no evidence of

32 0.a!W'.!d_ in oari. on f 1Shrna11 v Wlld<'fn(!.~s l'lldqo ,11 Stcw,NI Crcc1' Jnc 2010 ABC4 345

241 NEL

arson but still the insurance company refuses to pay. Whlte believes that the insurance company is in breach of contract on several fronts, including failing to pay out on the policy and failing to answer Ws questions regarding refusal of Ws claim when he first posed them. Assumjng tWs analysis is correct, do you trunk Whlte will be successful in claiming punitive damages?33

3. Tropical-to-Go Ltd (Tropical) retails large plants and trees. Its long-term supplier, Green Trees Ltd (Green), failed to d eliver a large ord er to Tropical, in breach of contract to do so. As a result, Tropical lost a major contract with a large property management company for commercial buildings throughout the city, including the supply and maintenance o f plants. Tropical lost trus contract because without tl1e d elivery from Green it could not supply tl1e contracted-for plants to that property management company. Tropical estimates it has lost $25 000 in revenue as a result.

a. When Green failed to deliver, Tropical's duty to mitigate was triggered. Describe mitigation and what it would require Tropical to do in this case. If Tropical fajls to m itigate, how d oes tllat affect its damages claim against Green?

b. What is the measure o f damages in a breach o f contract action? Based on that measure, what can Tropical recover by way ofloss of profi t? You may assume for the purposes of trus question that, acting reasonably, Tropical was unable to mitigate its loss.

c. Assume that the contract between Green and Tropical contained a clause as fol- lows: "Green's liability shall extend to all damages proximately caused by Green for breach o f its contractual obligation(s) to Tropical but such liability shall in no event include loss of profi t." Based on the Tercon case discussed earlier in this chapter, d o you think the court will enforce the clause? Assuming tile court will enforce the clause, how does this affect Tropical's d amage claim?

33 B.?is.ed, 111 part, on VltMen, supt a note 23.

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4. Atlantic Fertilizer (AF) operates a fertilizer plant in New Brunswick. AF made a major sale to tl1e government of Togo in Africa and engaged Pearl Shipping (PS) to transport tile fertilizer to Togo for a fee of $60 000. The contract between AF and PS specified thatAF would deliver the cargo to PS for loading on its srup between March 25 and March 31 and tl1at AF would pay $1 000 (in addition to tile srupping charges) for each day after March 31 that the cargo was delayed. AF had difficulty in filling tile large ord er in its plant and notified PS tllat delivery would be sometime after March 31.34

PS is contemplatingAF's message and d eciding how it should react. Options under consideration are to wait for AF to d eliver and add tile $1 000 d aily charge to the bill, give AF a firm date bywruch it must deliver, or termjnate tile contract witll AF and seek another cargo for its srup. WWch options are legally available to PS?WWchshould PS choose?

5. Peter Pan Equestrian Ltd (Peter Pan) wanted to increase the amount of natural light in its horse-riding arena. It decided to purchase a skylight system from Skylights-R-Us Ltd (Skylights), wruch d uly supplied and installed metal frame acrylic skylights on the nortll and south s ides of the riding arena. Unfortunately, tile skylights soon began to experience problems with humidity, cond ensation, and leaking. As well, the acrylic itself began to crack. In response to complaints by Peter Pan, Skylights suggested that Peter Pan add supplemental heat to the building as well as install a proper ventilation system. They had previously made thi s suggestion to Peter Pan when negotiating tile contract but Peter Pan refused. Peter Pan refused , again saying that it had been supplied with de fective skylights. Now the skylights are riddled with cracks and are beyond repair. Peter Pan has sued Skylights for breach of contract and is seeking damages to replace the skylights as well as undertake mould remediation work in the riding arena. What is the argument that Peter Pan has failed to

34 Based, !n part,, o" Annada Utzes Ltd v ChtJleur f!etlfl1zets Lid U994), 170 NR 372, 1994 CMLll 3500 tFCAJ. ""d !199712 SCR 6 17. 19970.nlll 362{SCC)

properly mjtigate? If that argument is successful, what jmpact does this have on Peter Pan's damage claim? What other weaknesses do you detect jn Peter Pan's case?"'

6. XYZ Ltd entered into a contract with ABC Ltd for the supply of resin, whk h XYZ Ltd needed in o rder to produce pipe for a large pipeline. ABC Lt d made the business decision to supply defectjve resin to XYZ Lt d and drafted the contract between the parties to protect itself from liability in relation to that defect as follows:

X'fZ Ltd assumes all responsibility and liabilit y fur loss or damage arising from the use of the resin supplied under this contract herein and acknowledges that ABC Ltd's

liabilit y is limited to the selling price of t he

resin .

Another clause stated:

X'fZ Lt d t o notify ABC Lt d of any objection to the resin supplied w ithin 30 days. Failure to provide ~uch not ice constitutes unquali-

fied acceptance and waiver of all claims.

ABC Lt d knew that the resin was dangerous and would allow natural gas to escape. In fact , this is exactly what happened . There was an explosion in the pipeline for whlch XYZ Lt d supplied pipe and whlch XYZ Lt d fixed at great cost. When it asked ABC Lt d for help, ABC Lt d refused to take any responsibility, pointing to the exclusion clauses. Due to negative publicity surrounding the gas pipe leaks, XYZ Ltd lost both its reputation and financi al viability. Assumjng that the supply of defective resin was a breach of contract, do you thlnk ABC Lt d will be able to rely on the exclusion clauses above? If so, on what basis?36

7. Imperial Brass Lt d wanted to computerize all of its systems. Jacob Electric Systems Ltd presented Imperial with a proposal that met Imperial's needs. In August, Imperial accepted the proposal, along with Jacob's "tentative" schedule for implementation, whlch led

35 Based, ii\ pa11, on Eps:e.n !questntln £ntetpr1se-s ltte v FrtN11'. J(Yfkrntln tlrn1Son<Lmu:d. 20J30NSC 78

36 Bas(c.'d, 1n pa1loOP1as Tex C.an<KJ;, !.tdvOov1Chem.lcalof Canilda Ltd, 2004 ABC~ 309, 245 DLR 14th) 650

Imperial to expect a total computerized operation by mid-January, with the possibility of a 30-day extension. In October, it became dear that there were problems with the software bejng developed, and Imperial asked for corrections to be made. At the end of October, the hard ware and two software programs were delivered to Imperial, and lmperjal's employees attempted to begin to use the programs. Very little trairung was provided, however, and there were major problems w ith the computer screens freezing and data being lost. More programs were delivered in January, along with some operating instructions, but lmperial's employees were still unable to make any use of the programs they had. The programmer whom Jacob assigned to lmperial's contract, Mr. Sharma, continued to work on the remaining programs. In May, however, Jacob informed Imperial that Sharma would be leaving the company, and Imperialinformed Jacob that if that were to happen, given the problems and delays the company had already experienced, Imperial would be forced to end the contract with Jacob's company.37 l s the bread1 by Jacob's company serious enough to permit the innocent party, Imperial, to treat the contract as at an end?

8. When the family matriarch, Edna, passed away at the age of 90, her son Leopold entered into a contract for funeral services with a local funeral home. Among other matters, the contract provided for an open-casket visitation for those grieving Edna's passing, and a funeral that was to occur later on the same day as the visitation. The contract specified that tl1e casket containing Edna's body would then be transported to tl1e cemetery and be buried (whk h is called an interment).

Just prior to the visitation, a staff member wheeled out a casket contairung a woman's bod y dressed in Edna's clothes. Unfortunately, however, the bod y was not Edna's. The staff member quickly investigated and had the diffi- cult task of informing Leopold and his sister

31 ~sed, ir\ part, o n l~tiaJ Brass Ud v J;,cob fleci11c Systems Ltd /J989J, 72 OR (2d) 17, 1989 ConLll 4360 tON SO.

NEL 243

that their mother's bod y had been cremated in error and that the bod y previously wheeled out was that of someone else. Leopold and his sister felt devastated and therefore cancelled the sched uled visitation, funeral, and interment. Ed na's ashes remain at the funeral home. Leopold and his sister are now considering an action against the funeral home for breach of contract."'

a. Leopold can most certainly sue the funeral home for breach of contract, but Leopold's sister cannot. Why?

b. What term or terms of the con- tract do you think the funeral home has breached?

38 Othe1 acltons 10 pursue v..ootd be in :'M:?gli92nce tsee Ch.-1pte1 IO and llJ .n v--el 1n balment !see Chapter 17J.

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c. Is Leopold obligated to continue in his contract with the funeral home- including rescheduling the visitation, fu neral, and interment- or is he free to treat the contract as ended?

d. In what way, if any, can Leopold mitigate his losses?

e. What are Leopold's pecunia ry losses?

f. Based on Fidler v Sun Life Assurance Com- pany of Canada (discussed earlier in this chapter), can Leopold recover for non-pecuniary d amages?"

39 Sasad, in pa11,.onAtyThOmsOr\ "Bc':>.1y Mtit .. Up<H NO\f()SCol~ l'\ine1~ Horne U!\accep1abttf $.e1vice Mlnistrir $sys· The Star US Janu<lr; 20181 on11ne · <hllps'//wv~"' I hesta1 .com/newslcaMOa/2018/0J /!B/ bOdy-mL11. .. oj:»al•OOV<l..Sco1a·looo1al•hoit-e•oroc~p1.ab6e-sorvce 0m:n~ter-saysh1m1>.

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CHAPTER Introduction to Tort Law

CHAPTER The Tort of Negligence

CHAPTER Other Torts

TORT LAW PROVIDES remedies to persons who have suffered physical harm and/or economic loss because of the intentional or careless actions o f another.

Business is exposed to tort risks on a variety o f fronts. A paper mill may release toxins into a nearby river and ruin the water d ownstream. A customer may slip on the floor of a store and suffer serious injury. One business may intentionally seek to drive a competitor out of business by spreading lies concerning the quality of products sold . An accountant or lawyer may provid e negligent ad vice that causes the client to lose money. In response, tort law provid es a set of rules through which the innocent party can recover financial compensation for the loss sustained . The next three chapters consider the risk exposure of business in the context of tort law.

245

I-- er::: <( Q_

OBJECTIVES After studying this chapter. you should have an under- standing of

• the broad scope of tort law

• the differences between a civil action and a criminal action

• the purpose of tort remedies

• how business can manage the risk of liability in tort

BUSINESS LAW IN PRACTICE

Gretchen Grenada worked on the installation crew for Tour-Allure Lt d (Tour-Allure). Tour-Allure provides sound, lighting, and audio- visual services to night clubs, restaurants, theatres, and retail spaces throughout Alberta. Sixteen-hour shifts were not uncommon; in such circumstances, Gretchen's boss- Ross Dirk- would provide beer to his crew members o nee the install was dose to completion. Gretchen decided to partake because the venue was particularly hot and sipping beer seemed to help her cool off. Dirk placed no restrictions on how much employees could drink. In the end, Gretchen drank a substan- tial amount of beer between 1 0:00 P .M. and 11:30 P.M., while on the job. After that, she stayed behind at the installation site, drinking with Dirk and her co-workers until 1:00 A.M. At this point , Gretchen insisted on driving herself home though Dirk unsuccessfully tried to convince her to take a cab as he knew that she had been drinking. Because Gretchen was seriously impaired, she could not maintain control of her vehicle. She collided w ith another car, causing cata- strophic injury to its 25-year-old driver in the form of paraplegia. Gretchen was less seriously hurt, suffering a broken leg and a concus- s ion. Following correct legal procedure in every way, the police secured a blood sample from Gretchen which showed that her alcohol level was three times the legal limit and so she was charged under the Criminal Code with impaired driving causing bodily harm .'

1. What legal actions against Gretchen arise from this scenario?

2. What legal actions arise against Tour-Allure?

3. What kinds of r isk management actions could Tour-Allure have taken to prevent Gretchen's accident in the first place?

Defining Tort Law The word tort1 describes any harm or injury caused by one person to another- other than through breach of contract - and for which the law provides a remed y.' According to tl1e Supreme Court of

1 Por1:onsOl l"is Bt.is1ness Lavi 1nPrac11ce scE!na•oare based onJacObsen v Ntke CantxltJ !.rd 11996). 133 DLR l4thl 377. l \l% 0.nlll 3429 ISC SCi arro 1\l94 Canlll 2511 IBC CA) as wel :.is 1-Junt v Sulton Croup Jncet111ve lkt#Jry Jnc l2001), 52 OR {3.1) 425 {Sup C1 Jus). 2001 Canlll 28027. rev·d on Other grounds !2002.1 215 DLR t411') J93 !CA), 2002 (:()nlll 4 5019 {ON CA)

2 Thev1o·d ·1011: is derNed hO"l"l l he LAiin v1ord meaning ·crooked· and the French vK>1d ll'l<':?aning ·wrong· See Lewis Ktar & Cam~ron Jeffries.. Tort Law, 6 li\ ea tT01on10 Thomson C"..arsv.<el 2017) a t L

3 JM.

NEL 246

Canada, tort law provides a means whereby compensation, usually in the form of damages, may be paid for:

... injuries suffered b y a party as a result of the wrongful conduct of others. It may encompass damages for personal injury suffered, for example, in a motor velUde accident or as a result of falling in dangerous premises. It can cover dam- ages occasioned to property. I t may include compensation for injury caused to the reputation of a business or a product. It may provide damages for injury to honour in cases of defamation and libel. A primary object of the law of tort is to provide compensation to persons who are injured as a result of the actions of others.•

Given this diversity, the law h istorically evolved so as to break torts down into distinct categories, each with its own discrete definition. What follows is a b rief sampling:

trespass to land. Trespass to land involves wrongful interference with someone's possession of land.5 Parking garage operators might rely on the tort of trespass when drivers leave their cars in the lot but fail to purchase the required ticket from the automated ticket dispenser. The driver is responsible for the tort of trespass because he has left the vehicle on the property without permission.

deceit or fraud. This tort is based on a false representation intentionally or recklessly made by one person to another that causes damage.6 The tort of deceit or fraud occurs when, for example, a customer purchases a vehicle based on the vendor's intentional representation that the vehicle has a new engine when, in fact, it does not. The vendor has committed the tort of deceit because he made an untrue statement, on which the purchaser relied in deciding to make the purchase.

negligence. The tort of negligence compensates someone who has suffered loss or injury due to the unreasonable conduct of another.7 lt is one of the most common torts to arise in a business context. For example,

when a taxi driver is injured due to an unsafe lane change by another driver, she is the victim of the tort of negligence. The driver causing the injury is responsible for the tort of negligence because he has made the unsafe lane change and fai led to show the care and attention that t11e circumstances required.

when lawyers, accountants, or other professionals give their clients incompetent advice that causes loss, they have committed not only a breach of contract but also the tort of negligence, more specifically known as professional negligence.

when consumers purchase a defective product, they may have an action against the manufacturer for negligence if the product was improperly designed and/ or produced. This area of law is known more specifically as product liability, but its foundations are in negligence.

when a bar overserves a customer, it may be found negligent if that intoxicated customer is injured or causes injury to others.

4 H>U v Heooi, U993 J 2 SCR 159, 1993 Canlll 141 ISCCJ, a l para 58, per Co<y J . 5 Suprt1 note 2 at 127. 6 Ibid at 003 aoo fOl<N1ing. 'l Jbd at 195

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Tort

A harm caused by one person to another. otl1er ~han through breach of contract. and for which the law provides a remedy

Trespass to land

Wrongful 1merference with someone's possession of land

Deceit or fraud

A false represen~a:ion 1n tent1ona Uy or recklessly made by one person to a no th er that causes damage

Negligence

Unreasonabl e condu ct. including a careless act or omission . that causes ha rm to another

The law of torts will not automatically provide a remedy when someone has been physically or economically injured . One of the key objectives o f tort law is to distinguish between a situation in which t11e loss suffered by an injured in dividual should remain uncompensated and one in which responsibility for the loss should be "shifted " to ilie person considered responsible for causing the loss. Tort law provides an evolving set of rules for making t11at determination.

To a large extent, tort law seeks to impose liability based on fault. This means that when one in dividual suffers injury or loss involvinganoilier person, liability on that second person is not automatic. For example, in the Supreme Court of Canad a d ecision of Jones v Shafer Estate,8 Mr. Shafer was killed when his vehicle collid ed wiili M r. Jones's broken-down commercial truck which Jones had parked on the side of the highway the previous evening because it was undriveable. Road conditions at the time of the collision were foggy. And though Jones had left flares around the truck to warn oncoming motorists, these flares had been stolen by persons unknown p rior to Shafer's accident. It must be acknowledged iliat Shafer's d eath is tragic and one has great sympathy for the family of Shafer. However, ilie legal q uestion goes to whether Jones had been negligent or not, given all the circumstances. The Supreme Court of Canad a found no negligence. Jones's duty was not to guarantee that there could never be an accident associated with his parked truck but merely to exercise ilie care o f a reasonable person in all ilie circumstances. This he had d one.

By way of contrast, if Jones had simply abandoned his broken-d own truck in the middle of the highway, ilie result o f the litigation would have been much different. On these new facts, a court would likely fi n d that Jones had not exercised the care of a reasonable person in all ilie circumstances. Rather, Jones's careless a cts or omissions caused harm or loss to another, namely Shafer, and liability would follow.

It is important to note that liability in cases like Jones will vary from provin ce to province depending on the no-fault elements of the provincial Insurance Act as relating to auto insurance that may be in place. A pure no-fault system eliminates the ability to claim in tort. No-fault insurance is discussed furilier in Chapter 28 .

The idea iliat not every loss leads to liability is also illustrated in the case below.

Fullowka v Pinkerton's of Canada Ltd, 2010 sec 5, (2010) 1SCR132 THE BUSINESS CONTEXT: During a labour strike, owners may de cide to hire a security com- pany in order to protect replacement workers and employees willing to cross the p icket line since strike-breaking predictably makes strikers angry. In the event of violence by the strikers, the security company may face a lawsuit arguing that it was negligent in the provision of services and that it is therefore responsible for the loss or injury t11at follows.

8 119481SCR 160.1948 Canlll 32 iSC<J.

248

FACJVAL BACKGROUND: A tremendously bitter strike by m iners at the Giant Mine in Yellowknife- an underground gold mine-soon became violent. The owner hired Pinkerton's Canada Ltd (Pinkerton's) to provide security but, unfortunately, the violence only escalated. At one point, a large number of strikers even started to riot, du ring which time they damaged property and injured both security guards and replacement workers. In response, the owner fired approxi- mately 40 strikers. Eventually, the atmosphere grew calmer though some violence and property damage continued. A horrible tragedy and crime

NEL

Giant Mine, located in Yellowknife, Northwest Territories

then ensued when Roger Warren, a striker, evaded Pinkerton's security, gained access to the mine, and planted an explosive device there. The d evice was detonated by trip wire, killing nine

miners. The widows of the d ead miners sued Pinkerton's, among others, in negligence for faili ng to prevent the murders?

THE LEGAL QUESTION: Did Pinkerton's commit the tort of negligence?

RESOLUTION: The Supreme Court of Canada rejected the argument that Pinkerton's had been negligent even though Roger Warren did gain unlawful access to the mine. This is because Pinkerton's legal obligation had not been to ensure that mine entrances were properly guard ed to stop intrusions. Instead, Pinkerton's obligation was to use reasonable care to prevent such intrusions. As Canada's highest court

~ observed, the law does not require Pinkerton's !t to guarantee success in its security mission, )j particularly given "Mr. Warren's determinat ion "' to commit an intentional, criminal act."'0 .l1 ~ The Supreme Court of Canada therefore dis- ~ missed the claim against Pinkerton's in its <'.l !!, entirety.

Note that the bomber, Roger Warren, was convicted o f nine counts o f second d egree murder in 1995 and sentenced to life. In 2014, he was granted parole.

CRITICAL ANALYSIS: Do you agree with the Supreme Court of Canada's analysis?

As noted in Chapter 2, courts are governed by precedent when d etermining the law in any particular case. The nature o f precedent is inherently historical, meaning that judges can reach back and rely on old cases as well as more recently d ecided ones.

How Torts Are Categorized Torts can generally be categorized as falling into two main groups: torts com- mitted intentionally and torts committed through negligence. The first, called an intentional tort, is a harmful act that is d eliberate or committed on purpose. For

:1 ll is teyorv.I t~ scoooor thtS texi Lo anaty2e the Wo1kers·corn~~a110n Board aspect of l "iS tr19auon. Suffiee 1 to say ll'al IX!cauS(! treir lllJS:'.>21nds ~d bOOn kled on the;ob, ire wbov1s wc.1e 1ocerv109 o~i~ comp<~'l!>atiOn tiom the VJorkt?rs · Comp<~t\Si'tUon B~:d of ti'l'? f\bi lhv..est Temtories fWCB), OO\YC~d the Y./or~rs·Sat?ty and CompcnsatcnComrntSsiOn. The pi.noos.t'! of th:: wt:k.YM. ~Jbseeluent acton 3'Jainst P:nkertol\S el at \'-'as at seas1 1v.<0tdd firs:t.. I successful 11 would perm111re ¥/CB to 1eCOtJP ts oosis io l'l:'Y11ng ~fits to the \YidO' .. .'S hom the Ct.Jtpabf.edefer>janls; ar.d second rt vA':llJ\d ;'..'(Hfniltne v11dov..s to pote'lteiyS'1cuie add111orta1 compensa1on. ~e !ate1 11\ L1'iS ch.-1:;<~1 101 bnelco!lSJderalionof 'NC.Btog~tlCtt. Soo 100 CBC: Nev's, ·a~ru M ine Y./kbws·~im R~jected ty lbpCourr US reb'1Jaiy 2010), ortoa <hllp//w..w1c.'oc. C/JJ/r~evlS/cantJda/ {10nt•m;oe-WidO',..,s-ci.-tim·tE?JOCled•by~top-cou1t·l.871230>. ror diSCussion of the 1nsu1er"S rig rt Of subrogal!on,, s<...oa ('.Mpter 28.

JO fuJlowk/J v Pinkerrorfs of Cat:t1d<1 Lfd. 2010 SCC 5, !20101 J SCR 132 at ;:>a•a SO

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Intentional t ort A harmful ac ~ha- is comm1tt0 d deliberately or on purpose

The Jawrequiresempkiyers tn keep the t~orkp/aa safe. How can the risks of a workplace acddent be managed?

example, if store security personnel prevent a customer from leaving the premises because they mistakenly believe she has shoplifted, the security guards have com- m itted the tort of false imprisonment . They have intentionally prevented the cus- tomer from going where she has a lawful right to ben- namely out of the store. False imprisonment is discussed further in Chapter 12 but is defined as unlawful deten- tion or physical restraint or coercion bypsy- chologk al means. If the guards physically restrain or punch the suspected shoplifter, for example, they have committed the tort of b attery because they have intentionally inflicted harmful or offensive physical con-

False imprisonment

Unl awful detenuon or phvs1cal restraint or coercion by psychol og1 ca l means

Battery

ntentlonal 1nfl1ct1on of harm ul or offensive physical contact

tact .12 The fact that the guards have made an innocent mistake as to her crimi nality is no defence. Chapter 12 also exanlines this and other kinds of business-related torts, most of which are intentional.

Torts comnlitted through negligence comprise another large group. When someone is negligent, he is liable for damages even though he did not intention- ally cause the event in question. For example, Tour-Allure (through its manager Di rk) was obligated by the law of negligen ce to take reasonable care to see that Gretchen, who had consumed alcohol at work, was not harmed. 13 Though her employer did not intend for Gretchen to be injured, this is not a defence. Courts have found that employers owe an "overriding managerial responsibility" to protect employees like Gretchen and "safeguard her from an unreasonable r isk of personal injury while on d uty"14 so as not to interfere with her ability to d rive home safely. In short, the employer must provide a safe workplace. 15 Dirk should never have permitted drinking in the workplace nor allowed Gretchen to d rive. He should have taken away her keys, if necessary. The law even goes so far as to require Dirk to call the police, fai ling all else, if someone like Gretchen insists on driving. 16 Based on the case law, a court likely will fi nd Tour-Allure liable in negligen ce because it provided alcohol in the workplace, did not monitor Gretchen's consumption, and then permitted her to drive.17 The tort of negli- gence i s assessed in more detail in Chapter 11.

This chapter discusses tort law from a more general perspective in order to lay the foundation for subsequent discussion .

Tort Law and Criminal Law The same event can give rise to two distinct legal consequences: one in tort law and one in cr iminal law. From the perspective of criminal law, Gretchen was charged

11 K\a1 b Je(tries, supra 001e 2 al 67. 12 Ibid at 53. N:>!e lhal N01be1g v V,.Ynnb 11992] 2 $CR 226, 1992Canlll 65 ISCC) ()l l6dt'.!f ioos battei-yas the

"intenlionat innction of tJM.lv1fut force o n another person: U Hunt, supra not~ 1 at pa1a SS 14 Ibid at P"<a 55, c Hng Rice v Chan Estate U998). 62 SCLR f3d) ll3 !SC). 1998 Canlll 3978 tBC SO. 15 1-Junt, supra note L 16 JbJd al pa1a 56. 17 Set:! tw~2. supta note 1 a1 ~ra 53.

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under the Criminal Code with impaired driving causing bodily harm. What follows are the relevant provisions of the Criminal Code:

253(1) Every one commits an offence who operates a motor velllcle or vessel or operates or assists in the operation of an aircraft or ofrailway equipment or has the care or control of a motor velllcle, vessel, aircraft or railway equipment, whether it is in motion or not,

(a) wlllle the person's ability to operate the velllcle, vessel, aircraft, or railway equipmen t is impaired by alcohol or a drug; or

(b) having consumed akohol in such a quantity that the concentration in the person's blood exceeds eighty milligrams of alcohol in one hundred millilitres of blood.

s. 255(2) Everyone who commits an offence under paragraph 253(1) (a) and causes bodily harm to another person as a result is guilty of an indictable offence and liable to imprisonment for a t erm of not more than 1 0 years.

But not only was Gretchen charged w ith a crim inal offence, she faces tort liability too. This is because the d river who was seriously injured can bring an action in negligence against her. Put another way, Gretchen's behaviour and its consequences give rise to two separate legal actions. This is because, in adrution to tort law, the Criminal Code prohibits one from driving while impaired.

Purposes of the Actions The purpose o f a criminal prosecution is to censure behaviour- such as impaired d riving causing bodily harm- and secure the sanction of a fine, imprisonment, or both. The action is brought because the Parliament of Canad a has determined that anyone who violates the Criminal Code should be punished and deterred from such conduct in the future. Prosecution is considered to be cr itical to maintaining a rights-respecting society. Crim inal law does not compensate the victim of a crime, leaving compensation to other areas o f law.

In tort law, on the other hand, the objective is to compensate the victim for the harm suffered due to the culpability of another. It enforces the victim's private r ight to extract compensation from the party who has caused the loss."'

Commencing the Actions In crim inal law, the legal action is called a prosecution and is brought most often by Crown prosecutors employed by the fed eral or provincial governments. Rarely d o the injured parties bring the prosecution, though it is technically possible for them to d o so. l9 In a criminal action, Gretchen would be known as the "accused " or "d efen d ant" and the injured d r iver is known as the •complainant."

In tort law, the injured party brings the legal action. This means that the injured driver would sue in ord er to enforce his personal or private right to secure compensation for the injuries caused by Gretchen's negligent d riving. His action

18 Note 11\ut !nOniario, as one ~mi::te. vcl!l'hS or c1 iltt' a!so have <>:CC$'S to a fuOO thal .llbws sotr'le com~osa1cn 101 t!la·r toss 01 suUe1,rlg 5e\:!. tor ex.ampl.e, Comp6•n."./1tton for VK:tvns of Cntne A.Cl, RSO 1990, c C·24. and the VK:Vms' 8..JI oJ l?tghls, 1995. SO .1995, c 6 aod 1~ Prahib:ting Pmti11ng Iran l?e:ounttng ON'OO-s Act SO 2002, c 2.

19 Private p1osecu1ons- tM1ts,1h0se brou9'l11>y 100 victim or any-~ne~tse, ... no iS nolanagenlof theC1ov1n-a1e uocoml'l'Y.>n bol permiSS:bt<'.l. S-.:e Lavi Relo1m CommiSS~:'>n of Canada.. PrNate Prosecutions, INorkmg Papet No. 52 {Oua, ... .l Law Refo1m Commiss6!l ol Cal'....:la. 1986) a 1 51 ... 59

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is called a civil action because it is enforcing a r ight belonging to a person. In a civil action, the injured d river is known as the "plaintiff" and Gretchen as the "d efendant."

Proving the Actions To secure a conviction under section 253 o f the Criminal Code, the Crown must show that Gretchen was operating d1e vehicle and that she was impaired when doing so.

The Crown has the burden of proof in a criminal action. This means that the prosecutor must prove all the elements of the offence beyond a reasonable doubt based on "reason and common sense",w not on "sympathy or prejudice."21 Guilt must be a logical deduction from the evid ence,andit is not suffici ent that the jury or judge believed the accused "probably" comJUitted the act. "

Gretchen acknowledged that she was driving and the results of her legally obtained blood sample d emonstrated a blood alcohol content well above the legal liJU it . On this basis, Gretchen almost certainly faces conviction and will be subject to sentencing under section 255 of the Criminal Code.

In tort, by way of contrast, the injured driver must prove that Gretchen is liable for negligence, on the balance of probabilities. Put another way, the injured driver must establish that it is more likely than not that Gretchen was negligent. Represented in numerical terms, the injured must convince the judge that there is a better than 50% chance that Gretchen was negligent.

Given the different burd ens, it is obviously easier to prove a civil case than a criminal case, and for good reason (see Figure 1 0. 1). Criminal convictions can result in d epriving per sons of their liberty. This has always been consid- ered to be far more serious than requiring them to pay damages in a civil action. While the odds are high that the plaintiff will succeed in tort if the defend ant has already been convicted under aiJUinal law, this is not a certainty since the definition s of the individual torts and crimes are not always exactly the same. However, some courts have agreed that evid ence of a conviction for conduct constituting a crime is relevant to establishing the existence o f a related tort.23

FIGURE 10.1 Differences Between Civil and Criminal Actions

Commencing the Proving the Action Outcome Action

The injured driver files a claim against Gretchen based on the tort of negligen<e.

The injured driver must prove his case on the balance of probabilities.

A court orders Gretchen to pay theinjured driver compensation for hisinjums.

The Crown prosecutes Gretchen based on section 253 of the Criminal Code .

The Crown must prove its c:.ase beyond a reasonable dou bt .

A court orders Gretchen to be imprisoned, 6ned, or both.

20 R v Ufchus.11997] 3 SCR 320. 1997 CanLll 319 ISCCJ at ;>a•a 30 21 !bid at 1)()1() 31. 22 ft»d al O<)fa 39. ~e too A1oour .rs dOCtSIO!l H't i? v Rhee, !2001] 3 SCR 354, C'JOl sec 71 {CanUIJ al Dara 20. 23 SJtry>son v Cesv,e>.'l, {19951 6 '\/Wr/R 233 (Man OBJ. ror a l\J1Lhe1 d:sc:ossonot Ll'\!S po'nt.. inctud 1ng rek!v~nl

s1~1ute tav1, see Klar b Jeflri~. SuPftl note 2 at 4 7

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Liability in Tort Primary and Vicarious Liability As djscussed jn Chapter 20 in more d etail, there are two kinds of liability in tort law: primary and vicarious. Primary liability arises due to one's own per- sonal wrongdoing. Gretchen has primary liability for jnjuring the other driver. Vicarious liability, by way of contrast, arises due to the relationship that someone has to the person who actually commits the tort. For example, the doctrine of vicarious liability makes an employer liable for the torts committed by its employees acting in the ordjnary course or scope of employment. For example, jf retail employees commit the tor t of false jmprisonment by wrong- fully restrajning a customer, the retail employer will be vicariously liable for that tort.

See too, the Business Application of the Law box, "Steve Moore's Tort Action Against Todd Bertuzzi", later in this chapter.

Traditionally regarded, an employee's wrongfu l conduct is within the ordinary course or scope of employment if it is

authorized by the employer; or

• an unauthorized mode of d oing something that is, in fact, authorized by the employer.

It can be particularly difficult to distinguish between an unauthorized "mod e" of performing an authorized act that attracts liability and an entirely independent "act " that does not. This problem is illustrated in the application of vicarious liability to sexual assaults and other intentional, as opposed to negligent, acts committed by employees.24 In response, the Supreme Court of Canada stated in Blackwater v Plint:

Vicarious liability may be imposed where there is a significant connection between the conduct authorized by the employer ... and the wrong. Having created or enhanced the risk of the wrongful conduct, it is appropriate that the employer or operator of the enterprise be held responsible, even though the wrongful act may be contrary to its desires .. .. The fact that wrongful acts may occur is a cost of business.25

Note that there is no vicarious liability for crimes committed by employees even if there is arguably a signific ant connection between the conduct authorized by the employer and the wrong committed by the employee.

Liability and Joint Tort- Feasors A person who commits a tor t is called a tort· feasor. Those who commit a tort with others are known as joint tort· feasors. For example, if a Tour-Allure customer is injured by a ceiling-mounted loudspeaker whjch fell onto him d ue to improper installation by two Tour-Allure employees, those two co-workers would have joint liability for those injuries (and Tour-Allure itself would have vicarious liability). Legislation passed across Canada states that if the negligence of more than one person is responsible for the loss, the victim or plaintiff can sue any or all of them,

24 See, lor exam~ .. tf\eSuo1e1'1'>2 Court of Ca~tfs aMtysis 1n 8t1zley v Cuuy 11999] 2 SC:R 534, 1999 Canlll 692 iSCCJ.

25 BIJK:.kwaierv Pl.VII, 12005] 3 SCR l 1999C.nLll 692 iSCCJ al para 20. per Mcl.achlin <:J

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Vicarious liability

The l 1ab1 hty ha: an employer has 1or the ort1ous acts of an

employee committed 1n the ord 1na ry course or scope of employment

Tort-feasor

Person v1ho .:omm1ts a :art

Joint tort-feasors

Tvvo or more persons whom a court has held .o be Jointly responsible tor the pla1m1ffs l oss or 1n1unes

Contributory negligence A de ence c laiming tha: the p la1nt1ff 1s at least partia lly responsibl e for me harm that has occurred

with recover y apportioned between the joint tort-feasors according to their level of responsibility. Notwithstan cling the apportionment of liability between the joint tortfeasors, the plaintiff can recover 1 00% of the judgment from any of those d efendants whom a cour t has held to be jointly responsible for the loss o r injuries.26

Liability and Contributory Negligence Tort victims may be at least partially responsible for their own injuries. If the d efen- dant successfully argues that the plaintiff was responsible for at least a part of the loss- that is, the defendant uses the d efence of contributory negligence- the amount of damages that the plaintiff is awarded is reduced by the proportion for which the plaintiff is responsible. Contributor y negligence is a common defence used in lawsuits involving car accidents. For example, if the d river injured by Gretchen's negligence was not wearing a seatbelt at the time of the accident, Gretchen's lawyer may well be able to establish that the injuries he sustained were worse than they otherwise would have been. At this point, the court will d ecrease the injured driver's d amages award in proportion to the plaintiff's degree of con- tributory negligence. For example, if the plaintiff's d amages are set at $ 2 million and the court finds the plaintiff to have been 20% contributorily negligent- that is, responsible for 20% of the loss- the plaintiff's damages award will be red uced to $1600 000.

Damages in Tort The Purpose of Damages The primary goal of a tort remedy is to compensate the victim for loss caused by the d efendant. Generally, this is a monetary judgment. Less common alter- natives a re equitable remeclies, such as an injunction- a court order requiring or prohibiting certain cond uct. An injunction would be ordered if money would not suffice- for example, in the case o f a recurring trespass where there is little econom ic harm, but the plaintiff simply wants the trespasser to stop comi ng onto the land in q uestion. Financial compensation means the defendant is ordered by the court to pay a sum of money to the successful plaintiff. More specifically, the plaintiff in a tort action is entitled to be put into the position he was in before the tort was committed- so far as money can d o so. Such a remedy has obvious limi tations. For example, where the plaintiff has suffe red serious physical injuries, how can money truly compensate someone for the permanent loss o f health? However, in personal injury cases tl1ere are no ready alternatives to fi nancial compensation.

Tort law compensates not only for physical injury or loss but also for mental pain and suffering and other forms of emotional distress. These latter areas are compensable if proven, inclucling througll psychiatric and other expert evidence.

Because any awa rd or out-of-court settlement is fi nal, a plaintiff's lawyer will not usually settle or bring the case to court until the fu ll extent of dam- ages is known.

26 for e~m~, Negligence A.cl R$O l~, c N"l Cont1lbutay Netjtgf:l'ICe Ac.1, RSNB 2011, c C· l31, CantnbutOI}' Neg!'!Jence Act RSNS 1989. c 95. NegJ.9erice Acl, RSBC 1996. c 333

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BUSINESS AND LEGISLATION

WORKERS' COMPENSATION

Although tort law remains primarily a common law matter, it has also been modified by statute law. Workers' compensation legislation, for example, provides monetary compensation to employees for work-related injuries and illnesses. At the same time, it prohibits the employee from suing the employer for any negligence or other

tort that might have caused the loss. In this way, the statute takes away the employee's common law right to sue but provid es compensation no matter who is at fault.

Critical Analysis: Should employees be deprived of their right to sue their employer when that employer has been in the wrong and caused the employee's injury?

Pecuniary and Non - Pecun iary Damages When a person is injured by the tor t of anot11er, his damages are categorized as being either pecuniary (i.e., monetary) or non-pecuniary.

Non-pecuniary damages- sometimes called general damages- are damages that are award ed to compensate the plaintiff for:

pain and suffering.

• loss of enjoyment of life.

• loss of life expectancy.

Because Gretchen's negligence caused the other driver to suffer from paraplegia, that driver has undoubtedly suffered a considerable amount of general damages. These damages are non-pecuniary in the sense that they are not out- o f-pocket, monetary losses, but they are nonetheless both real and devastating. The quality of the injured driver's life has been seriously dimirushed d ue to a loss of mobility and independence; his life expectancy has likely been reduced. A jud ge will award damages based on these facts, as well as on expert testimony as to how badly he has been injured . The more serious and permanent the injury is, the higher the general d amages will be . Courts have developed preced ents to assist in this process, and the Supreme Court of Canada has set a clear upper limit on what can be awarded for general damages. 27

Pecuniary damages fall into three main categories:

cost of future care.

loss of future income.

special damages (out-of-pocket expenses).

Cost of Future Care

The injured d river is entitled to an award sufficient to provid e him withal! the care and assistance his injury will necessitate. This can include the cost of a personal care attendant for the rest of his life, modifications to his living accommodations to increase accessibility, and the costs related to equipment and treatment of

27 MdrewsvCNN>d b TqyAlt&ta Lid, 119781 2 SCR 299. 1978Canlll l ISCCJ. ArnoldvTeno. 1197812 SCR 287, 19 78 Canlll 2 tSCCJ. and Thornton v Sdloo! Drst No 57 /PrW:e George), !19781 2 SCR 267, 19 78 Caolll 12 lSCCJ. In Andrev1!>, toe $oprema Courl ol Cal')OOa pl.a~d a c eflng o n r<:covery 101 gener."lt pain and sul te1!09 31 $100 000. In Aor l 20 1-8 dotars. this a'llou nts to approximatd y $379 000.

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Workers' compensation legislation

Leg1 sla oon ha' provides no iault compensation for iniured employees in lieu of th e1 r n ght to sue 1n tor.

Non-pecuniary damages

Compensa t1 on , or pain and suffering. loss of enioyment o: hfe and loss of life expec:ancy Also called general damages

Pecuniary damages

Compensa t1 on or oul of pocket expenses. loss of future income, and cost of future care

his condition. As in other areas of d amages, what he is ultimately award ed will be based on the testimony of experts, including occupation, rehabilitation, an d medical experts.

Loss of Future Income A judge will value the injured driver's diminished earning capacity resulting from the injury. Thi s calculation can be complex, involving the input of vocational experts, labour economists, accountants, and actuaries. Since he has suffered a seriollS injury as a result of Gretchen's negligence and he is a young person, his loss of future income will likely be consid erable.

Special Damages Special d amages relate to out-of-pocket expenses resulting from the injury-causing event. These expenses may includ e any number of items, including ambulance costs, medication costs, housekeeping, and yard work. The injured d river should keep records and receipts of such costs and expenses in ord er to prove them in court. In some provinces, medical costs must be claimed as special damages, although these will be repaid to the provincial health insurer und er the insurance principle of subrogation.28

Not all torts cause personal injury, of course. For example, when a developer goes onto someone's property without permission and cuts down a stand of trees, the owner has been subject to the tort of trespass but has not suffered any bod ily harm. Damages a re nonetheless recoverable. Courts, in such circumstances, will

Dennis Schrtlz was catasrYophically injured at a &m Jo vi amart Sch11/z alleges that several people started fighting in the stands and one of them ended up falling on him from above, lmakinghis neck and reswting inqtladriplegia. What kinds of damages should Schwz seek and why'!"'

most cer t ainly award the replacement value o f the d estroyed trees.30 This attempts to put the plaintiff in the position she was in before the tort occurred. And on this basis, some precedents have award ed additional d amages for loss of enjoyment of the trees during the period that the replacement trees are growing to the height o f the replaced trees.31 Beyond this and d epending on the circumstances, addit ional damages, such as punitive dam- ages, are available.32 Punitive d amages are discussed below.

Punitive or Exemplary Damages Punitive damages- also known as exemplary damages- are an exception to the general rule that d amages are intended only to compensate the plaintiff. Their main goal is to punish the defen- d ant for "outrageous, antisocial, or illegal behaviour"" or, less commonly, to prevent the defend ant "from benefitting from the wrong."34 As the Supreme Court of Canad a has noted, punitive d amages "are in the nature of a fine which is meant to act as a

28 ll iS be;-ooo Lile scooeof thtS texl 1oat5cuss tllet<Yv190,e1n,ng heatthcaiecx.pense sub1ogati0n. 29 Based on Ryan Co1mier, ·Man Seeks $ 13M fo1 ln.~rie$ a1 Bon JoV1 Concert· The fdfl'X'>ntan JOLJ1nf:IJ

123 November 2007) at 6 7. 30 Peters v Dramorzd, 1196411 OR 139 (Co CU U963J 41 DLR i2dJ 3U at 316. 31 Set:! Kate-sv H<JJJ. !1991J BCJ No 263, S3 BCLR f2d) 322 tCA} where in. the ap~late COIHt alf.lmt'!d IM lllal

JUdge·s decision 10 aw~1d $1000 per cu t•dov1n tree lor loss o f use and enjoyment· of the t•ee-s du1il\g the pe1i0d 11 v•ouk1 tak.t'! Lile rt(N1 tr~~s to 1each the height o r the re~ced troos

32 See Kates,, Jbd. Tile appdtate court aU .1med the t1iat ,udg e·s decision to a\v.:irc $2000 per oee by \V~yof oo~:u~ damages because 100 destn.Jc tion o f too t1ees w~s "hghhaOOed, oerh.los outrag~ous:

33 Ktar & Jellrie>, supra not~ 2 al 143 34 Jbid a t 14 4.

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deterrent to the defendant and to others from acting in this manner."35 For example, if Gretchen had intentionally driven her car into thepath of the oncoming car, causing injury to the driver, punitive damages would almost certainly be awarded. The court would seek to punish such offensive conduct.

BUS INESS APPLICATION OF THE LAW

PUNITIVE DAMAGES IN THE UNITED STATES AND CANADA

The Canadian press regularly reports instances of high punitive awards given by American juries to sympathetic plaintiffs in the United States. Most famously, Stella Liebeck of Albuquerque, New Mexico, was awarded nearly $3 million in punitive damages against McDonald's when she suffered serious burns upon opening a cup of coffee that she had placed between her legs while in a vehicle. Due to severe scalding, she remained hospitalized fo r eight days. According to The Ne w York Times, the jury was influenced by McDonald's prior knowledge that at least 700 of its customers had also been burned. The Times also reports what is less commonly known, namely that the plaintiff was fo und 20% con- tributorily negligent and that an out- of-court settlement red u ced her damages award significantly. 36

Jury trials are much less common in Canada than they are in the United States. This is at least one fac tor that keeps punitive damages lower, sin ce judges may be less easily influenced to make large awards than members of the public who compose juries. Second, the spectre of "uncontrolled and uncontrollable awards of puni- tive damages in civil actions"37 is a matter that the Supreme Court of Canada guards against by insisting on "proportionality" as the measure for punitive damages. Any punitive award must be

Sho rdd the defendant's ability to pay be a consideration in the awarding of punitive damages?

rationally related to the incident and be no more than necessary to punish the defendant, deter wrongdoers, or convey denunciation of the defendant's conduct. Moreover, the court has insisted that punitive damages should be excep- tional, leaving crimi nal law as the m ain venue of punishment.

Significantly, the U.S. Supreme Court in Exxon v BakeY"' reviewed the history of punitive dam- ages in the United States. At issue was the appro- priate amount of punitive damages the plaintiffs should receive as a result of damage caused by an Exxon supertanker grounding on a reef and spilling millions of gallons of oil into Prince William Sound, Alaska. The plaintiffs were com- mercial fishers, seafood producers, and others who relied on Prince William Sound to make their livings. What made the circumstances of the acci- dent particularly egregious was that the captain, who had a history of drinking problems, "inexpli- cably left the bridge, leaving a tricky course

35 Hiii v ChureJ'/ of Sc.ientO/ogy of To1onto !H}.V L 119:>5] 2 SCR ll30, 1995 (:anUI 59 iSCC) al para 196. 36 AnLhOny Ramiret,. "For McD:'>MtO s, Brllish:.)Jstce Isa Different Cup cl TE:?.') The N...~1 Yotk nmes {7 Ap!'I

2002) al 7. In Bogle v /vlcOotii'lkJ's l?eS!;J;JtiJtUS Ud f2002l £¥/HC 490 (OBJ, an £ngl1sh cour1 was mucn te>s symP<>Lhelc lea Si!'nlclr c~m by P4a1n1iffs wl')O had been burl\ed oy t')Ot t>evera9es at MCOot'W:fs ou1tets in the United Ki"Qdom. Acco10i~ to thal ;.ioge. ·Persof\S geooratty exoect tea orcollee ooichased 10 be co~umed on L!le premises Lo be ML Persons generaly knov1 LML if a hOl d11nk is sp(lled on10 sorneona a serous scalding injury can 1esut1. !Tllle~5ega11ons .. thal Mc0.::11\a$c'l's a1e tegany liatl4e tor t'M?se unfortunate 1nju11es nave net been ma::ie Otil. ·

37 Whiten v P.'bt Jnw1ance Co, 2002 SCC 18, 1200211 SCR 595. TnlS C()SG IS su1nma112co 10Ct\apte1 28. 38 554 us 12008)

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correction to unlicensed subordinates. "'9 Expert evidence indicated tl1at ilie captain was legally impaired at ilie time of ilie accid ent. At trial, the jury award ed $5 billion in punitive d amages against Exxon, which was lowered to $2.5 billion by the appeals court The U.S . Supreme Court low- ered iliat amount even furilier, based on its view that punitive damages, in federal maritime law, should be limited to ilie same amount as the com- pensatory d amages. Compensatory damages in tltis case were set at $5 07.5 million, and ilierefore an eq uivalent amount was awarded by way of punitive d amages. In bolstering its analysis, the U.S. Supreme Court noted iliat some states have regulated punitive d amages by legislation, such as, for example, limiting iliem to a 3:1 ratio of punitive d amages to compensatory damages,40

with Nebraska going so far as to ban pun itive awards altogether.41 The Supreme Court's view was iliat, contrary to myth, there have been no "mass-produced runaway award s" in the United States.4 2 However, tl1e court acknowled ged that "punitive d amages overall are higher and more frequent in the U.S. tl1an anywhere else"43 and, more importantly, expressed concern about the •stark unpredictability of punitive awards"44 in ilie United States. Setting a 1:1 ratio would alleviate that problem. The court was fortified in its selec- tion of a 1:1 ratio by studies indicating that most awards of punitive d amages put the median ratio at less than 1 :1. In the court's words, "we consid er iliat a 1 :1 ratio, whid1 is above the median award, isa fair upper limit in such maritime cases."45

How can b11Sinesses avoid being ordered to payp101itive damages?

Critic•l A1111l1ri•: Do you tltink iliat Canad a should follow ilie approach taken by the U. S. Supreme Court or d o you prefer ilie flexibility o f ilie Canadian approach? Would it be a good idea just to set a fixed d ollar amount as a max- imum and not worry about ratios or word descr iptors?

Aggravated Damages Aggravat ed damages Compensation for 1man g1bl e in1uri '.?S such as distress and hum1 lia ban caused by the defendant's reprel1ens1ble conduc:

Aggravated damages compensate the plaintiff for intangible injuries such as distress and humiliation caused by tl1e defend ant's "outrageous and malicious cond uct."4 6 Aggravated d amages are different from punitive d amages because iliey seek to compensate the plaintiff fo r the emotional consequences of the defen- dant's poor behaviour, not punish ilie d efendant for iliat misconduct.

39 JbJd al 1 oe1 oo.adoote rummaiy 40 J!>ld at 37. 41 Jt»d at 21. 42 JbJd al 24. 43 J!»dat22. 44 Ibid <lt 26 45 J!»dat40 40 1-llJ 51.J·pra note 35 al p<iiia 189.

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For example, when store d etectives unlawfully restrain a customer, they have committed the tort of false imprisonment (discussed further in Chapter 12). If, in restraining the customer, they treat the person in a humiliating or d egrading fashion - by, for example, making accusations o f shoplifting in front of other customers- a court may well award aggravated damages to compensate the plaintiff for the mental distress the whole experience caused.47 In extreme circumstances involving false imprisonment, courts have o rdered both aggravated damages and punitive damages.48

BUSINESS APPLICATION OF THE LAW

STEVE MOORE'S TORT ACTION AGAINST TODD BERTUZZI In response to an on-ice attack, Steve Moore sought tort damages against Todd Bertuzzi, among others, in compensation for serious injuries he suffered when he was sucker-punched by Bertuzzi during an NHL game. The attack- which is called battery in tort law because it involved actual physical contact or violation o f bodily security- ended Moore's NHL career.

One court d escribed the circumstances as follows:

During a National Hockey League (NHU game on March 8. 2004. the defendant Todd Bertuzzi. then w ith the Vancouver Canucks Hockey Club (Canuc ks). allegedly struck t he plaintiff Steve Moore. then a hockey player w ith t he Colorado Avalanc he Hockey Club. from behind and drove his f ace o nto the ice causing Moore serious injury and allegedly ending his career in t he NHL. It is alleged that the action was taken as a payback for an inci dent in an earlier game between Moore and another Canucks player. Markus Naslund. The Canucks are owned by the Orea Bay defendants. The incident was highly public ized. has been t he subject o f o ngoing media attention and was described as o ne of the most violent attacks in the NHL. tarnishing the image o f Canada's nati onal sport. Bertuzzi

An injured Stew Moo re

pleaded guilty to a charge o f assaul t causing bodily harm o n December 22, 2004, and was disciplined for his conduct by t he NHL w it h a multi -game suspension.''

Moore's injuries are lasting and devastating, according to his lawyer, who stated to the press:

We have the top neurosurgeons in the world o n this case and we have reached the point w here we can say Steve's brain injury is permanent. . Unf ortunately for Steve Moore. he's not only dealing w ith the l oss o f his NHL career. he has to deal w ith the serious damage to his post-NHL career as a result o f the brain injury.50

47 rordi$Ct>SSbl\ ~e De»son v TCa tott CoCtN'ladtl Ud U976),63 DLI~ 565, 1975 C..aoUI 1107 tABO B). 48 Ruttccr vCoo!d. (2000) 2SS AR 239, 2000 ABO S 25 (CanLU) al P<')r~ 65. In 1~is case., the oerend~!'i S<Js~cted 1M 1

L!"'.e ~il\l ifl h<)d st~" IVK> o f htS rt.~reatonat qu.Y.Js ll v1as a!-sgea tM l I.he? defe!"ld.lnt.. a:o~ vi.th tlsacco"npUce. 1n:ev1 the ~1rt1ft ·10 lhe g roo.Jnd, duct taped him, forco.1 h,m 1ntoa neticooter, 1ook 100 cbcr o ff tne ~Uccpter ,_nd whle in the a,1 thre~tened Lo ll'ucr.-1 hu'f1 ou t o f lhe he{ICOCter a t l).lra 1. umess he rev~OO v1~rt'! lheQuads \'/€re In tn~ case, tile p4a1rt1U ~c~SShJty ~oo 101 a !lUmbe1 of 1011.s inctJd'r>g faise ;mpi isOnrneni.. ass~AI.. and batte1y

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Moore also sued the Vancouver Canucks hockey team.st Cla ims against the team inclu d ed v ic arious liabili ty as Bertuzzi's employer and because, allegedly, its personnel encouraged Bertuzzi' s attack and failed to take reasonable measures to prevent violence against Moore. More specifically, the amended statement o f claims sought:

$ 35 million for pecuniary and non-pecuniary damages, including loss of income. The amended statement of claim asserts that the defendants' actions caused Moore severe emotional distress "including but not limited to stress, fear, anger, shock, mental anguish, and pain and suffering."

$1 000 000 in aggravated damages because Moore suffered a "loss to his dignity."

$2 000 000 for punitive damages on the basis that Bertuzzi's attack, for example, amounted to conduct that was "hi gh hande d, malicious, contumelious, insolent and vindictive ."52

Both Bertuzzi and the Canucks filed state- ments of d efence, disputing Moore's claims.

In a victim impact statement subm itted in the sentencing portion o f Bertuzzi's criminal trial, M oore described his life in these terms:

As I reflect o n the impact this attack has had o n me. both on my health and o n my lif e as a w ho le. I am overwhelmed. There is n ot o ne

single piece o f my Ii fe w here I do not find mysel f severely a nd prof oun dly affected. Everything has chan ged. The toll that all o f these cumulative effects h ave had o n my heal th and my life. and in my relationships w ith family and friends. cannot be measured. I think back to anxiously looking f orward to being a part o f the greatest c hampio nship in spo rts. the Stanley Cup playoffs: thrilled at embarking o n such a monumental j o urney. w i th such speci al teammates. Those experiences were taken away from me. and I can never get them back. So many extraordinary experiences that I so unfairly missed o ut o n. are now gone for- ever. My w ho le career. built upon the ha rd work. disc ipline and comm itment of my entire lif e. and fuelled by a persistent dream. has been hal ted in its tracks."

[n the end, the civil t rial never proceeded because the matter was settled out of court for an undisclosed sum. Responding to the settle- ment news, Globe and Mail sportswriter Gary Mason stated: "The best that can be said is the NHL can now officially dose one of the ugliest chapters in its history. But the stain left on the game will never come out."54

Cl'itic.al Arurlym: In what way do the criminal and civil actions against Bertuzzi overlap? In what way are they distinct?

Sour ce: .41an Mak1. "Seven Ye.'l1s La1e1, SttNe Moore Stl1 Haun1ea by 1-111· The Gote :Jnd Mafl 17 March 20ll, "st updateo 23 Au9u-s1 2012), onl1ne· <hllo //w...,w.tllegbOOandmail.com/sporls/hock.eyl seven-~ar s-ta te 1 • s teve-rnoo1 e·S IU· h.ltJ nted•by•tu I/ a1 t:<:tel 9 3 304 51,

Tort Law and Contract Sometimes the same set of facts can gjve rise to liability in tort and in contract . For example, assume that a nightclub bouncer punches a patron, mistakenly thinking that the patron is about to start a fight. The bouncer's tortious conduct is attributed to his employer, the nightclub, byway of vicarious liability and, on the same facts, also places the nightclub in breach of its contract with the patron. That is, it would be an implied term in the contract for the purchase of beverages that

51 Mo:e t~chnC.;ily speaking, 11\e st.-Hement or claim na~s. as dE'!feOOarHs 01ca B<\y HociC.i'lY Um!t~CI Partnersh;p a:'ld Oica Bay Hockey, 1nc.,do1ng ousinessas lh<:'! vaoco.Jv~rCa!llJCks HockeyC\Jb, as v.~las lhe V<'locouver Canucks l im11ed P.lrlnershipa!ld Val\COuver Hockey Genera! Partner Inc.

52 AmerKled Statement of Cam 1n Moorev Bet1uzziCou11 mew., 06·CV~3060BJPD3 53 ~teve Moore·s VIChm Impact St.a1e11e"11· CTVNews 123 Oecembe1 2004), o"'i!)e'. <https//arehiveJd

bRcr\iVTSN> 54 Gary Ma501\. "Le-SSO"-" Unk!a1r)(:?d",C&::>be6' Ma,.,t t20August 2014), Sl a1 S4

260 NEL

the nightclub would provide a reasonably safe environment for their consumption. When the patron was attacked by the bouncer, this term was breached.

Overlapping liability in contract and tort is also common when a professional- such as an accountant, lawyer, or banker- gives advice to a client. If that ad vice is incompetent, the professional is in breach of contract and has committed the tort of negligence. Thi s matter is explored further in Chapters 11 and 22.55

Whether the plaintiff recovers his loss in contract o r in tort d oes not generally make any difference in such circumstan ces because the d amage award should be the same, according to the Supreme Court of Canada .56 On o ccasion, however, the availability of a tort action in a contractual context is crucial. For example, in University of Regina v Pettick,57 the plaintiff sued for the negligent design of a roof system. The contract provided for a one-year warranty but, perhaps unusually, did not exclude liability for negligence. The roof system failed after one year had passed. Therefore, the action in contract would almost certainly fail because the contractual warranty had expired. However, the negligence claim would still be available because it was unaffected by the contract.58 In short, the plaintiff was able to succeed in tort where the contract action would fail for being out of time, with the plaintiff bei ng award ed $786 000 in damages.59

Managing Tort Risk Chapters 3 and 4 extensively discussed the issues of risk management and dispute resolution. Business es are exposed to a wide variety of r isks re lated to tort actions, particularly in the area of negligence. In addition, they are vulnerable because of the do ctrine of vicarious liability.

No business can eliminate all r isk. It must, however, assume active measures to minimize it. This is because ignoring tort risk can result in

incurring the costs of a tort that could have been avoided, including lawyers' fees, management time devoted to defending the claim, and the an10unt of the actual judgment awa rded to the successful plaintiff.

losing insurance coverage because of a poor claims history.

losing a hard-earned business reputation.

Risk management strategies that business operations such as Tour-Allure m ight deploy are set out in Business Law in Practice Revisited.

BUSINESS LAW IN PRACTICE REVISITED

1. What legal actions against Gretchen arise from this scenario?

Gretchen faces a civil action by the injured driver for the tort of negligence. The dr iver has suffered loss and injury due to Gretchen's unreasonable conduct of driving while impaired. The tort of negligence is asse.ssed in more d etail in Chapter 11.

SS NOL(.l ltk\l torts may not Oe ,usl cornrn11t~d w~n t~ con11<Y.:t L'i being pertoim<:d, as v1~n a "3',•1y-er p10\'ldf!S ne9b~en1 tegat adv ICE!. As diSCus~d 1n Chapler 6, the 1011S of negligE!n.t and lr.1t1du\en1 misrep1esentatbn ca11 M oomm ttec! when 1he con11a.-:1 iS 00\og fC>ffrJed.

56 As 1heSup1em.:"? Courl or C".al\c-Y.Ja noted 11' Sc~ Checo lflf9'"l'la!JOt'lal Ltd y B1:t1sh Columbia Hydro attd Power Al.JthOrlty, 1.1993.1 1 $CR 12, 1993 C.anUI 145 (SCCJ "In situations of COnt::\Jff{'nlt~bi1ly 1n IOrl and CO!Ul~Ct I v.-.")1Jd Sfle'11anomabus 1ca, ... a1dadiff~renL\ev~ofdamages fo1 \Yhal isessent1.)ly1he stiimewioog on 100 sde OOsiS ol 1ha losm ot actonchOs.tH\.11\ough par1x::u""1 c11cumst.ances 01 p0(1cy fl"l<)ydlCt.alG 9.JC1lacourse·a1 pa1a42

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£ducation Socie1y Inc 2005J a1 S. 59 Supr.> note 59.

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Gretchen also faces a criminal action and conviction for impaired driving under the Criminal Code. This is because she was d riving the vehicle in question and the results o f her blood sample placed her above the legal limit.

2. What legal actions arise against Tour-Allure?

The young injured driver- in addition to his action against Gretchen- could sue Tour-Allure in negligence because Tour-Allure could reasonably have foreseen that Gretchen would be a danger to other drivers on the roads and failed to take proper steps to stop her from d riving home. In this case, the employer is directly liable for the tort it committed against the young driver.

It is unlikely that Tour-Allure would be found vicariously liable for Gretchen's tort of negligence against the injured d river because the accident did not occur while Gretchen was on the job. This is not, of course, a problem for the young driver since ms action in negligence against the employer covers the same general terrain.

Note too that the employer has no vicarious liability for Gretchen's crime as the law does not impose vicarious liability in the realm of criminal law. Corporate employers can be found directly liable in criminal law on otl1er grounds, however, which is a matter discussed in Chapter 1 6.

Gretchen can sue her employer fo r the tort of negligence. Her employer fa iled to safeguard her and should not have permitted alcohol in the workplace, let alone permitted her to attempt to d rive home.

3. What kinds of risk management actions could Tour-Allure have taken to prevent Gretchen's accident in the first place?

Tour-Allure requires a better und erstanding of how to keep the workplace safe and the legal d uties it owes to its employees. The best r isk management strategy is to avoid such tragedies by neither supplying alcohol nor permitting its consump tion d uring work hours. Risk ma nagement strategies in relation to work-related social events should also be d eployed.60

CHAPTER SUMMARY

Tort law has a signifi cant impact on business enterprises, particularly in the area of negligence. Tort law permits someone who has been injured or suffered a loss to sue the responsible person for d amages. The objective of a d amages award is to compensate the plaintiff, thougll punitive damages are sometimes available if the defend ant's cond uct has been particularly egregious. Aggravated d amages are also available to compensate the person who suffers intangible injuries such as distress or humiliation caused by the def end ant's reprellensible conduct. Less commonly, the injured party will seek an injunction o r other form of equitable remedy, as in a trespass-to-land scenario.

Criminal law also affects a business, thougll to a lesser degree. As the purpose of a criminal law is to pu nish the offender- througll fines and imprisonment- distinct procedures are in place to help ensure that only guilty people are convicted. For example, in a criminal prosecution the Crown must prove its case beyond a reasonable doubt. By way of contrast, the plaintiff in a tort action need only demon- strate ms case on the balance of probabilities.

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262 NEL

Liability in tort can be primary and vicarious. Primary liability arises d ue to one's own personal wrongdo ing. Vicarious liability arises d ue to the relationship one has with the actual tort-feasor, as in an employer- employee context. Since a business may have several employees, its exposure in tMs area can be considerable.

When a person is injured d ue to the tortious cond uct of more than one person, those culpable are known as joint tort-feasors. A court can apportion liability between them, but the victim or plaintiff can recover 100% of the judgment from any one of them.

When a tort victim is partially responsible for Ms own injuries, he has been contributorily negligent. The amount that the plaintiff is awarded will be red uced by the proportion for wMch he is responsible.

Sometimes, the same set of facts can give rise to liability in tort and in contract, particularly in the context of a professional ad vice giver such as a lawyer or an accountant.

The best response a business can have to its potential liability in tort is to establish a risk management plan that reduces, eliminates, or transfers risk.

CHAPTER STUDY

Key Terms and Concepts aggravated damages (p. 250)

battery (p. 242)

contributory negligence (p. 246)

deceit or fraud (p. 239)

false imprisonment (p. 242)

intentional tort (p. 241)

joint tort-feasors (p. 245)

negligence (p. 239)

non-pecuniary damages (p. 247)

pecuniary damages (p. 24 7)

tort (p. 239)

tort-feasor (p. 245)

trespass to land (p. 239)

vicarious liability (p. 245)

workers' compensation legislation (p. 247)

Questions for Review 1. What d oes the term tort mean?

2. Give an example of a tort.

3. What are the two main categories into which torts are organized?

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4. Why does the law require employers to m aintain a safe workplace?

5. The goals of tort and criminal law are quite distinct, even when they stem from the same event. Explain the differences.

6. What is a joint tort-feasor?

7. What does burden of proof mean?

8. How does the burd en of proof differ between a criminal case and a tort act ion?

9. What is the differen ce in the way tort and criminal actions are irutiated ?

10. What is the purpose o f damages in tort?

11. Und er what circumstances might an injunction be awarded in tort?

12. Vicarious liability is an essential feature of modern tort law. What is it?

13. What might be a d efence to a claim for vicarious liability?

14. How does contributory negligence affect the amount of d amages a plaintiff may recei ve?

15. Explain the difference between pecuniary and non-pecuruary damages.

16. How are pecuruary dan1ages typically calculated ?

17. What are punitive damages? How are they different from aggravated damages?

18. When is overlapping liability in tort law and contract law common?

Questions for Critical Thinking 1. What are the justifications for the basic legal

principle that the standard of proof is higher in a criminal matter than in a civil one?

2. Punitive damages are somewhat controversial even in jurisdictions where they are relatively common. What are the reasons for allowing the plaintiff additional recovery over and above the actual loss? Should the compensation principle of tort law be compromised in this way?

3. The concept of vicarious liability developed in the business world, where the company is out to make a profit and its activities are for the most part directed to generating profit. ls it appropriate to apply a test developed in th is context to a charitable organization? What are the pros and cons for holdfog organizations liable for the conduct of their employees?

4. When a plaintiff who has been injured in a car accident has been contributorily negligent- by travelling over the speed limit, for example-the court will reduce the size of the damages award accordingly. In a small number of American jurisdictions, however, if a plaintiff is contributorily negligent to even the slightest degree, the plaintiff's recovery in a personal injury case is barred in its entirety. It's all or nothing." The hfatorical origins o f such a rule relate to the idea that courts will not assist a wrongdoer.62 Which approach to the question of contributory negligence do you prefer, and why?

5. Tort law judgments have an educational function because they set out when certain activities will lead to liability and why . ., For example, one could argue that the availability of a tort action in the hands of hockey player

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Steve Moore (discussed earlier in this chapter) helps to make hockey games safer. Do you agree? Is tort law the best mechanism for deterring dangerous conduct? How is its role different from that offered by the criminal law?

6. Negligence law requires a security company like Pinkerton's to show reasonable care in the provision of services (as discussed in this chapter on page 240). rs this standard too low, particularly in the context of a violent workplace strike?

Situations for Discussion 1. Larry Jones and his co-worker were on shift as

security guards ina large warehouse. They heard noise coming from a far comer of the building and went to investigate. At that point, three men jumped out of the darkness and began to viciously beat both Larry and his co-worker. Throughout the assault, the attackers kept yelling "You' re dead I! I'm going to kill you!! You're dead!! You're so dead." Larry's co· worker managed to get away, but Larry was seriously injured and has experienced great emotional trauma. Larry has filed an action against the men who attacked him for the tort of battery, which is defined as the intentional infliction of harmful or offensive physical contact. Assume that Larry can prove that the tort of battery took place. Do you think a court will award Larry aggravated damages given the circumstances of his attack? What about pun.itive damages? Explain.64

2. Reginald Smith, an employee of UR Safe Lt d, a security company, broke into a branch of a bank that was a customer of UR Safe Ltd Smith did so when he was not on shjft with UR Safe Ltd, and by using keys he had stolen from his employer. Using these keys, Smith gained access to the ATM room in the bank, but could not figure out how to open the ATM combination lock He was dose to giving up when he noticed that the bank kept an ATM instruction manual on a shelfright beside the ATM in the ATM room. Smith read

b4 S,.,sed 11\ oari., on /<Ac111Ci< vGu1lt1C.Jt.1,1t, 2009 NSSC.. bO, 21b NSR 12oJ 6S

264 NEl

the manual and on that basis was able to open the safe. ls UR Safe Ltd vicariously liable for Smith's tortious conduct?65

3. Georgina owned and operated her own delivery truck. She disliked the head rest behind the driver's seat because it was uncomfortable and did not regard it as a safety device. She therefore removed it. Georgina also disliked the feeling of being restrained and so never wore a seat belt. One day, Georgina was in a car accident while making a delivery. The court has found the other driver liable for causing the accident and has assessed Georgina's pecuniary and non-pecuniary damages to be $500 000. Do you think that Georgina will be awarded that entire sum by the court, or should the amount be red uced? Explain.66

4. The plaintiff hired the defendant to renovate the wooden wharf that the plaintiff owned in British Columbia. The wharf was part of the plaintiff's grain-loading facility in Vancouver Harbour. During this renovation process, the wharf was seriously damaged by fi re. The fire was started by molten slag from an oxyacetylene torch operated by the defendant's employee. The defendant's employee did not minimize the fire hazard created by the torch. Among other deficiencies, the defendant's employee failed to wet the combustible surfaces before using the torch and failed to keep a proper fire watch during cutting operations so that any slag that landed could then be doused wjth water. When it came time to fight the fi re, the defendant's employee ran into difficulties because the plaintiff had not provided a fire-protection system anywhere near the wharf in q uestion,

65 B~d_ in part, on Roya1 B.>nk of Canadtl v Jnuvcon 5ecurJty Ud 12005) 143 ACWS 13d) 608. 2005 Canlll 40376 ION SC)

66 Based on Vg,gas v Leung 119921 BCJ No 827. 1992 CanLll 131 ISC SCJ and Stamp v The Oueen :n t1ght of Ontar.lo er al Stamp eJ /JI v B3Con et al. U9B4J 47 OR 12'11 214 1984 Ca•Lll tl47 l(JN CA)

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not even a fire extinguisher. The plaintiff claims damages in the amount of $1 million. Assuming that the defendant's employee has been negligent in how he used the torch, what would a possible defence of the defendant be? Should the plaintiff recover all its damages or only a portion thereof? Is the defendant responsible forthe tort of its employee? Why or why not?67

5. Louise arrived for a two-week vacation at a Mexican resort. She spent the day at the beach and, upon returning to her room, found a bottle in the fridge containing a dear liquid. Louise assumed the liquid was water and started to drink from the bottle. It turns out that a member of the cleaning staff had inad vertently left a bottle of caustic cleaning solution in the fridge in Louise's room and this is what Louise had drunk. Louise suffered extensive injury and required emergency surgery to remove some of her esophagus. Louise wants to sue the cleaning staff member who left cleaning solution in Louise's fridge. Will this action be successful? Does the deaning staff member have any defences?""

6. Arch ie became drunk at the office Christmas party. When he was leaving tl1e event, his employer grew concerned and offered to drive h im home, particularly as the wjnter weather was getting bad . Archie declined, notwithstanding a snowstorm and hi s own impairment. Ardlie was in a serious car accident, resulting in his suffering brain injuries and multiple fractures. Is the employer responsible to Ardlle for negligence? Will a court fi nd Ardl ie contributorily negligent? ..

S'! Sasad. in pail,. on Albett;) Whe;>t PoOI v NorU'rwc.~t Pile Onv;ng Ud ll99B). SOACWS [3d)692. 1998 C.nlll 3890 iBCS0.1evd ;npan 2000 BCCA 505, 80 BCLR !3d) 153 [CA)

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69 ~ed. io oart. on J Juru v Sutton, !J.Jpth note 1

OBJECTIVES After studying this chapter. you should have an under- standing of

• the conduct that the law of neg li gence addresses

• the principles of the law of negligence

• the defences in a neg ligence action

• the common kinds of neg ligence actions that businesses face

• the difference between neg ligence and strict liability

BUSINESS LAW IN PRACTICE

Lazio LeTendre purchased a Samsung S7 smartphone from a local Winnipeg retailer in 2016. Initially, he was very happy w ith the phone's performance, including the convenience of its extended bat- tery life. This satisfaction ended abruptly, however, when Lazio noticed his pocket warming up and, upon pulling his phone out to investigate, felt it explode and catch fire in his hands. Lazio was driving a vehicle at the time so he quickly pulled over and tried throwing the phone out the car window. He did not initially succeed because, to his horror, the burning phone had stuck to the flesh of his hand. In great pain, Lazio then drove himself to the hospital. There, doctors confirmed that the explosion had caused severe burns to Lazlo's hands and wrists. Lazio had to take several months off of work to recover.1

When Lazio first purchased his Samsung S7 smartphone (S7), he considered it to be a safe product which reviewed well. However, Samsung's Galaxy Note7 (Note7) had the opposite reputation- it was actually considered to be dangerous. Indeed, the Note7 had been made subject to a product recall' around the time of Lazlo'spurchase because its defective battery system caused short-circuiting,3 leading

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the phones to sometimes burst into f lames. In fact, the Note7s were considered such a menace that they were banned on Canadian and US airlines- both in the cabin itself and in checked luggage.4 Samsung offered refunds or replacement phones' but class actions against Samsung in relation to the Note7 have still been proposed in the United States• and Canada,7 for example.

Lazio wondered if the S7 was being afflicted by the same battery problem as the Note7 and his Internet search confi rmed that several class actions had been commenced in the United States in relation to S7s catching fire and causing d amage." The class actions allege that the S7 d evices, along with several other Samsung mod els, are d efective because they can overheat and explode.• Lazio is very relieved to have found a Canaclian law firm that is pursuing a proposed class action against Samsung in relation to the S7 and the Note7 as well as other Samsung models, and he would like to join it. 10 But whether alone or as part of a class action, Lazio wa nts to recover d amages from Samsung for the terrible pain he suffered from being severely burned, his loss of income while he was off work, and the fac t that one hand suffers from a nwnbness that could well be permanent.

1. What tort may Samsung have committed in relation to its S7 prod uct and what d oes Lazio have to prove in o rder to establish that tort?

2. What d efences does Samsung have to this action?

3. What additional risks does a class action create fo r Samsung?

The Law of Negligence What Is Negligence? Chapter 10 d efined the tort of negligence as a careless act that causes harm to another. The law understands carelessness as a failure to show reasonable care, that is, the care that a reasonable person would have shown in a similar situation.

Negligence is a very common tort action in the commercial world because it covers a broad range of harmful cond uct. For example, a negligence action can be brought by someone

who has been injured by a defective product.

who has been injured by the d angerous driving of a d elivery truck driver. who has suffered loss by relying on poor ad vice provided by an accountant, lawyer, architect , or engineer.

whose furniture has been damaged in t ransit by a moving company.

4 Ass-:')CQt~CI Press, "Sarnsu09 Gat.lX.y Not~7 Smt1rtohooes Bannsd rrom Clnacfi,ll\. US A;rlines Over Fi1t?: COOCt'HrtS". littiN'ICI~ Post us October 2016). one·~ <htlO //b'IJSif)E?SSJiMOC~;')OSl.COm/l1'?Chrdogy/ samsong·9al.lxy•note-7"5mar1phones·banned~hom.can.ooan·u•S-aiit1nes•OVe1•f 1e-<:O!')CE!tn!>>.

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Reason able care The care that a reasonable person woul d exhibit 1n a similar situation

The plaintiff need not show that the d efendant intended to cause the d amage or that there were deliberate acts that gave r ise to the damage. Instead, the tort of negligence makes the d efendant liable for failing to act reasonably- for care- lessly supplying a prod uct that fai ls, for driving too fast, for giving unprofessional ad vice, or for not taking proper care of fu rniture entrusted to it.

In the Business Law in Practice scenario above, Lazio can only succeed in negli- gence against Samsung if he can show that Samsung failed to use reasona ble care in the d esign and manufacture of, in this case, the S7 model.

Negligence law- like tort law in general- seeks to compensate victims for their loss or injury. It provides this compensation after applying rules that d eter- mine who is liable to compensate another, on what basis, and for how much. Without such limiting rules, business and professional people m ight be reluctant to pro duce goods and services because the risk of liability in negligence would be unknowable. Those goods and services that did reach the market would be relatively more expensive since the price would need to reflect the increased risk flowing from wid espread liability. With these kinds of factors in mind, the courts have the task of balancing competing interests. They must compensate victims of negligence, but without discouraging legitimate activity and without making the legal stand ards that a business must meet unreasonably exacting.

The roots o f the modern negligence action are found in the following case.

Donoghue v Stevenson, (1932) AC 562 (HL)

THE BUSINESS CONTEXT: Before large-s cale prod uction, most goods were sold directly from prod ucer/ artisan to consumer. By the 20th century, a multistage distribution chain was the norm, comprising several distinct transactions or contracts- from manufacturer, to supplier, to retailer, to the ultimate consumer.

FACTUAL BACKGROUND: A customer bought some ice cream and a n opaque bottle of g inger beer for her friend, Donoghue. Some of the g inger beer was poured over the ice cream and some was drunk by Donoghue. When the remainder o f tl1e beer was being poured into a tumbler, a decomposed snail was discovered in the contents. Donoghue became ill and sub- seq uently sued the manufacturer for d amages, based on negligence.

THE LEGAL QUESTION: At this time, the extent of the manufac turer's duty o f care was severely constricted; the manufacturer was responsible only to those witl1 whom it had a contractual arrangement. Most consumer "victims" were prevented by this limited responsibility from

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Why is the consumer of gin[#' r beer dte neighbour of the beer's maniifactw er?

recovering from the manufa cturer. There was almost certainly a retailer in the transaction and no direct contractual relationship between the manufacturer and consumer.

RESOLUTION: Lord Atkin, for the majority, wrote the following classic statement when

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discussing how to determine to whom a duty of care is owed in negligence:

The rule that you are to love your neighbour becomes in law. y ou must not injure your neighbour. and the lawyer's question. Who is my neighbour? receives a restricted reply. You must take reasonable care to avoid acts or om issions w hic h you can reasonably foresee would be likely to injure your neighbour. Who. then. in law. is my neighbour? The answer seems to be - persons w ho are so closely and directly affected by my act that I ought reason- ably to have them in contemplation as being so affected w hen I am directing my mind to the acts or omissions which are called in question.

CRITICAL ANALYSIS: ls it reasonable to make manufacturers liable for their products to end users? Would it be enough simply to make the retailer liable for breach of contract and leave the manufacturer out of the equation?

Since the case of Donoghue, the law con- cerning negligence-and, in particular, when a duty of care is owed- has become increasingly more complicated, as the discussion below illus- trates. However, as the Supreme Court of Canada has recently confirmed, Donoghue re111ains a cornerstone.11

Establishing a Negligence Action The rules that govern when a plaintiff like Lazio will succeed in a negligence action are set out in a series of elements, as summarized in Figure 11.1, which is based on the 2017 Supreme Court of Canada decision of Deloitte& Touche v Liventlnc (Receiverof).11

These elements of a negligence action, by d esign, lack a certain specificity. Their purpose is to d escribe general standards or markers that help a court assess whether the defendant in any g iven case has been negligent and on what basis.

FIGURE 11.1 Elements in a Negligence Action

1. Does the defen<lant owe the plaintiff a duty of care? This element involves two sta9es as discussed below. If a duty of care is owed. proceed to the next element

2. Did the defen<lant breach the standard of care? If yes. proc"l?d to the next element.

3. Old the plaintiff sustain dam~e? It yes, proceed to the next element

4. Was that dama9e caused by the defen<lant's breach? If yes, proceed to the next element.

5. Was the damage too remote? If not. then the plaintiff has proven ne91i\jence.

1: Does the Defendant Owe the Plaintiff a Duty of Care? The defen- dant , Samsung, will be liable to Lazio, the plaintiff, if it owes Lazio what is known in law as a duty of care. Having a duty of care means having a responsibility to avoid carelessness that causes harm to others.

Stage 1: In the relationsh ip between the plaintiff and defendant, is there a prima fade duty of care?

To fulfill Stage 1, the plaintiff must demonstrate two things: reasonable fore- seeability and proximity.13

11 Rank . .,, /R>nk<>'s G>"1ga fJ Sales) v JJ. 2018 SCC 10. 12 Delatte fl Touchev U~nl Inc (Re<-£wet oli, 2017 SCC 63 12017] 2 $CR 855. Sa::! 100 ibKJ, t)I para 71 in 100

decision of Brov1n J. (diS'fenlin.g on othar grounds) 13 lb:d at pa1() 24

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Duty of care The responsibility owed to avoid carel essness that causes ha rm to others.

Prfmafacfe

At first sight or on firsr appearances

Reasonable Foreseeability: That the harm to plaintiff was a "reasonably fore- seeable consequence of the defendant's negligence'.'1' Reasonable foreseeability considers whether the defendant should objectively have anticipated that Ills or her act or omission would cause harm to the plaintiff.

AND

Proximity: That the parties are in such a dose and direct relationsrup that it would be "just and fair having regard to that relationsrup to impose a duty of care in law."15 In asses~ing proximityt the court must take into account all rele- vant factors arising from the relationsrup between the defendant and plaintiff.

If the plaintiff can establish foreseeability and proximity, he or she proceeds to Stage 2. w

Stage 2: Are there residual policy considerations outside the relation- ship of the parties that may negate imposing a duty of care?

This stage of the inq uiry no longer consider s the relationship between the parties but considers, more generally, "the effect of recognizing a d uty of care on other legal obligations, the legal system and society more generally."17 The concern is for the court not to extend liability too far because of the general ill effects it may have.

Applying these two stages to Lazlo's case, there is no d oubt that businesses like Samsung owe a d uty of care to consumers like Lazlo. 18 Under Stage 1, it is reason- ably foreseeable that careless acts or omissions by Samsung could cause harm to Lazio. Also und er Stage 1, it is clear that the relationship between the manufac - turer and end user like Lazio is a relationship of suffici ent proximity to establish a duty o f care. Samsung is unde r an obligation to be m indful of Lazlo's physical safety because Lazio is a consumer o f its prod uct. That is inherent in the consumer- manufac turer relationship.

On this basis, a prima fade duty of care is established und er Stage 1 . A Stage 2 enquiry asks whether there are any more general considerations that ought to eliminate or reduce that duty. An important objective o f this stage is to ensure, for example, tl1at businesses and otl1er d efendants a re not made liable to an unreasonably broad, unknowable, and in deter minate extent. In practice, consid- erations that eliminate or re duce a d efend ant's duty of care a re more likely to arise in the area of pure economic loss- such as loss of profit - than in cases of physical harm such as Lazio has suffered . This is because the law is more willing to make the defend ant accountable when per sonal injury is involved , given its impact on the plaintiff and the need to generally d eter such incidents in the future, to name several reasons. 19 Concerns regarding economic loss recovery are prevalent in the context of negligen t misstatement, a tort that is discussed later in this chapter.

In Lazio 's case, a personal injury is involved. A judge would almost certainly not fi nd any reason und er Stage 2 tl1at would eliminate or reduce Samsung's d uty of care to consumers. Though making manufacturers responsible for their defective

14 Jmd at pa1a 32. 15 Jl><d•t25. 16 ll is Deyo~ 1na soope of tn:s t~xt 10 de1!l1mine on \ ... hat basts a S~e 2 a!'WysiS can~ skip~d. See Uvent,

SLJ{X'iJ OOlG 12 .ll pa1as 26 and 28. 17 Jbid at pa1<l 38. 18 See. for ex..ampte, Kn.ighr v ltr'l(>etf;).' Tobaeco Can<Jda Ud, 2000 BCCA a1 pa1as 47 .. 48, 313 OU~ {4th) 695. See

lOO l/.'(id:/Jn Jnc v Bo*JT Jnc 120021216 DLR t41hJ 121, 2002 ABCA 173 (Canuo al Cla•a 31 19 lewiS l<t.lr &Ca'Tlt'!to!\Jeft1ies, Tori Law, 6thed IT01ontO; ThOrnson neuters. 2017J at269

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products could, for example, lead to their being liable to a great number of con- sumers, this is the nature of a manufac turer's chosen business. After all, a manu- fac turer's prod uct is intended to reach many members of the public.

Having established that Samsung owes a d uty of care to the ultimate consumer of its product, Lazio would have to move to the next elements in establishing a successful action in negligence.

2 : Did the Defendant Breach the Standard of Care? In general, the d efendant's cond uct is jud ged according to the stand ards of behaviour that would be observed by the reasonable person in society. In law, a reasonable person is regarded as being an ordinary person of normal intelligence who uses ordinary prudence to guide his cond uct. The law does not demand that the reasonable person be perfect.

Professionals such as doctors, accountants, engineers, and lawyers are treated differently and must meet a higher or specialized stand ard of care when delivering thei r services. In cases involving specialized tasks, courts introd uce the standard of the "reasonable" person with that specialized traini ng- the reasonable elec- tronics engineer, or the reasonable heart surgeon, for example. To determine just what the standard is on the facts before it , the court will hear from expert witnesses who, in turn, will present evidence of what that standard is.

Where the activity or product poses a high risk, the law imposes a higher stan- d ard of care. The policy reason for this higher standard is to encourage compe- tence and caution in light of the very serious harm that could result if the task were poorly performed.

In assessing whether Samsung breached its d uty of care, a court will apply a higher stand ard because Samsung is required to operate at the level of the rea- sonable electronics manufac turer. Of crucial relevance would be how Samsung's d esign and/or manufacture of the S7 measured up to standards in the industry. Practically speaking, Samsung will be held to a very high stand ard given the nature o f its prod ucts and the harm those products might cause when defective.

At issue is whether the S7 is somehow d efective, perhaps d ue to the battery short circuiting as suffered by the Galaxy Note7. 21> Samsung on its website has denied any sud1 defects, however, noting that it stands behi nd its Galaxy S7 prod- ucts. Acco rding to Samsung, more than 10 million of its d evices are in use in the United States but there have been "no confirmed cases of internal battery fail- ures"- only i nstances of fai lure caused by "severe external damage."21

Samsung does not explain what it means by "severe external damage" but it appears to capture the idea that the battery failure was not caused by any- thing intrinsic to the phone itself but by an outside fa ctor- such as water exposure, perhaps.

3: Did the Plaintiff Sustain Damage? This step is easily met. Lazlo's d oc- tors have confirmed that Lazio suffered severe burns to his hands and wrists from when his phone explod ed and caught fire. He has also had to miss several months o f work to recover from his injuries.

20 Sul"" r>0te 4 21 Samsung, "S~tement on t~ Gafaity S7 rarn1y· us November 2016J, ori1~ <https'//~v..s.sam9..lr\g com/us/

s 1.ata ment -gatax.y4 s7 .f arn1ty/,.

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Reasonable person

The standard used to Judge whether a person's conduct tn a particular situation 1s negligent.

causation The relationship that exists between the defendant's conduct and the plaintiff's loss or injury

4 : Was That Damage Caused by the Defendant's Breach? Whlle the legal test for ca usation is sometimes d ebated, courts generally ask the following question: would the harm not have occurred but for the d efendant's actions?22

Assuming that Samsung failed to use reasonable care in the d esign and/or manufacture of the S7, the next issue is whetl1er tl1at failure caused the phone to explode in Lazlo's hands. This is largely a matter to be established through expert evidence. If that evidence is forthcoming and accepted by the judge, Lazio will suc- ceed on iliis step. For example, if it can be shown that the battery short-circllited d ue to d efective product design or manufacture whi ch, in turn, started the fi re causing Lazlo's burns, Lazio will have established causation.

Causation is described in more detail in the case below.

Resurfice Corp v Hanke, (2007) 1 SCR 333, (2007) 1 SCR 333

THBBUSINBSS CONTEXT: Every d ay, people are injured by using potentially dangerous prod ucts and tl1en bring lawsuits against the manufac- turer to recover compensation. However, if the user's injury was not caused by the manufacturer but by the user's own carelessness, the manufac- turer has a complete defence to the claim.

FACTUAL BACKGROUND : The pla intiff, Mr. Hanke, was the operator o f an ice- resurfacing machine, which he was using to groom the ice in a local arena . Unfortunately, Hanke was badly burned because he mistakenly placed hot water in the gasoline tank portion of the machine rather than in the hot water tank portion, where it belonged . As a result, vapour- ized gasoline was released into the air, which was then ignited by an overhead heater. Thi s created an explosion and fire resulting in devas- tating injuries to Hanke. Hanke sued the man- ufacturer o f the machine, Resurfic e Corp., among others, for d amages on the basis that the gasoline and water tanks were similar in appear- ance and placed close together on the machine. He argued that th is design was negligent because it mad e it easy for someone to confuse one tank for tl1e otl1er. 23

Ralph Hanke since st1staining injwies from the frre and explosion

THE LEGAL QUESTION: Did the manufacturer cause Hanke's loss?

RESOLUTION: The plaintiff must show tl1at "but for" the d efendant's alleged negligent act- here in the d esign of the machine-the disfiguring accident would not have happened. The Supreme Court of Canada restored the trial judge's ruling that the alleged design defects did not cause the accident; Hanke's own carelessness caused his injuries. According to the trial judge:

[4411 agree w ith the argument o f Counsel for Resurfice Corp. [the manufacturer and def en - dant[ that Hanke knew precisely whic h was the water tank and w hich was the gasoline

22 Su(Xa nooe19 al 520. See, l<>O,Clemen1s vClem<!r.IS, 2012 SCC 32.1201212 SCR 181. 23 Not<? thal oocoose theaccoent OCCtHrOO v1heo Ha'lk~ v1as al vKHk.. he re:::eiv~d Deool ts tJn6e1 p1ovif\Clc'.)1

v101kers cornpens<>t10ote915'aton {OiS.cussad in Chaot~r 10) and Iha outcome of thiS trtiga1on \ ... O!Jtj not atlec1 his en1 t\ement 10 do so. Rath-21 . thiS act.on v1as tnougru by the Workers· Compt?nsation Board PNCB) 1n Hanlte·s na1nE;'! The WCB heped to 0tove ooqtigencE a!ld thereoy !e:':0~1 hom too dcfeooant the arn~un1 ol compensation pad to Hanke by shO\YlllQ the delendant , ... as l'K!grigt'!nt a!l(j cd~chn-;t horn that delendant. This iscateda suo109atec c~tm, v1hCh isdiscusse::i inmo1ede1ai il\CMpte1 28.

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tank on the machine that day. His evidence of having ·noticed" that the machine did not have a propane tank and that it had a gasoline tank and his evidence o f his discussion w ith Binette (another employeel about l ooking at the machine and seeing the gasoline tank and asking Binette if the machine had to be filled w ith gas. l ead to the conclusion that he knew the difference between the tanks. He further testified that w hen he looked at Unit 4059. a similar machine. a photograph of w hich was Exhibit #21. that "he knew precisel y w hich was the water tank and w hich was the gasoline tank.· He testified that he was fully familiar with the fact that hot water should not be intro- duced into the gasoline tank.

(431 In my opinio n it is al so significant that Hanke was never asked and d id not say w hether he was con fused or d istracted. although his answers to other questions leave the impression that clearly he was not.

(451 My conc lusi on o n the facts is that i f Mr. Hanke di d not put th e hose in th e

gasoline tank. he did see it there. His training an d experience was such that he shoul d have known that it was in the wron g pl ace and he carelessly and unthinkingly or absent mindedly. turned hot water into the gasoline tank ....

In short, the accident djd not happen because the machlne had a confusing design. Hanke understood how the machine worked and, tragically, was simply not paying proper attention to what he was doing.

CRITICAL ANALYSIS: Do you agree with the court's analysis that Hanke entirely caused hjs own loss through carelessness? Is the court being unreasonably harsh? For example, per- haps the court should have found the man- ufacturer liable for failing to design a safer machlne, one that made it impossible for the water hose to fit into the gas tank portion? Thls would mean that an operator's momen- tary inattention could not create such cata- stroph.ic consequences.

5 : Was the Damage Too Remote? At this point in the test for negligence, a court asks, "Even if there is an obligation to take reasonable care and it was breached, how far will the legal liability of the d efendant stretch?"24 The jdea js that there must be some limit on the d efendant's responsibility for the conse- quences of hls negligence. More specifically, the Supreme Court of Canada has stated that remoteness of damage examines whether the actual harm suffered by the plaintiff was "too unrelated to the wrongful conduct to hold the defendant fai rly liable"25 and, in thjs way, not reasonably foreseeable. 26

Remoteness of damage

Whether the actua l harm suffered was reasonably foreseeabl e or not.

In assessing Samsung's responsibility at thls point in the sequence, a court need only be satisfied that the injury wh.ich Lazio suffered was reasonably fore- seeable. Thls bar seems easy to dear: suffering burns and lasting numbness from an exploding smartphone is reasonably foreseeable and not too remote.

On a related front, tort law operates on the principle that the injury suffered must be of a reasonably foreseeable type but the full extent of the injury need not be foreseeable. Thls principle that also finds expression in the thln skull rule, whlch protects the plaintiff who has an inhe.rent weakness or "thin skull" that makes a given injury more serious than one might otherwise reasonably antici- pate. The rule states that such a plaintiff is still entitled to recovery for the full extent of the injury. For example, if Lazlo's recovery from hls burns takes a longer

24 Kta1 b Je!lries, SJ.Jf>rtl note 19 al 565 25 1.J\ent, supra llOI~ 12 al Cla'<'l n 20 lb:d a t pa1() 78.

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Thin skull rule

The principl e that a defen dant is liable for the full extent of a pl aintiff's injury even where a prior vulnerabi lity makes the harm more seriou s than it otherwise might be

period of time than would normally be anticipated because he has an impaired immune system, his damages will not be reduced for that reason. Though the condition impairing the immune system is reasonably rare, Samsung cannot use this fact to escape liability to fully compensate Lazio.

Mustapha v Culligan of Canada Ltd, 2008 sec 21, c2008J 2 scR 114 THE BUSIN£SS CONTEXT: Manufacturers and suppliers who provide a product to the consumer are responsible for the quality of that product. Even with the best quality-control measures in place, a defective product can slip through the system.

FACTUAL BACKGROUND: Mustapha was a cu stomer of Culligan, a manufacturer and supplier of drin king water. Mustapha used Culligan's services becau se cleanli- ness and proper sanitation were tremen- dously important to him. As Mustapha was replacing a large, empty water bottle w ith a new, unopened one, he noticed that the new bottle contained a dead fly. Mustapha became obsessed with the dead fly and its "revolting implicat ions" for his family's health and well- being. At trial, Justice Brockenshire awarded $80 000 for Mustapha's emotiona l upset altl1ough he found the claim to be "objec- tively bizarre." He also awarded $ 237 600 for past and future economic loss. According to the trial judge, it was clearly foreseeable that supplying contaminated water would cause the plaint iff and others like him to suffer ner- vous shock. The Court of Appeal reversed the decis ion, and leave to appeal to the Supreme Court was granted .

THE LEGAL QUESTION: Was Mustapha's reac- tion a reasonably foreseeable consequence?

RESOLUTION: The Supreme Court of Canada agreed that Culligan owed a duty of care to Mustapha to provide clean water and that it breached the stan dard of care by supplying water contairung a dead fly. As well, this breach was the factual cause of the serious psychologic al damages M ustapha suffered, which included a major depressive disorder. The problem with Mustapha's case was that

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Mr. Mustapha, shown above, had hiscase litigated all the way t.o the Supreme Court of Canada.

his extreme reaction to a relatively insignif- icant event was not a reasonably foreseeable consequence of the fly incident. Only if mental injury would occur in a person of ordinary mental fortitude could recovery for such dam- ages flow. Here, the plaintiff coul d not show that mental injury would occur in the ordinary person fac ed with a dead fly in an unopened bottle of water. On this basis, the plaintiff's action failed. Note that if mental injury would occur in a person of ordinary mental fortitude, the thin skull rule applies and the defendant must take the plaintiff as it finds him. In such a case, even an extreme reaction would be com- pensable.

CRITICAL ANALYSIS: Do you agree with the Supreme Court of Canada's resolution of this case? Do you think that Mustapha's action in contract might succeed even tl1ough the tort action failed?

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In relation to the d1art setting out the elements j n a negligence action in Figure 11.1, Lazlo's largest hurdle will be d emonstrating that Samsung breached the stand ard of care (Element 2 from Figure 11.1) and prod uced a d efective phone. This matter will likely resolve almost entirely on the basis o f expert evidence. There is little d oubt that Samsung owes a duty of care to Lazio (Element 1 from Figure 11.1), that Lazio sustained damages (Element 3 from Figure 11.1), that the injurieswerecausedbyan exploding phone (Element4), and that the injuries were n ot too remote (Element 5). The question is why the phone explod ed to begin with and if phone's failure thereby shows breach of the standard of care.

If Lazio is successful in demonstrating all the elements in a negligence action, he is entitled to recover for damages related to the Samsung prod uct- both pecu- niary and non-pecuniary- as discussed in Chapter 1 0. This would includ e the right to recover loss of income during his convalescence and, if his ability to work in the future is compromised d ue to some kind of permanent injury to hjs hands, the amount of lost future income attributable to that red uced ability. In short, Lazio is entitled to be put in the position he would have been in had the tort not occurred.

The media "'l'Orts that Winnipeg resident Amarjit Mann suffered second degree b11Y11swhen a Samsung S7 smartphone exploded in his hands.21 To sua:eed in any daim against Samsung, Mann must be able to show all the ingredients of a negligence action. Does the law requin! too much from the plaintiff?

Tort law has traditionally been reluctant to permit recovery for pure economic l oss, that is, loss that is only financial and involves no personal injury or property d amage to tl1e plaintiff. When a person not in a contractual relationship causes someone else to suffer a financial detriment only, sum a loss is generally not recoverable. One explanation is that the rule prevents d efendants from bej ng overwhelmed with liability.2• A related explanation is that to perm it recovery of d amages in such cases would cause too much litigation in the courts. It is only

27 Supra no1e L 28 ror a 9ene1at oiSOJStion of ti'le$(! poinLS, see Kta1 & -k!UriCS. !J.Jpt/1no1e 19 at 268 and folovv1ng.

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Pure economic loss

Financial loss that results from a negligent act where there has been no accompanying property or personal injury damage to the person claiming the loss

in a relatively few areas, such as negligent misstatement (discussed later in this chapter) , that a plaintiff can recover for pure economic loss.

The law requires the plaintiff to prove each and every element in a negligence action. It is not enough to establish some of the elements or even most of them . In short, the plaintiff must show that the defendant owed a duty of care and breached the standard of care associated with that duty. Provided that the plaintiff sustained damages, that the breach in question caused the plaintiff's damages, and that the damages were not too remote, the plaintiff has won the negligence action.

Defences to a Negligence Action Though a court may find the defendant to have been negligent, the plaintiff is not automatically entitled to recover all of her damages. The defendant may raise defences against the plaintiff in order to place at least some of the responsibility for the loss on that party. This section explores two such defences: the defence of contributory negligence and the defence of volenti n on fit injuria- that the plain- tiff has voluntarily agreed to assume the risk in question.

Contributory Negligence The defence of contributory negligence was introduced in Chapter 1 0. It refers to unreasonable cond uct by the plaintiff that contributed- or partially caused- the injuries that were suffered.29 This defence recognizes that, in many instances, both the defendant and the plaintiff may have been negligent. If the plaintiff is found to have been part author of her own misfortune, then, as noted in Chapter 1 0, provincial legjslation"' will come into play. It provides that responsi- bility for the tortious event must be apportioned between or among the respective parties. Through this mechanism, the plaintiff's damages award is then reduced in proportion to her own negligence.

Kralik v Mount Seymour Resorts, 2008 BCCA 97, 78 BCLR {4th) 313

THE BUSINESS CONTEXT: When providing ser- vices to the public, business owners face liability in negligence if they fail to provide a reasonable standard of customer safety. However, should the customer also fail to pay proper attention to his own safety. such failure can provide the founda- tion for the defence of contributory negligence.

FACTUAL BACKGROUND: Kralik, an experienced skier, was trying to clear some snow and ice from the chair of a chairlift as it moved toward him from the boarding ramp. Too focussed

29 .lbi<1at6JS

on this task, he fai led to seat himself in time. Instead of moving away and waiting for the next chair, Kralik instinctively grabbed onto the chair he had been deaning and dangled from it as the chair began to ascend. Kralik realized that the longer he hung from the chair, the higher the fall would be. He therefore let go and fell about three metres to an embankment below. His r ight shoulder sustained injury, causing him loss of future earning capacity.

THE LEGAL QUESTION: Was Kralik contributo- rily negligent for failing to pay attention as the chair approached him and grabbing onto it at the last second?

30 Jmd at 618. Each common ,a..,, province Ms contr1bo.JlOiy neqt1ger.ce k?96tatiOrl. whch has 1e;::.taced the common ta ....

276 NEL

RESOLUTION: The trial judge found the lift operator liable in negligence and the ski resort vicariously liable for its employee failing to notice that there was a problem with how Kralik had loaded . She should have stopped the chair immeruately. But beyond this, the court found that Kralik had not been con- tributorily negligent. On appeal, the British Columbia Court of Appeal reversed the finding on contributor y negligence for these reasons:

... Mr. Kralik did not only suffer a · momentary l apse· (quoting from the trial judge!. He did n ot simply stand to the si de an d let the c hair continue o n w i thout him. Instead. he grabbed o nto the seat in some fashio n (not expl ored in the evi dence w hic h I have read). wi th the inevitable result that he was soon high in the air, being transported up the mounta in. Wi th all due def erence to the trial judge's findings o f fact. I conc lude that Mr. Kra li k was 50% at f aul t for failing

Voluntary Assumption of Risk

Is dte law U!o harsh fo r ded1Kting from a plaintiff's damages award becar1se he made a mistake?

to take reasonabl e care for his own safety. Pursuant to s. 1(1) of the Negligence Act . I would apportion 50% o f the responsibi lity for Mr. Kralik's inj uries to himsel f.

CRITICAL ANALYSIS: Do you agree with the Court of Appeal's decision that Kralik was con- tributorily negligent?

When tl1e court makes a finrung of volentinon fitinjuria or voluntary assumption of risk, it is concluding that the plaintiff consented to accept the risk inherent in the event that gave rise to the loss. Vo/enti non fit injuria is therefore a complete defence to the lawsuit, and the plaintiff will be awarded nothing by a judge even though the defendant had been negligent.

Voluntary assumption of risk

The defence that no l!abi lity exists as the plaintiff agreed to accept the risk inherent in the activity.

To succeed on tlus defenc e, the defendant must show that tl1e plaintiff- knowing of the virtually certain risk of harm- released his rigllt to sue for injuries incurred as a result of any negligence on the defendant's part.ll In short, both parties must understand that the defendant has assumed no legal responsibility to take care of the plaintiff and dlat the plaintiff does not expect him to. 31 Since tl1is test is not easy to meet, volenti non fit injuria is a very rare defence.

Crocker v Sundance Northwest Resorts Ltd, [1988) 1SCR1186, 1988 Canlll 45 (SCC)

THB BUSINESS CONTEXT: When a business sponsors promotional events, it runs the risk

3 1 Oub<'v L>b.,.119861 l SCR 649 a ! 658, 1986 Canlll 67 32 lb.'(/

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of being held legally responsible for any injuries that might occur.

FACTUAL BACKGROUND: Crocker entered an inner-tube race at an event put on by Sundance, the operators of a ski slope. He decided ~

so having seen a video of the event held in the previous year. Like other participants, Crocker was required to sign a waiver- that is, a com- nutment not to sue the promoters for any loss or injury associated with participating in the event. Crocker signed the waiver without reading it or knowing what it involved .

It was obvious to the m a nager o f the faci lity that Crocker had been d rinking. In fac t , on Crocker's second trip down the Mil, the manager ad vised h im not to proceed with the race. Crocker did not listen. On hi s way d own the Mil, Crocker fell off the tube, broke Ms nec k, and was rendered q uad r iplegic. Crocker sued.

THE LEGAL QUESTION: Was Sund an ce negli- gent? Did Crocker voluntarily assume the risk (i.e. , could Sundance rely on the d efence of volenti non fit injuria)? Was Crocker contributo- rily negligent?

RESOLUTION: The Supreme Court of Canad a ruled that Sundance owed a d uty of care to the participants because it had set up a n "inherently dangerous competition in order to promote its resort and improve its financial future." It was therefore obligated to take all reasonable care to prevent Crocker- who was clearly d runk- from competing in the event at all . Management's suggestion to Crocker that he not continue with the race was insufficient to meet the stan- dard o f care associated with the d uty. On the contrary, Sundance allowed and even helped

a visibly intoxicated person to participate in a dangerous event it had organized. Sundance was therefore liable fo r the resulting d amages.

The court rejected Sundance's d efence o f volenti non fit injuria. The court stated that while Crocker's participation in tl1e event could be regarded as an assumption of the physical risks involved, even this was a q uestiona ble conclusion g iven tl1at Crocker was inebriated. But, leaving this aside, Crocker had ce r t ainly not consented to the legal r isk. As the court observed, "Sliding d own a hill in an over sized inner tube cannot be viewed as constituting per sea waiver o f Crocker's legal r ights against Sundance." Even though Crocker had signed a waiver, this had no legal effect since he had not read the waiver nor did Sundance have any reasonable grounds for concluding that the signed waiver expressed Crocker's true intention. The d efence of vol en ti non fit injuria therefore fai led.

The trial jud ge's fin ding that Crocker was 25% contributorily negligent for his own inju- ries had not been appealed to the Supr eme Court and therefore was not disturbed. Crocker was awa rded 75% of his d amages because his voluntary intoxica tion had contributed to the accident.33

CRITICAL ANALYSIS: Was Crocker treated too harshly by the court in deducting 25% from his award for contributory negligence? Was Crocker t reated too leniently gjven that Sundance's defence of volenti non fit injuria failed?

Negligent Misstatement (or Negligent Misrepresentation)

Negligent misstatement or negligent misrepresentation

When negligence takes the form of words, the tort is known as a negligent misstatement or negligent misrepresenta tion. The plaintiff's loss does not arise due to the defend ant's physical act ions but due to the defend ant's careless oral or

An incorrect statement made carelessly.

33 In fO!O\"llOog uo o~ in.a Oo:.ker ca~ in 2013.. Pe1er Sowa! and Dan et Latonde 00100 as fd:5ov1s ·crocKei spcke 10 lheC.bbe and f.litJ."I afte• 100;,idgment of tf\e Supreme Court. He s;gl'lied, I 001 my la!ln in toe systeni. a')d the systelti\YO•kcd 101 ma. lls t:oeenabrlg 11ma eigllt years tllre<: months,a!\d fr.re days but I led as if 10000 pounds nave ooen t1I ted ofl my sh0utde1s · C1ocker w~ a~ to 1ieave the caie of a nursing homt>. IX.ll he !s sUI restriet~d cy his iniHies ar)('j musl use a \YhE!(!(chair ffootootes dek?t'2!d] ·See P<'!ter Bo\vat and Dan el Lak>llde ... V/Mtev~1 Happeood 10 ... Croeker vs Sundtu:ce· Lli.•1 Naw (3() AtJQUSl 2013), onl10C <hllp //\YW\Yl<!N<OO\Y 019/whate\er~happru~o-10-crocke1•vs-$unda')Ci'!/>

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written statements. If the plaintiff can establish the steps to a negligence action previously set out in this chapter, including establishing a d uty of care, the plain- tiff's action will succeed . How the duty of care is established in the context of negligent misstatement is explained by the Supreme Court of Canad a in Livent34 and discussed in the box below. Professiona l

Someone engaged From a business perspective, it is a professional- such as an accountant, a lawyer, or an engineer- who is most likely to commit the tor t of negligent mis- statement by giving bad ad vice or providing the client with an incompetently prepared report. Such a professional not only faces liability for the tort of negli- gent misstatement but also is in breach of his contract with the client. That is, providing incompetent advice to one's client is both a tort and a breach of contract .

in an occupation. usually governed by a professional body. re qui ring the exercise of special knowledge, education, and skill.

Deloitte fl Touche v Livent Inc (Receiver of ), 2017 SCC 63, [2017) 2SCR855

THE BUSINESS CONTEXT: Accountants are reg- ularly hired by corporations to prepare audited financial statements. If the client suffers loss d ue to the auditor's negligent misstatement or performance of a service, the auditors are liable.

FACTUAL BACKGROUND : Livent Inc. (Livent) was a publicly traded cor poration involved in live theatre productions, whose apparent suc- cess was, in fac t, a massive d eception. This is because two directors- theatre moguls Garth Drabinsky and Myron Gottlieb-(as well as some their associates) fraudulently manipulated Livent's fi nancial r ecords. 35 This includ ed booking falsified expenses as assets a nd, in the words of the Chief Justice, recording "imaginary revenue."36 Meanwhile, Deloitte & Touche (now Deloitte LL P) had been retained by Livent on a number of matters, including to conduct audits as required by statute. Unfo rtunately, Deloitte conducted its audit incompetently and fa iled to detect the fr auds perpetrated by Drabinsky,

34 Supt;) r.ote 12. 35 Jbtd al para 122.

Gottlieb, and thejr associates.37 The following year, new investors in Livent put new managers in place who, in turn, discovered the frauds."" Soon thereafter, Livent went into receivership and, through its receiver, sued Deloitte. Livent claimed that, as a result of Deloitte 's negligence, Livent's shareholders were unawa re of Livent's true financial state and were unable, in thejr col- lective capacity, to properly supervise manage- ment39 or otherwise make decisions "concerning the proper overall adm inistration"•• of the cor- poration. This, in turn, artificially extend ed Livent's cor porate life and increased its liquida- tion d efici t beyond what it would otherwise have been.41 At trial, Livent was successful and awarded very large d amages for negligence or, alternatively, for breach of contract. This out- come was upheld by the Cour t of Appeal for Ontario.42

THE LB GAL QUESTION: Can Livent establish the tort of negligent misstatement against Deloitte?

RESOLUTION. In a legally complex d ecision whk h is beyond the s cope of this text to fully canvass, the Supreme Court of Canada concluded

36 Jb.\-1 Note that Oiabif\Sky ~na Gonlieb , .. -e1e bolh convicted ol targe·sctite commeicial traiJd aoo on appe.M, v.-ere ser'\1enced to fi..e· aoo ra.u -year )c)R sentence~ 1espec1wety. See CBC Nevis. ·orabil\Slc.y ~"° Gotttteb rr<M.Jd Convctons Uph€jd. U3 Sep1amt:er 20ll). Onli~ <h1tp//w,•1v1c.bC..Ca/OO\'IS,IOOsi.rK?SS/ d r ab;l\S k.y-a nd·g::> 111 iC b·f raud·convic 1\0 ns-u poekJ ~ 1 l 02 5139>

37 Li\eru, supra r'Y.)le 12 at 001a 123 38 Jtnd al para 124. 39 Jb.Uat pa1a3. 40 lmd {~uo11ng He1CUl<?S Mbn~emmts Ud v t1ns1 & Young, fl997J 2 SCR 165. 1991 Canlll 34!'1 tSCC)) 41 Jtnd. 42 lb:d at para 131

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that Deloitte's auclit work was negligent (as well as a breach of contract). In so doing, the Supreme Court essentially"' applied the fi ve-part negli- gence test outlined earlier in this chapter in the "Establishing a Negligence Action" section and Figure 11.1 .

As previously noted in relation to the prima facie duty question, the plaintiff must establish proximity between the parties and that harm to the plaintiff was reasonably foreseeable. In order to establish proximity in the context of a negligent misrepresentation, the main question is whether the d efendant undertook or com- nutted to present information to the plaintiff in a reliable way. 44 In order to assess reasonable foreseeability of harm , the court must focus on whether the plaintiff's reliance on that informa- tion was reasonably foreseeable and reasonable g iven the circumstances of the case. 45 If both proximity and reasonable foreseeability are in place, then a prima facie d uty o f care is established .

In assessing proximity, the Supreme Court concluded that Deloitte committed to provid e Llvent with a reliable statutor y audit for the pur poses of permitting Livent shareholders to oversee Livent's management and to protect the company from, for example, wrongd oing.•• Proximity was therefor e in place. Reasonable foreseeability of harm to Li vent was also estab- lished . This is because Livent's reliance on this audit was reasonably foreseeable and reason- able given the circumstances. It was reasonably foreseeable that Live nt would rely on Delo itte 's negligent audit for the purposes o f monitoring management. That is, after all, one of the main

How did Deloitte's negligence <.a!lse Livent's liq!lidation deficit to inaease?

purposes of securing an auclit. And it was also reasonable for Livent to so rely for the same reason. Furthermore, and as the court con- firm ed, the type of injury that Livent suffered (an increased liquidation d eficit) was also rea- sonably foreseeable because it arose from Livent's reasonable reliance.47 The court agreed with the argument that Li vent's de fici ent audit gave "a false financia l p icture" such that Livent's corporate life was artificially extende d,48 and its liquidation d e fici t grew in size.

Based on preced ent and analysis of the facts before the court, it also concluded that there were no residual polic y reasons not to recognize a duty of care between Deloitte and Livent.4~ A classic concern in thi s policy anal- ysis phase is "the spectre of unlimited liability to an unlimited class."50 If this would be the effect, it would influen ce a court against rec- ognizing a duty." The Supreme Court was not

43 SGe Y.JPfil 001e 12 ,.,, para 24 v1heH~io Lile court decided 10 assess p1ox1m ly before reasonAt:'e lo1esaeab1t1ty v1ne!l lne 1ort is nQgtig~rH m~staterrcn.1.

44 lt»d a1 pa1~ 30. 45 Jmd at pa1a 35. 40 Jbid at pa1as 54--62. rtlfy1~ In Pclrt. on r1ercu.'es MlrM1gements, supta note 40. 47 .lblda164. 48 Jmd at pa1a 63 and 3 49 Nole th.al slrietty S~.<)king and (or t.?C hniCal 1~.s-:'.)rtS, a ma.:ority cl lhe Supreme Courr conduded that il dic:I

not have 10 appty Stage 2 10 the casa at 001 Decause 100 <')Ud1101s duty of care toils dienl had atreOOy been rccogn!2~d by· the SopremeCoun 1na 01{'V.Ouscaseand ,1 wasapp1opuate lOapoty lhale<)SG 10the1ac1sol Ltvent. S~e ibid 01 para 67. ~e too paras 26 and 28 Tile rMp1 1ty did ofter a residual pd:icy al\c'ltyslS, hOvKNe1. 1n r<.'!spon$e to analy!>iS offerOO by 1ne d S'Sienl.

SO .Ibid at pa1a 40. 51 Jbid at pa1<l 45.

280 NEL

concerned about this danger, however, because among other matters, Deloitte's liability for an annual audit would be limited to a one-year win d ow.51 It was not in determinate. As another example, there was no concern about there being a n in determinate number of people complaining about the negligent a udit . Thls is because there could only be one plain- tiff, namely Livent itself.53

properly assessed in light of a properly cond ucted audit.

That Livent's actual loss- in the form of an increase in its liquidation defici t beyond what it would otherwise have been54- was not too remote but in fact was reasonably fo reseeable.

In addition to fi nding that Deloitte owed a d uty of care, a majority o f the Supreme Court went on to conclud e as follows:

As a result of all thi s analysis, Deloitte was fo und liable to Livent in the amount of approx- imately $40 million.55

Deloitte breached the standard o f care by producing a negligent statu- tor y audit.

CRITICAL ANALYSIS : Does the Supreme Court of Canad a's approach to liability expose auditors to excessive financial risk, especially when they are working for large, fi nancially complex corpo- rations? Why or why not?

Deloitte's negligent audit caused loss to Livent because management was not

For fu rther discussion of thi s case, see Chapter 22.

The box above demonstrates why a professional, such as an auditor, has lia- bility to its corporate client. Byway of contrast, a third party (i.e., someone other than the client, such as a shareholder of the corporation being audited) is not generally owed a duty of care by an auditor and therefore cannot be successfully sued.56 Part of the reason is because the professional has had no dealings with that thlrd party and may not even know that third party exists until sued. Courts are concerned that the professional could face an unreasonable level of liability. In fac t, they have stated that such d efendants should not be exposed to liability "in an ind eterminate amount for an indeterminate time to an ind eterm inate class."57

Anotl1er reason is that audits are prepared for very specific purposes- such as the oversight of management- and this generally d oes not involve any personal inter- ests held by the sharel10lder. "' And because a shareholder is not typically in a contract with the auditor, it cannot sue for breach of contract ei ther.

Also tied up in the analysis of professional liability is the idea that, generally speaking, professionals cause pure economic loss as opposed to physical loss or injury. When the loss is merely economic- that is, purely monetary- the law is simply less solicitous of the victim. From tort law's perspective, monetary loss is simply not as worthy of compensation as property damage or personal i njury is.

For more discussion on professional liability, see Chapter 22.

52 Ll\ent a l pa1<ii 69 53 U\ent a t para 70 54 Jbkt a t l).')1as 78 ... 19. 55 lb:d at para 113. Beyond thiS, Lrvent argued, unsuccessful~ 1na1 OE!l:oitle w~ a1so t~b4e ror bSses 1eta100 10

11\e negligent p1~pa1at:OI\ o f oo:uments tJS<?d to sd:Crt ,nve-s1ment ~caus-:? these doc:timents Mso art• fieiat~ extended the,1re ot t~ coroo1a t10n. at Clara SS, and 1ne1oos.;:>d its t10u1d<)liOn deliC11, a 1 pa1a 57. The Sucneme CourLOI Car\<X'!a 1e.iec1a:i this argu!'l"'lent, na.-.-eve1. because 0€(011 te d<l not uooe11.ake to prept)re rrtese ~rUCJJl<N docu/T"ents 10 as!.ist inove1seeing Li~nrs managerrP-nt.. a1 para 55, and co1oor~t~ o~raliO~. SQC:aus(.l l hey were not ore pared lor .!UCh <li puq:osa l w<.'!nrs 1e(>an<':t'! Of') them v1as r.o t reasOMbty lo1eseea06e, a1 pa1a 55 As a resutt.. l!'l(:re c:oukJ be no duly o f ca1t? ano lne1efo1e no t~bi11ty on 1!1is l!onL

56 r1ercu!es M;,nagemet11s. supta note 4 0 57 UJtrtNflares Corpv Touche!WO€nb Co, 119'.S IJ, 255 NY 110 58 Hetcu!es Managet'l"lenls. supra note 4 0.

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Third p arty

One who 1s not a party to an agreement

Produ ct llabtuty

Lia b1lity re la ting to the design, manufacture. or sale of the product.

Negligence and Product Liability The law imposes a standard of care on manufa cturers in relation to the d esign, manufacture, or sale of their prod ucts. This area of law is known generically as product liability. The Business Law in Practice scenario und er ruscussion at the beginning of this chapter is a prod uct liability case because Samsung breached the standard of care it owed consumers if it produced a defective phone causing injur y to Lazio.

Product liability cases often involve contract law as well. Besides being able to sue Samsung in negligence, Lazio has an action for breach of contract against the retailer, assuming that the phone supplied was defective. The retailer is in breach of contract because it supplied Lazio with a product that was not fi t to be sold. Lazio can also sue the retailer in tort, for that same reason. Lazio does not, of course, have a contract action against the manufa cturer, since there is no contract between them.

Lazlo's contract action against the retailer will probably be more straightfor- ward tha n h.is negligence action against Sa msung. Th.is is because liability for breaching a contractual term is strict. That is, because in our example the retailer's promise to supply a non-d efective phone was not qualified in any way, there is no defence for breaching that promise. It is no defence to the contract action for the retailer to prove that it purchased from a reputable supplier, fo r example, or that there was no way of telling that the prod uct was d efective. To succeed in negligence against the manufacturer, however, Lazio has to demonstrate all the elements in the action, as outlined earlier in this chapter.

Because of the nature of prod uct liability, Lazio has two d efendants he can sue and would be well advised to proceed against both of them. Having two defen- dants increases the chances that Lazio will be able to collect at least something on any judgment in h.is favour. For example, if the retailer is out o f business by the time the matter goes to trial, Lazio will still have the manufac turer left as a source of payment of damages and vice versa.

The nature of product liability in fo reign jurisdictions is ruscussed at the end of th.is chapter. Chapters 23 and 24 offer further rusrnssion of liability relating to the manufacture, distribution, and sale of products.

Negligence and the Service of Alcohol Commercial establishments serving alcohol owe a duty of care to impaired patrons to assist them or prevent them from being injured .59 Similarly, tl1ese establish- ments can be liable to members of the public who are injured by the cond uct of one of their d runken customer s, 60 most notably through d runk d r iving. An important rationale for this d uty is that clubs, bars, and taverns benefit econom- ically from serving d rinks to their patrons. It stands to reason that such commer- cial establishments should also have some positive obligation to the inebriated patron and to others put at r isk by that patron. 6 1 This economic relationship between the commercial host and patron provides an important rationale fo r extending the law of negligence in th.is way.

59 See Kbr bJeffiies,su·pta oote 19al 233. 60 SGe, 101 gx.arn~a the diSCusson 1nStev1~1v~l&a-, 119951 1 SCR l:Sl, 1995Canlll147 tSCCJ. 61 Set:! KQ1 &Jelhies, supra note 19 at 234.

282 NEL

Mcintyre v Grigg (2006), 274 DLR {4th) 28 {Ont CA), 2006 Canlll 37326 {ON CA)

THE BUSINESS CONTEXT: Owners of night- clubs and other drinking establishments must actively manage the risk that a patron will become impaired and then drive a vehicle. Not only might patrons injure themselves or others, but also the owner may be found liable for those injuries and be subject to a large dan1ages claim.

FAClUAL BACKGROUND: Andrea Mcintyre, a Mc Master University student, was walking with several friends, on her way back home from The Downstairs John, owned and operated by com- mercial host, McMaster Stud ents Union. As Mcintyre was walking along the side of the curb of the sidewalk, she was struck by the defendant's vehicle. The defendant- a Hanillton Tiger-Cats football player named Andrew Grigg- had run a stop sign, and then made a wide right-hand turn while speeding. Next, his vehicle sheared off a lamp post and struck Mcintyre, causing severe physical and psychological injury. Just p revious to the accident, Grigg had been drinking at The Downstairs John as well as at other venues ear- lier that evening.

Mcintyre sued Grigg as well as the McMaster Students Union.

THE LEGAL QUESTION: Does the McMaster Students Union- a commercial host- have any liability for the injuries suffered by Mcintyre?

RESOLUTION: The Court of Appeal quoted the following portion of the trial judge's dlarge to the jur y as properly stating the law regarding commercial host liability:

At common law commercial vendors o f alcohol owe a general duty or care to per- sons who migh t reasonably be expected

to come in to contact with a n intoxicated pe rson a nd to whom the patro n may pose some risk. That duty o f care a rises if there is some fo reseeable risk o f harm to the patron or to the third party.

Common law and statutory law the refo re impose a duty o n taverns to its patro ns a nd others to ensure that the tavern does not serve alcohol whic h would either intoxicate or increase the patron's intoxicatio n. They do not escape liability simply because a patron does not exhibit any visible signs of intoxica- tion if in the circumstances the tavern knew or o ught to have known that the patron was becoming intoxicated.

The jury accepted that Grigg was showing s igns of intoxicat ion. Even though the majority of witnesses said that Grigg did not appear to be drunk at The Downstairs John, one witness at the accid ent scene said he did exhibit sudl signs. As well, Grigg's blood alcohol level two hours after the accident measured nearly three times the legal limit. Expert evid ence established th a t , on this basis alone, he may have been served up to 18 drinks at The Downstairs John. Accordingly, there was suffici ent evidence that Grigg would have been visibly impaired .

The Court of Appeal rejected McMaster Stu- d ents Union's appeal of the jury's findings. In the result, Mcintyre received $250 000 for pain and suffering as well as a sizeable amount rep- resenting loss of future income. Grigg was held 70% liable and the Students Union held 30% liable. Grigg was also ordered to pay an addi- tional sum in punitive damages.

CRITICAL ANALYSIS: Do you agree that bars should be held responsible when their patrons cause injury to themselves or others?

The Negligence Standard versus Strict Liability Strict liabilit y in tort makes the d efendant liable for the plaintiff's loss even though the d efendant was not negligent and, by d efinition, had exercised reason- able care.62 Given that Canadian tort law is found ed on a fault-based system, the

6 2 lb.d a t 741

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Strict liability

The prin ci pie that liability will be imposed irrespective of proof of negli gence

scope of strict liability is necessarily lirruted .63 These exceptions are largely con- fi ned to vicarious liability (discussed previously in Chapter 1 0), as well as liability for fires, for d angerous animals, and for tlle escape of d angerous substances.64

Anoilier reason strict liability is so unusual is because the law o f negligence has expand ed to provid e a remedy to most victims o f accidents who merit compensation.65

Though strict liability'° makes only rare appearances in ilie law o f torts, it would be wrong to conclude iliat businesses rarely fa ce strict liability. As already noted, there are significant areas where liability is strict, including:

liability in contract. When a business makes a contractual promi se iliat it breaches or fails to perform, that business is liable for breach o f contract. The absence of negligence is no d efence.

v icarious liability. As already discussed in Chapter 1 0, vicarious liability is a form of strict liability. An employer is automatically responsible for ilie torts of his employee when, for example, there is a s ignific ant connection between what the employer was asking the employee to d o and the employee's tort.

A third relevant instance of strict liability is d escribed in ilie following box.

INTERNATIONAL PERSPECTIVE

STRICT LIABILITY

Some of Canad a's major trading partners, such as members of ilie European Union (EU) and areas in the United States, use a strict liability rather ilian a fault-based stand ard in d efective-prod uct liability cases.

For example, all EU member states are sub- ject to a directive requir ing that manufacturers be strictly liable for their defective prod ucts. The directive provides that a product is d efec· tive when it d oes not provid e the safety that a person is entitled to expect, taking into consid- e ration all the circumstances. Relevant consider- ations include ilie presentation of ilie prod uct,

63 bid at 742.

expectation of use, and ilie time ilie product was put into circulation. The directive also provides for a "state of ilie art" d efence by stating iliat a product will not be considered defective for tlle sole reason iliat a better product is subsequently put on the market.

The effect o f a strict liability stand ard is that manufacturers can be held liable for unsafe prod- ucts even if iliey were not negligent in any way and exercised due care. This is markedly different from the result under a fault-based standard. In the latter case, if the manufacturer takes due care a tall stages of product prod uction- in designing the product, in selecting a prod uction process, in

64 Jmd at 644. l!t)blily 101 the a scape ot dal\garous substances tS cat~d the- Rylands v fk!:che! lorl The tort is ·no lautr aM the mere tact Lhat !.he dangerous .!l.lbsi.aoce es~pes from one·s llOD-1'.dHJral ose of land is eoou9n 10 ma;;,e tnedefeooaot 101ti0usty tatite.. t'?\(!n 1f t ne es.ca~ ,.,.as not due to negl'geoce{tack. of due care. 'JI/Mt cons1•1tJl't!s llOrl"Mturil: ust'! iS a matter or debate beyond the s.cooe ol thtS text. F'Of disa.iss:on. sae Kta•, ibid al 742 and ldbv1!1"9. Stlictt~t>:tity ;S further dtscus.'iOO ,nCl\ap1er 12.

65 bid at 741. 66 Note 1001 st• iC t tl<>bl11y in t~ con1ex1 or 101L a.-1 tS dillererH horn s11ct tablily 11') t he con1ext or 1e9u~101y

olfences. Go~rnl'r'CnLS e~ct 1e9utatory s1.a1u1es-crea11n9 1egu1a1oryofran.ces-ino1de110 protect t he pobh:: 1nte•es1..tar.:cord1n.g to thetMdi~ ~se of fl vCityof SJ1UJt Ste/vlat1e. !197812SCR1299, 1978<:.anlll 11 tSCC), regu\ato1y Sl.()tute.s suet\ as ~rw11onmental 0101ect>0n tegiS~tcn con1em!'AA1e 1t11ce dasses 01 ollences, one of which is knov1nasasttK:t l1ab.Y1tyoffence Ill 1n1scon1ext.. .SlliCL tiat>i±Lydoes no1 f'reantMlanottence ts cieat~d 10 vvh.ch. t hefe is no 6eteoci'!. for striCt C;ab1 ty olfences in tna 1e9Jta1or1 context, a oerson chargOO can iaise Iha d~far.ce ol due dli9'?nc0. That 1s, 11 st:Ch a person can SOON Lhat he took.al tMSOr)Abk"! care, li'l(;re wit t>t:! oo tlclbl1ty.

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assembling and testing, and in packaging an d labelling- there is no liability regardless of defects. Strict liability, on the other han d, is imposed ir respective of fault.67

Critical Analysis: Which approach to liability do you prefer and why?

BUSINESS LAW IN PRACTICE REVISITED

1. What tort may Samsung have committed in relation to its 57 product and what does Lazlo have to prove in order to establish that tort?

Samsung may have committed the tort of negligence. There are five elements to a successful negligence action as outlined in this chapter whlch Lazio must establish as the plaintiff.

Element 1: Does the defendant owe the plaintiff a d uty of care? Thls will be a straightforward exercise as manufacturers like Samsung generally owe a prima fade duty of care to consumers of their product. This is because, under Stage 1 of the duty question:

a. it is reasonably foreseeable that a negligent act or omission by Sam- sung in the manufac turing or design process would cause harm to Lazio; and

b. there is a relationshlp of suffici ent proximity between them in the form of consumer and manufa cturer.

Moving to Stage 2 of tl1e duty question, tl1ere are no policy considerations to reduce or elimi nate this d uty since, for example, there is no concern about Sam- sung facing indeterminate liability.

Element 2: Did the defendant breach the stan dard of care? Lazio will have to prove that Samsung breached the standard of care by producing a defective cell phone. This will largely have to be established based on expert evidence whlch Lazio may or may not be able to produce. Assuming success on this front, Lazio moves on to the next elements.

Element 3: Did the plaintiff sustain damage? Lazio will have to show that he has suffered loss or damage, here in the form of personal injury (severe burns) and loss of in come (he was off work for several months in recovery), to name two examples.

Element 4: Was that damage caused by the defendant's breach? Lazio must prove that "but for" the defect he has established in Samsung's man- ufacture or design, the phone would not have exploded in Lazlo's hands. Perhaps there were other reasons that caused the explosion, such as water damage.

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Element 5: Was the damage too remote? It is entirely fo reseeable that someone holding a phone that explodes will suffer burns.

2. What defences does Samsung have to this action?

Samsung's strongest challenge would be under Element 2 . That is, Samsung would argue thatthere was no breach in tl1e standard of care because there was no defect in the design or manufa cture of tile phone. Furiliermore, even if there were a defect, tltls may not have been tile cause of tile explosion under Element 4. There could be oilier causes external to the phone that caused it to catch fire.

3. What additional risks does a class action create for Samsung?

As noted in Chapter 4, a class action isa lawsuit laundled by one or more persons representing a larger group whose member s have similar claims against the same defendant. Class actions allow a group of people to bring a claim that someone acting alone might be unable to afford. Thls means that individuals who oilierwise would not have sued can join the class action and receive their fair portion of the damages awarded.

CHAPTER SUMMARY

Donoghue v Stevenson is the foundation of modern negligence law. Negligence law is an inherently fle.ldble, growing legal area. It seeks to provide a remed y to the plaintiff who has suffered a loss or injury due to the culpable iliough uninten- tional cond uct of tile defendant.

The five elements in a negligence action describe general standards o r markers iliat help a court assess whether the defendant in any given case has been negligent.

One of the most common defences to a negligence claim is that of contributor y negligence. The plaintiff's damages award will be red uced in proportion to her own culpability in causing the loss, for example, by failing to wear a seat belt or drinking to the point of impairment.

A less common defence is to allege that the plaintiff voluntarily assumed the risk . This defence is rarely established since the defendant must prove that tile plaintiff not only consented to the physiml risk of harm but also agreed to accept the legal r isk of not being able to sue tile defendant for resulting loss or injury.

Negligent misstatement or negligent m isrepr esentation holds tile defen- dant responsible for negligence taking written or oral form . Professionals such as accountants and lawyers are most likely to commit tltls kind of tort. Courts guardagafost tile professional facing liability in "an indeterminate amount for an indeterminate time to an indeterminate class." TMs sheltering of the professional is also partially justifiable in light of the fact iliat a professional's negligent m is- statement is likely to cause only pure economic loss as opposed to personal injury or proper ty loss. Tort law has been historically less concerned when the plaintiff's loss is purely monetary.

Business is also affected by prod uct liability. Prod uct liability involves both negligence law and the law of contract. The m anufac turer of a poorly prod uced or designed product will fac e an action in negligence by the disappointed purdlaser. The retailer will fac e a breach of contract action by that same person and- if tile retailer was also negligent- an action in negligence as well.

NEL 286

Another area of liability for business relates to the service of alcohol. Commer- cial servers of alcohol, such as bars, taverns, and restaurants, owe a duty of care to protect against the foreseeable risks of intoxication.

Strict liability is a liability imposed even whe.re the defendant has not been negligent. This is a rare phenomenon in tort law, but there are other areas of law in whi ch strict liability is common. The two most hnportant areas relate to lia- bility for breach of contract and vicarious liability for the torts of one's employees. As well, some of Canad a's major trading partners, including the EU and parts o f the Uruted States, use strict liability rather than a fault-based standard in d efective- prod uct liability cases.

CHAPTER STUDY

Key Terms and Concepts causation (p. 264)

duty of care (p. 261)

negligent misstatement or negligent misrepresentation (p. 270)

prima fade (p. 261)

product liability (p. 27 4)

professional (p. 271)

pure economic loss (p. 26 7)

reasonable care (p. 259)

reasonable person (p. 263)

remoteness of damage (p. 265)

strict liability (p. 275)

thin skull rule (p. 265)

third party (p. 273)

voluntary assumption of risk (p. 269)

Questions for Review 1. What competing interests must a court balance

in decirung a negligence action?

2. What are the five elements in a negligence action?

3. Before Donoghue v Stevenson, what defence could most manufa cturers of goods raise when fa ced wjth a cWm for negligence brought by an injured user of those goods?

4 . What is the role of reasonable foreseeability o f harm in d efi rung whether a d uty of care is owed?

5. What is the stand ard of care in negligence?

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6. How is causation usually d etermined in negligence?

7. Does the normal or orrunary stand ard of care vary in any specific circumstances? ExpWn.

8. Does tort law generally allow recovery for pure economk loss?

9. What does contributory negligence mean and what are the conseq uences of its being found to exist?

10. What is the consequence of a volenti non fit injuria fi n rung?

11. Give an example of when the defence of volenti non fit injuria might be applied.

12. What kinds of plaintiffs will be likely to succeed in an action for negligent mi sstatement against a professional?

13. Why was a d uty of care owed in Livent?

14. What area of law otl1er than tort law do product liability actions often involve? Why are actions in that area often more straightforward than in tort law?

15. What is the thin skull rule? Give an exan1ple of when it would apply. How d oes the thin skull rule protect thepWntiff ?

16. Is the commercial host liable if one of its patrons is injured because of the patron's own impaired d riving? Explain.

17. Why is strict liability rare in Canada's tort regime?

18. Name two areas where strict liability is common.

Questions for Critical Thinking 1. An important part of the legal test for finding

a duty of care focuses on analysis of policy considerations. What is meant by policy considerations? What are some examples? What might be policy considerations in product liability cases as compared to other types of cases?

2. From time to time, it has been proposed that the principles of strict liability be applied to product liability in Canada as they are in certain other jurisdictions. What are the pros and cons of applying this concept in Canada? What changes would result for producers of goods and services, as well as for consumers? Are there inherent r isks that mjght arise for society as a whole if strict liability were imposed in certain industries?

3. In Mcintyre v Grigg, discussed earlier in this chapter, the commerc ial host was found liable for the damages suffered by the plaintiff when struck by an im paired driver who had been dr inking in that commercial host's establishment. How can commercial hosts manage the risk of serving alcohol and the potential liability that goes with that?

4. It is relatively new for courts to allow recovery for pure economic loss in negligence, that is, loss unrelated to any physical loss. Some would argue that extending negligence in this reganl potentially places an unfair burden on some occupations and service providers. In our society, people should accept that there are some losses for which recovery cannot be obtruned. What are the pros and cons of allowing recovery for pure economic loss?

5. The application of the "thin skull rule" often places a considerable burden on a defendant who is found liable in negligence, above and beyond what would normally be "reasonably foreseeable." ts it fair that the negligent party should assume the burden of these extra costs? Does the th in skull rule make sense when considered alongside the rule about remoteness of damage?

6. The court in Mustapha had no doubt that the plaintiff suffered extreme mental distress caused by seeing a fly in the sealed bottle of

water and that he was not exaggerating his response. As long as the plaintiff is being truthful about his reaction to the defendant's negligence and the court believes him, why should that not be sufficient to permit recovery for emotional upset? Discuss.

Situations for Discussion 1. Mrs. Kauffman was riding up the escalator

owned by the Toronto Transit Commission (TTC). The escalator was equipped with a metal-clad handrrul instead of the rubber type, which presumably would have been less slippery. Three young men, riding the same escalator just above Kauffman, began pushing each other around. They ultimately fell on Kauffman, knocking her over and severely injuring her. Kauffman sued the TTC for damages , claiming that it had been negligent in installing an untested handrw made of metal which offered less support and that is why she fell. Will Kauffman succeed in showing that the TTC caused her loss?68

2. Meat Products Ltd (Meat) is an Ontario-based food processing and distribution company. t t supplies deli meat and related products throughout Canada and parts of the United States. Meat's CEO was appalled to discover that one of its production plants was contaminated with a bacterium that causes listeriosis-a serious, food borne illness. Around this same time, Jennifer Jones consumed a deli product made by Meat and became seriously ill with listeriosis. She contacted a lawyer who was immediately in touch with Meat. Now that Meat is aware of a possible listeriosis contamination, what risk management steps should it take going forward? What factors are important in determining what strategy or strategies it employs?"" Assuming Jennifer makes the decision to sue Meat in negligence, what must she prove to succeed?

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288 NEL

3. Klutz won a contest sponsored by a radio station, entitling him to play in a twilight golf tournament. He went to the radio station and signed a form releasing the station from any liability connected with the tournament. The event was held at the Dark Side Country Club, beginning at 11:00 P.M. Klutz attended a pre- tournament instructional meeting and was told that his team was to tee off on the second hole. While the team headed for that spot, Klutz hurried to his car to get his clubs and golf shoes. As he sprinted down the path to the parking lot, he ran into one of a series of black iron posts embedded in the asphalt path at the point where the walkway and parking lot met. Klutz somersaulted several times, ending up on the d riveway with banged knees and a badly bruised elbow. He played seven holes of golf, but could not carry on. Prior to the accident, he was a self-employed upholsterer. Following the accident, he was unable to work for three months. After that his production was down 20%. His ability to participate in household and leisure activities was also reduced .70

Apply the principles of tort law to this situ- ation. Suggest a result. What further informa - tion would be useful?

4. Lee Leighton parked his car in a parking lot and was asked by the parking lot owner (who was manning the booth) to leave the keys in his vehicle so that it could be moved as necessary. Leighton did so. Within the hour, Leighton's car was stolen by a thief who simply drove off with it. There was no need to hotwire or otherwise bypass the ignition switch in the vehicle, for example, as the keys were still in the ignition. One week later, the thief was in an accident with the plaintiff while d riving the stolen car. Is the parking lot owner responsible for the plaintiff's injury, or is the loss too remote?71

5. Mr . Worton purchased a slide for the family's four-foot-deep aboveground backyard pool from Jacuzzi Canada Inc. A Jacuzzi Canada employee told Mr. Worton that installing this kind of slide with his pool would be "okay" and

10 Ba~d. tn oort on PoJ.uk v Ciiy of EdmC>r'UM 11996), 19 1 AR 301, 19% Canlll 10537 (AB OB)

71 B~d_ in part, on SpiigOOlo v 1'vl~g~sson:S SpotlS Ud 11983). 145 DLR 130) 31!1 1983 Canlll 1904 [ON CA)

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"not a problem ." He was not advised that there was any risk at all in doing so. Wor ton installed the slide according to the instructions. Unfortunately, Carla, his 1 5-year-old, was seriously injured when she went down the slide headfirst and as a result is now paralyzed.72

Carla had been instructed by her parents only to go down the slide feet first, but on this occasion, she fa iled to follow this rule. Carla's parents have sued Jacuzzi on her behalf. ls there negligence? Did this negligence cause Carla's accident?

6. Ellen attended a skin care clinic to receive laser removal of unwanted hair. The technician performed the entire treatment without first cond ucting a full patch test and failed to stop the treatment when Ellen complained of pain. As a result, Ellen sustained facial and neck scarring. She was left with permanently lighter skin below the lasered skin and was very concerned that others would think she had leprosy. She was very traumatized and unable to work for at least a month. She also requires ongoing psychological care.73 What elements must Ellen establish in order to demonstrate a negligence claim? What kind of damages should she seek and on what basis?

7. Big Pizza, a province-wide pizza ch ain, has a new promotional campaign. The chain guarantees that all pizzas will be delivered w itllin 30 minutes or tl1ey will be free. While this promise is readily kept in small cities and towns, it places considerable stress on franchises in large urban areas. Franchisees are required by their franchise agreement to pass on this stress to drivers by fini ng them half of the cost of any pizza not delivered within the requisite time. To overcome this threat, d rivers often decide to drive well above the speed limit. One driver, attempting to meet the deadline, fails to notice another vehicle in his path and collides with it , seriously injuring the passengers in that vehicle.

Assuming tl1at the issue of negligence by the driver is clear-cut and tlut tl1e d river is an

72 ~ed. in ;h)rl, on WbJfotd (LJ1Jgation guiKdNN'I on V Jile.uZZi Cll'iadc> Inc. 2007 O N:":A 729. 87 OR !3d) 2&

73 Sasad, in pa11,.onAyMa v Skin Kl,,1~. t2009J 68CCLTl3dJ 2.L 200;) C.a• Lll 42042 [ON SCI

employee, can the injured persons claim dam · ages from the franchisee for the actions of the employee? Why or why not? ls there any argu· ment that Big Pizza has itself been negligent? Present arguments for both sides of the case, and det.ermine whether liability will be upheld.74

8. The Bridge Engineering Company contracted to build a bridge between a suburb and the downtown core of a medium-sized town. For years, the two communities were joined by a one-lane bridge, and this new four-lane bridge was a major improvement. Indeed, as a result of the new bridge, a local contractor began

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building a new housing project of 30 homes. Just before the first home sales were made, a major defect was discovered in the bridge design that meant that the bridge would be unusable for at least h'llo years. Residents would be forced to use a lengthy detour that added approximately 30 minutes to the average drive between the suburb and downtown, where the majority of the residents worked. The market for the new housing project immediately collapsed, and the contractor was unable to sell any houses. The contractor is considering litigation but realizes that he has no claim in contract against the engineering company. Are there any alternatives? Explain.

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BUSINESS LAW IN PRACTICE

Ron Smi thson owns and operates a small manufac turing business in St. John's, Newfoundland and Labrador. The business supplies specially crafted items for gift stores, specialty boutiq ues, and craft shops. Ron sells mostly through trad e shows, although online sales are beginning to account for a sizable part of ms business. He also has a small factory outlet. Ron cond ucts business in a two-storey building that he owns, in a historic part of the city. The basement houses a manufac turing faci lity consisting of pottery wheels, kilns, and a decorating and glazing studio. Themain floor is used for wa re- housing and storage, packing, and shipping. The second floor, with the exception of a small unit devoted to the fa ctory outlet, is leased to a number of other small businesses.

Ron has had a successful year, although there are two situations that have the potential to jeopardize the bottom line:

Julie Osbourne, a local resident, suffered serious injuries on Ron's premises. Julie had planned to visit the fac tory outlet to purchase some gifts for visitors. To access the store, she had to use the elevator. As she travelled between floors, the steel plate covering the indicator lights above the elevator door became unhinged and fell, rutting her on the head, neck, and shoulders. Apparently, the plate fell off because the elevator maintenance company, Elevator XL Services, which had been hired by Ron to maintain all features of the elevator, had run out of plate clips to keep the plate itself in place. It instructed its employee to use a broken clip for the time being rather than leave tl1e steel plate off altogether. Ron knew tl1at a broken clip had been used on the steel plate but had also been assured by the elevator maintenance company that a proper clip would be installed on the very next business d ay.

while visiting a trad e show on tl1e mainland, Ron saw a replica of his best-selling fi gurine, "Old Man of the Sea." The replica was d ressed in the same fisher garb as Ron's figurine, was decorated with the same colours, and had the same style of packaging and labelling. The only differences were that the replica was mad e with cheap plastic and that it was named "Man of the Sea." Ron is concerned about the impact that sales of trus competing figurine will have on ms business. L

1 Based, in p.ttrt, on Saw.'er v f tanklyn £ntetprJses Ltd (1992), U 7 NSR (2dJ 316, 324 APR 316 lTO)

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OBJECTIVES After studying this chapter. you should have an under- standing of

• the range of torts that are relevant to business organizations

• how torts arise from the use of property

• how torts arise from business operations

• how a business can manage the risk of liability in tort

Occupier

Someone who has some degree of control aver land or buildings on that land.

1. What potential legal actions does Julie have against Ron's business?

2 . What is the responsibility of Elevator XL Services?

3. Does Ron have any recourse against the manufa cturer of the replica figurine?

4. How can Ron manage the r isk his business faces o f potential tort liabilities?

Introduction Business activity- whether it involves generating electricity, cutting hair, filing tax returns, or selling automobiles- involves interactions that may ultimately have a negative impact on others and their proper ty. Consider the following examples:

a rnstomer in a grocery store slips on a lettuce leaf and falls, breaking his ankle.

a store d etective d etains a shopper asswmng, incorrectly, that the shopper has stolen merchandise.

a salesperson intentionally overstates an important quality of a prod uct because she wants to dose a sale.

a golf course ad versely affects an adjacent landowner because players con- tinually drive balls into her yard.

In each o f these examples, the business may have interfered with a legitimate interest o f another and could, as a result, be subject to a tor t action.

The laws that make a business liable for its tortious cond uct also operate to protect that same busjness when it is the victim of a tor t . Consjder the fol- lowing examples:

a newspaper columrust maligns the environmental record o f a business.

vand als continually spray-paint graffiti on fac tory walls.

a competitor entices a skilled employee to break his employment contract a nd join the competitor's business.

a new business creates a logo that is remarkably similar to that of a n existing business in the same market.

Tort actions relevant to businesses can be converuently divided between those that arise because a business occupies a property and those that arise because of actual business operations.

Torts and Property Use Tort actions may arise in relation to property in a number of ways, most com- monly when the o crnpier of the property harms others. An occupier is generally de fined as someone who has some d egree of control over land or buildings on that land.2 An enterprise cond ucting busjness on proper ty is an occupier, whether it is the owner, a tenant, or a temporary provider of a service. Following from this d efin ition, it is entirely possible to have more than one ocrnpier of land or a building.

2 Lew IS Ktar & Came roll .}effries, Tort Lilv1, 6th ed tToronto· Toom~on ~eu1ers Ca~a. 20l1} a1 704.

NEL 292

Ron, as owner and user of the building, is an occupier. His tenants on the second floor are o ccupie rs of that space. Elevator XL Services Ltd was h ired to service and maintain the elevator. As such, Elevator XL Services had control o f the elevator at a critical time and can also be classified as an occupier, although for a much more fleeting moment. The main tort actions in relation to occupation of property relate to occupiers' liability, nuisance, and trespass.

Occupiers' Liability Occupiers' liability describes the liability that occupiers have to anyone who enters onto their land or property. This area of the law- which has deep roots in the law o f negligence discussed in the p revious chapter- varies by jurisdiction. For example, jurisdictions such as Newfound land and Labrador, Quebec, and Saskatchewan retain the common law while other provinces have occupiers' lia- bility legislation.3 In New Brunswick, statute has abolished occupier s' liability as a specialize d category altogether.•

Liability at Common Law The liability of the occupier fo r m ishaps on property is not determined by the ordinary principles of negligence. Rather, liability is d etermined by classifying the visitor as a trespasser, licensee, invitee, or contractual entrant. Each class is owed a different standard of care, with the trespasser being owed the lowest stand ard and the contractual entrant being owed the highest. This area of law is often criticized for the difficult distinctions between the different classes of visitors, the blurring o f d uties owed between the various classes, and the severity of the result when the visitor is classified as a trespasser.

A contractual entrant is someone who has contracted and paid fo r the r ight to enter the premises.5 Visitors to the premises who have bought tickets to see a pottery exhibit would be contractual entrants. The d uty owed to this class (in the absence of a contract specifying the d uty) is a warranty that "the premises are as safe as reasonable care and skill on the part o f anyone can make them."•

An invitee i s someone whose presence on the property is o f benefi t to the o ccupier, such as store customers and delivery or service personnel. The occupier owes a slightly lower d uty to the invitee than to the contractual entrant. He must warn the invitee of any "unusual danger, (of) which he knows or ought to know." 7

There is no requirement to warn of usual or common d anger that "ordinary rea- sonable persons can be expected to know and appreciate. "8

Julie is dearly an invitee, and the improperly fastene d steel plate would be classified as an "unusual d anger." She is therefo re entitled to hold the owner and elevator maintenance company liable for injuries suffered as a result of that unusual d anger.

3 See Ktar & Jetff~s. ibid, al 704, Cillf\9 Ocwp1ers' Uab11JtyAct, RSA 2000, c 0·4, Oa:.u(>iers· !Jtmil1l}' Act, RSBC 1996, c 331; Occup.ers· U/Jt'NIJ:y Act CCSM c OB as arr~OOed, Occup.ers· U/Jt'NIJ:y Act, SNS 1996, c 27, Occup.>ets' !Ja'b.'h.:y Acr, RSO 1990, c 0·2; and 0cCuf»€ts' 1.1/Jbt,!Jiy Ac!, RSPCI 1988, c ()·2.

4 See Law Reform Act ~SNB 20ll, c 184, s 2 5 Kbr & Jeffries,su·pta oote 2 ~l 717. 6 Jbld al 719, lootnotes orn1ued 7 lndermaurv Dames UB66J, LR 1 CP 274 at 288. otro U867J. LR CP 314 tr, C•J Cited by Kia• & .leJl<c~

ibid •t 718. 8 Mc Er lean v Sare/ il987J. 61 OR l2dJ 396 at 418, 22 Ql>.C 186 (C"Al leave to appeOI to SCC .eh.sod 11988). 63 OR

l2d) x. !oote) ISCCJ as 9.Jmn-anzed oy K\31 b Jeflri~. ibid.

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Contractual entrant

Any person who has paid (contracted) for the right to enter the premises

Invitee

Any person who comes onto the property to provide the occupier with a benefit.

Licensee

Any person whose presence is not a benefit to the occupier but to which the occupier has no objection

Tresp asser

Any person who is not invited onto the property and whose presence 1s either unknown to the occupier or is objected to by the occupier.

A licensee is someone who has been permitted by the occupier to enter forthe benefi t of the licensee.• If Ron allowed people accessing an adjacent business to take a shor tcut through his building, those users would be licensees. A licensee might also includ e guests invited to someone's property for a social occasion.

The general rule is that occupiers are responsible to licensees fo r any unusual d anger of which they are aware or that they have reason to know about. The latter part of the rule is a recent addition and tend s to blur the distinction between the d uty owed an invitee and the d uty owed a licensee.10 Since there is no strong rationale for distinguishing between a licensee and an invitee to begin with, this blurr ing i s entirely justifia ble.

A trespasser is someone who "goes on the land without invitation o f any sort and whose p resence is either unknown to the o ccup ier, o r if known, is practically objected to."u A burglar clearly fi ts the d efinition of a trespasser.

An occupier still owes som e responsibility to a trespasser. In particular, the occupier will be liable for any act done with the d eliberate intention of d oing harm to the trespasser, or an act d one with reckless disregard for the presence of the trespasser. 12 Though the trespasser is not owed a common law duty o f care as d escribed in Donoghue v Stevenson,13 the occupier d oes owe him "at least the duty of acting with common humanity towards him.''14

Though a t re.spasser is owed a ver y low duty, courts have often mitigated the harshness of this result, particularly when the trespasser is a child. For example, courts have at times reclassified the trespasser as a licensee, interpreted the d uty owed the trespasser very generously, and even brought the child ren's claims under the ordinar y law of negligence.15

Liability under Occupiers' Liability Legislation With the goal of simplifying the common law, provinces such as Alberta, British Columbia, M anitoba, Nova Scotia, Ontario, and Pr in ce Edward Island have enacted occupiers' liability legislation. 16 Although there are differences in the legislation from one jurisdiction to the next, there is also considerable common ground because of a united legislative purpose. As the Supreme Court o f Canada confi rmed in the context of Ontario's Occupiers' Liability Act, the legislative purpose was "to replace the somewhat obtuse common law of occupiers' liability by a generalized d uty of care based on the ' neighbour' prin ciple set d own in Donoghue v Stevenson.""

Indeed, legislation across the country provides for a high duty of care-equivalent to the negligence stand ard- to be owed to entrants who are on the property with express or implied permission (at common law, contractual entrants, invitees, a nd

9 Ktar & Jeffries, 1b.'d at 708. 10 Jt»d al 716 .. 717, citing Mitchell v CantKJ1:m N:mon;)J. Rlltl'."ltly Co, {1975] l $CR 592.. !1974] SCJ No 67, ()mol",g

o lher cases. 11 Rowt Mdie& Sons v Dumbfed.: 119291 AC 358 ()t 371 tHL), Cilt'!d by Ktar& Jetlries, 1b.'d at 707. 12 Robert Addie, ibkJ t>l 713 13 1!932j AC 562 IHL) 14 Brr:ish 1?11t1 .. 1ttys btd v Herrington, !1972} AC Bn tH L), (luOted \V1lh app1&va1 by toe Supr~me Coorl of Ct.M1~

in Ve.V?OI v Kcr,,.Atk/1sot1 Mines itd, !19751 2 SCR 31-1. 51 DLR {30) 533 .lnd c11ed oy Ktar & Jeffi~s.. SJJpra oote 2 a1 715 .. 116.

15 Kiar & Jeflries,1b.'d at 713aoo fotb ... 1~ 16 Supra note 3 17 11./hJd.ick v/vlak':olm. !1991J 2 SCR 4 56 at 466, 83 DLR f41h) 144 fWab11ckJ quoting v1 th ~pprovat 1he appetate

1Jd91!! from U989). 70 01~ l.2dJ 717 !CA). No 1e hov.-ever 1na1 ii\ Alberta. tor eX1.1mdi!, separate categories (01 lr(!Spt)SS<lrs and ch11d 11espass.t!n; a1e rcta,ncd As v..e«, 10 some JUrlSdiCl !Otts, Sn0\>1mobf~rs a1G tre~led according 10 speci.)1i2:ed rutes. See K\a1 b Jeffries, supr;, not'1 2 al 737.

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licensees). Responsibility to trespassers differs among the various statutes. In gen- e ral, however, an occupier must not create d eliberate harm or d anger,"' and, in Alberta, the responsibilities increase where the trespassers are children.19

If Ron's business were located in Ontario, where occupiers' liability legislation is in place, the court would likely still find both the elevator company and Ron liable to Julie. This is because under section 3 of the Act, an occupier owes a statutory d uty of care as "in all the circumstances of the case is reasonable to see that per- sons entering on the premises, and the property brought on the prem ises by those persons are reasonably safe while on the prem ises." Specifically, a court would find that the elevator company ought to have foreseen that harm could occur as a result of a defective clip. Likewise, since Ron was aware of the use of the d efective clip and was prepared to allow the elevator to remain in service, he too is liable.

In the context of Ron's business, the outcomes using either statutory or common law applications are, for all intents and purposes, the same. Nonetheless, it remains important to apply the correct principles to the specific provincial con- text, as responsibilities can vary at times.

BUSINESS APPLICATION OF THE

SLIP AND FALL

Businesses fac e liability for the tort of negligence as well as under occupiers' liability legislation (as applicable) for what is known by lawyers as a "slip and fall." For example, in a decision affirmed by the Ontario Court of Appeal in 2018 ,w the judge in Tondat v Hudson's Bay Company21 foun d that the Hudson's Bay Company- and the property management company responsible for cleaning tl1e Bay store in q uestion- were liable to the plaintiff who slipped and fell in the vestibule (or enclosed entrance) of a Bay store in Oakville. That is, when the plaintiff entered the vestibule, she lost her footing d ue to water that had accu- mulated on tl1e floo r, suffering serious injury. This water, in turn, had been tracked in by cus- tomers caught in the rain.22 The cour t agreed with the plaintiff's submissions that both defen- dants were occupiers, both had a d uty to take reasonable care under Ontario's Occupiers' Lia- bility Act and both failed to disdlarge tllat duty. This is because, in the plaintiff's submi ssion accepted by the trial judge, the Bay store "had no

18 Kla1 & Jefhie'S, ib.d at 737. 19 lbid•t735. 20 Tond>t v Hudsan·s Bay Corryxmy. 2018 ONCA 302 21 Tond>t v Hudson·s Bay Comp;Nty. 2017 ONSC 3226. 22 Jbkt at pa1a 28. 23 lb:dat pa1()12

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What main defences does a retailer haw shordd a customer sue for a slip and fall?

proced ures in place to protect patrons who entered the store in adverse weather, nor did they display any warning signs concerning water in the vestibule."" Likewise, tl1e property manage- ment company (Quinterra) was liable because it did "not have a system for d ealing with water

hazards in the vestibule and that, even if it did, it was not working" on the d ay in question.24 In short, the court agreed that there was no evi- den ce "that anything was d one, ei ther by Quinterra or by the Bay store, to mitigate or red uce the danger posed by water on the floor in

the vestibule."25 The t rial j udge award ed $100000 in d amages.

(ritimlAmd,,..U: What risk management strat- egies can a business put in place to reduce the chances of a slip and fall?

Nuisance

Any activity on an occupier"s property that unreasonably and substantially interferes with the neighbour"s rights to enjoyment of the neighbour"s own property.

The Tort of Nuisance The tort of nuisance26 addresses conflicts between neighbours stemming from land use. It concerns intentional o r unintentional actions taken on one neigh- bour's land that cause harm of some sort on another's, as in these examples:

noise from a steel fabricator's 800-ton press seriously interrupts the neigh- bours' sleep.

ashes and unpleasant od ours27 escaping from a rendering company are car- r ied onto neighbouring properties because of dated technology.

The focus of nuisance is on one's right to enjoy the benefits of land/property uni nterrupted by the actions o f neighbours. The general test is whether the impugned activity has rerulted in "an unreasonable and rubstantial interference w.ith the use and enjoyment of land."'" For example, Ron may vent his kilns and the decorating and glazing operation in the direction of thew.ind ow h.is neighbour must routinely leave open in the summer for cool air. Conversely, the restaurant/ bar in the building next d oor may begin hiring bands that play so loudly that Ron's tenants are th reatening to leave.

How can locating hDuses and factories adjacent to each other lead to claims in nuisance?

24 .Ibid at pa1a 40. 25 Jbid at pa1<l ll 26 As Klar& ~lh.es, !.U(>rtt oote 2at 8St 1001Cate. there are tv.<0d1shnclc~.Jsesof actiO:'k$ ii\ ooiSance: PtJbfC

nuisaoce and p11va1e nu1sar.ce. $;nee oubl:c nui~nee pl,t)y.; only a ·oonpht!1a! 10k! 10 contempo1a1ytaw· thiS li'!Xt w ll focus or)ty OI\ orivate nu•sa'lce

27 Note tMt M.lnrlOM has tilgi~atbn tirn1ting f:ab11ity fo1 nui~nce ii\ 1ne CO'ltext or a busil\C$S C.')!JSil)g 01 crMh!'\9 an odour. Sae Nu1si'Nlee Act CCSM, c Nl20.

28 Ktar & Jeffri~, supra note 2 al 868.

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In striking a balance between the respective parties, courts have developed the following guidelines:

interference must be substantial and unreasonable.

nuisance typically does not arise where the interference is only temporary. For example, construction and demolition may be unpleasant, but are likely to be considered temporary and will not lead to a remedy in n uisance. not all interests are protected by the tor t of nuisance. For example, the right to sunlight is an unprotected interest as far as the law of nuisance is concerned.

in nuisance actions, courts will considertrad eoffs in interest. For example, when the noise in question is reasonable and for the public good, the action in nuisance will fail.29

Some of these principles are illustrated in the followjng case.

TMS Lighting Ltd v K3S Transport Inc, (2014) 314 OAC 133,2014 ONCA 1, varying 2012 ONSC 5907

THB BUSINESS CONTEXT: Businesses operating in dose proximity can come into conflict when the activity of one business interferes wjth that of the other. Litigation can result.

FACTUAL BACKGROUND: T MS Lighting Lt d (TMS) manufac tured h igh-end commercial lighting fi xtures in a prestigious ind ustrial/ commercial area of Brampton, Ontar io. T MS purchased this location because it req uired clean premises for its lighting fixture manufac- turing fac ility. KJS Transport Inc. (KJS), which operated a long-haul trucking service, moved in next d oor some time later. Unfor tunately for T MS, KJS's operations interfered Mth its manufac turing operations. KJS did not pave its parking lot. As a result, over the next four years, dust particles raised by KJS trucks driving on its unpaved pa rking lot caused d amage as d ust blew into TMS's fac tory and settled on the lighting products manufac tured on site. Even if T MS closed all its wjnd ows and doors, factory fans would draw in dust. And the heat inside the factory created intolerable working conditions. Production would then have to slow down or

halt altogether. When KJS failed to remedy the d ust problem, the plaintiff sued.

THELEGAL QUESTION: Has KJS committed the tort o f nuisance?

RESOLUTION: The Court of Appeal and trial judge found for the plaintiff, relying on the Supreme Court of Canad a's recent case on nuisance"' to reach that conclusion. The Supreme Court directs that nuisance involves an interference wjth the plaintiff 's use or enjoyment of land that is both (1) substantial and (2 ) unreasonable. As the Supreme Court explained:

A substantial interference w it h property is o ne that is non -trivial. Where t his t hreshold is met t he inquiry proceeds to the reasonableness analysis. w hich is concerned w ith w hether t he non -trivial interference was also unreasonable in all of t he circumstances."

Unreasonableness in turn is to be assessed by, in the Supreme Court of Canada's words, "balancing the gravity of the harm [caused by the defendant] against the utility of the d efen- dant's conduct in all of the circumstances."32 In assessing the gravity of harm caused by the d efendant, courts are to consider such factors as "[1] the severity of the interference, [2] the character of the neighbourhood, [3] the

29 Mtlndt<lk.e M">ttagement Consultants Ud v Toronto TrMs1t CommiSSJon, 11993] OJ No 995, 62 OAC 202, 1993 Caolll 94V IO N OJ.

30 AtHttm Truck Cenrre Ltd v Ort:ano (rf;)n!.p(>rti»!Oni. 2013 SCC 13, 355 DL R {4th) 666 31 Jtnd al para 19, <:;uolM 1n TMS !Jghl!ng a l pa1a 14 32 lb:d a t pa1() 20,quol!!d in TM.S Ug'tting al par.:. JS.

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sensitivic.y of the plaintiff to the harm caused, and [4) the frequency and duration of the inter- ference ... ."33

The Court of Appeal quoted with approval the trial judge's findings that "the frequency. duration, degree and impact of the dust gener- ated by the KJS trucks, among other factors, caused a continuing and substantial interfer- ence with TMS's manufacturing operations."34

Beyond this. the Court of Appeal agreed that the interference was unreasonable given that the dust problems began in 2007 and were not resolved until 2011 when KJS finally paved its parking lot. In particular, and quoting from the trial judge, the Court of Appeal rejected TMS' s argument that the plaintiff's manufacturing operations made it uniquely sensitive to dust and therefore not able to establish nuisance:

(Wjhile TMS"s manufacturing process was sen - sit ive to dust. its sensit ivity was not unique in the area. its use of its property was consistent w ith the use that its neighbours made of t heir properties. including retail warehouses. small

Trespass

manufacturing concerns. and professional offices. TM S's sensitivity to dust Is not what made KJS's faHure to pave its [parklng] lot for four years unreasonable. although It contrib - uted to the extent of damages TMS suffered because of iL is

This conclusion, combined with other fac- tors, including that KJS's business was not of special utilic.y to the communic.y, led to a finding of nuisance.

Though the Court of Appeal agreed with the trial judge on most matters, it did reverse on how the lower court assessed T MS's dam- ages for loss of prod uctivity associated with having t o diver t company resources to deal the nuisance, however. The Court of Appeal ruled that the judge's m ethodology in award ing $266 500 lacked a proper evidentiary founda - tion and therefore ordered a new hear ing on this quantification issue.

CRITICAL ANALYSIS: Could TMS and KJS have come to some kind of compromise on the nui- sance issue instead of litigating?

Trespass to land

Wrongful 1mer1ererice with someone's possession of land

The tort of trespass to land protects a person's possession of land from "wrongful interference."36 Trespass arises in several ways:

a person comes onto the property without the occupier's express or implied permission.

a person comes onto the property with the occupier's express or implied consent but is subsequently asked to leave. 37 Any person who refuses to leave becomes a trespasser.

a person leaves an object on the property without the occupier's express or implied permission.

The tort of trespass is i mportant for resolving boundary/title disputes and, more generally, for protecting property right s. It also protects pr ivacy rights and the right to "peaceful use ofl and.""' For these kinds of reasons, trespass is action- able without proof of harm o r damage. In the excep tional case where the occupier

33 Jbld .at oar.,)s 26 and 53 ·54 auol~d ·n TMS J.Jgh1.V'lg at oora 15 34 TMS l.Jghl;ng Dl ().'.)1c:i 16

35 TMS Loghl"9 .. Oi><• 23 36 54/prA nol~ 2 .JI 127. 37 II !il1oukl 00 noted 11\c)t t he1e a1~ st.ci to toiy 1estr,ct iol'lS o" a busi'lessparson s common "rw 1igh1 to oo DYt1N'!>S

w.t hwhoni She 01 he St.(!S Iii Atberla hul'r'I()!') righl !i $egislt)tiOI\ {11'e AJt'XY!;) J JumlNI Rights Act RSA 2000, cA-25.SJ, lot GX<>rnDte. p1oh1b~ dtSC11m1Mtion t:ty thOsa wh0o ffa1 g oooso1 SQr~ccc; t l\i\la1cCy\lon101ty avalllbC<! to lhC pubh: Thts rncal'lS th.-'lt 11at>usinesspe1son1etused 10 S<'!rv<'! a C\Js torncr t}('IClllJ!i(! o f 1 ll.)t

OJi. tomcr's ctl'lnc•ty 01 9eooc1. tor (!yampte, a!ld tM t cus tomer refused to k!ave .l t rC'\pa\t. Mi. ooc1J11Cd

I bWCV<!t. thO DuS·l"K$t.pc1!i0nwootd atso IX! subJ"Cl toa poMtty lot vdat 1ng human 119hl \ k'U~hl 10!'. 38 5£,P'• 0010 2 • • 127

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suffers monetary damages due to another's trespass (as in the case below), those damages are recoverable. More commonly or in addition to damages, the plaintiff will seek an injunction requiring the trespasser to stop trespassing. Provincial legislation in several jurisdictions also provides for fines against the trespasser.19

TMS Lighting Ltd v KJS Transport Inc 2014ONCA1. (2014), 314 OAC 133, varying 2012 ONSC 5907 (cont.inued from above)

~H., BUSL I.SS _ON TEXT See the case box just above.

FACTUALBACKGROUND. TMS'slegalcomplaint against K.JS was not just in nuisance, described above. Beyond this, some of the very large trucks owned by KJS (the eighteen wheelers)would fre- q uently pull onto TMS' s driveway because there was an insufficient turning radius on KJS prem- ises. To prevent the trespass from continuing, TMS first installed six-inch-high concrete curb stones along the edge of its factory d riveway but K.JS trucks simply drove over those stones, ul6mately destroying them. In response, TMS installed three-foot-high concrete blocks which KJS trucks continued to strike and often ended up pushing them right onto TMS's driveway. This blocked TMS 's driveway, re qui ring T MS to send employees out with forklifts to reposition the blocks on a regular basis.

THE LEGAL QI i.STION: Has KJS committed the tort of trespass?

ENVIRONMENTAL PERSPECTIVE

TORT ACTIONS RELATING TO Tl£ ENVIRONMENT

At common law, there are four main torts that may provide remedies for environmental damage: (1) the tort of negligence; (2) the tort of trespass;

RESOLUTION: The Court of Appeal agreed with the trial judge who stated as follows: "I find in the present case that the trespass by KJS's trucks over TMS's driveway is a substan- tial interference with TMS's rights and that KJS was or should have been aware, when it bought the KJS property, that it would not provide a sufficient turning radius for its trucks without their trespassing on TMS's driveway."•0 The Court of Appeal also agreed with much of what the trial judge ordered as a remedy, including an injunction to prohibit future trespass by KJS and compensation for the destroyed barriers.

The Court of Appeal set aside the trial judge's award of $23 400, however, for loss of productivity related to costs TMS sustained in having to regularly reposition the barrier stones tltat KJS trucks knocked over. A new trial was ordered on the issue of how to assess lost pro- ductivity damages because, as with the nuisance matter discussed in the previous box, the trial judge's method lacked an evidential foundation.

CRl11CALANALYSJS, K.JS began trespassing on TMS' s property in 2007 yet it was not until 2012 thatTMS's matter finally went to trial and it was able to secU!l! an injunction. Do yoo think the civil justice system served TMS well? Why or why not?

(3) actions based on Rylands 11 Fletcher;41 and (4) the tort of nuisance. These avenues of redress are all somewhat hit and miss given their highly specific requirements.

To successfully sue in negligence, the plaintiff must establish all the elements of a tort action

39 S~1at);1t9d:ctio1U hlrvc.? tn.lctt'd lrq \\illiOf\tl"-.,ll pc'1m 1.s 11es~scrs 10 be fo-.ed See. forex.amokt T1cs~s.s10 P1crn1s12sAct. RSA 2000 c T·7 a~ P<·liy 11cspas.c;, A.cl. n~ 2000, c P· ll, TtesptJSsAa, RSBC 1996,c462, Pcuy TtC!p.'ISS ..0.Cf, RSNL 19".K>. c P U. T1e~.'i.\ A.er. SNB 2012, c U1, Pcuy 1iesp;1s.s Act, CC$M c P-50, TteSp.1.c;,S to P1opc11y Act RSO 19~)() . c T 21 Noto too th."11 tr.a Onldro 5cqi!Ailtion. lor exam~. also provld~ for da1'rk)9~ 10 lx:awardL'd againSI l hQ ltC!.P.."IS.!.('t

40 TMSilglHWJ L<dvKJS Tl•MP<"I Jn<: 20120N5C 5001 a t pa1a 270 41 118081 UKI Ill 11861JJ LR 3 I ,L

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(discussed in Chapter 11), including that the environmental damage was caused by the de fen· dant's carelessness. To succeed in trespass, the plaintiff must show direct intrusion of pollutants generated by the defendant and which came onto the plaintiff's land without permission or aud10- rization.42 The tort in Rylands v Fletcher does not require the plaintiff to show that the d efendant was careless but rather that something from the d efendant's land (such as water or gas) escaped onto the plaintiff's land due to the defendant's dangerous and non-natural use of his land. Much less drastically, the tort of nuisance requires proof that the d efendant's pollutants amounted to an unreasonable and substantial interference with the plaintiff's rights to enjoyment of his or her own property. The plaintiff in all these kinds of actions would seek damages for associated losses and, in the right circumstances, an injunc· ti on to prevent future occurrences.

In whatwaysanildstoring chemimlwaste in oildrumsgenemte torts in relation to adjoining landowners?

In response to the limitations of an exclusively private law response to environmental degrada- tion as well as to facilitate tradeoffs in land use, governments began to enact environmental legislation of an increasingly sophisticated and complexnau1re. Such legislation seeks to balance economic d evelopment with a degree of "accept- able" environmental damage. In addition, munic- ipal and land-use planning laws have put further constraints on the kind of activity that can occur on the land affected. (For discussion of environ- mental legislation in Canada, see 01apter 2.)

Though legislation has therefore displaced some of the importance of common law actions from an environmental perspective, nuisance and other tort actions can be nonetheless regard ed as Canada's original environmental law. Until the advent of legislation, they were the only way of controlling adverse neighbouring land use.

Critical Analysis: What are the advantages o f regulation of the environment via environ- mental protection legislation as opposed to by private action?

Sources: Lew is Kt.'l1 & Came1011: ..k?ffriE?S. Tort L.w1, 6th ed {Toronto Tnomso!'l ~tJlers Canad~ 201'7), Chris Wal.SOI\ ·us!l')Q Nu dance ana Other Com~n Law Torts to Prot~Cl VI/Aler, LaOO, and Ai( (Vancouver PAcUc Busl!leSS b Lavi lnst1lule, 2007J. inteNlew or Prol~sor (taine Hug~s. f:acutly ol la'w, u nw(!rs1ty of Moer-ta !2002).

Torts from Business Operations Business operations involve a broad range of activities from which tort actions can arise. A useful way of categorizing these torts is to consider separately torts involving customers or clients and those more likely to involve competitors.

Torts Involving Customers Chapter 11 considered the most important tort arising in this context: negli- gence. Product liability, motor vehicle accidents, alcohol-related liability, and

42 Smith v Jnco !.td, 2010 0N$C 3790 <')I para 37, 12010j OJ N:') 2864, 1ev·a on ol~r grounds 2011ONC-.A628, 12011] OJ No 4386.

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negligent misrepresentations are all examples of negligence affecting the bwtiness/ consumer relationship.

In this section, additional torts beyond negligence will be considered.

Assault and Battery The torts of assault and battery are not common in a bufilness or professional context, although they may o ccur. For example, security personnel may comm.it the torts of assault and battery when seeking to apprehend a suspected shoplifter or eject a patron. An assault is the threat of imminent physical harm by disturbing someone's sense of security. Battery (introd uced in Chapter 10) is the intentional infliction of harmful or offensive physical contact. The contact need not cause actual harm.43 Where the torts o f assault or battery are proven, the most common remedy is d amages.

Note that sections 494 and 25 of Canad a's Criminal Code (RSC 1 985, c C-46) can sometimes provid e a defence to these k inds of torts. For discussion, see the next section below.

False Imprisonment False imprisonment occurs most often in retail selling. It arises where any person d etains another without lawful justifi cation through physical restraint or coercion by psychological means.

False imprisonment occurs when the victim is prevented from going where he has a lawful r ight to be.44 The tort includ es physically restraining that person or coercing him to stay by psychological means.

The tort of false imprisonment presents retailers in particular with a filgnif- icant challenge. To d efend against the tort of false imprisonment, the retailer and/or its employees must show legal authority to detain under section 494 o f Canada's Criminal Code, which provid es as follows:

494(1) Anyone may arre>t without warrant (a) a person whom he finds committing an inclictable offence; or (b) a person who, on reasonable grounds he believes

(i) has committed a criminal offence, and (ii) is escaping from and freshly pursued by persons who have lawful authority

to arrest that person.

This provifilon sets out the defence o f legal a uthority (or citizen's arrest). A suspicion or m istaken belief by the person claiming legal authority that he

has seen someone comm.it a crime is not sufficient under section 494(l )(a). The suspect must have actually committed the crime. Furthermore, when store per- sonnel d etain a customer in reliance on section 494, the Criminal Code req uires them to "forthwith d eliver the person to a police officer." This means that they must immediately call the police. Beyond this, the store owner or his employees can only use as much force as is necessary given the circumstances und er section 25 of the Criminal Code. Otherwise, they face liability in tort for assault and bat- tery as well as liability under the Criminal Code. Criminal Code liability as discussed in the foll owing box.

43 Kta1 t: Jef111es, suprtl 001e 2 .ll 53 44 /b,dat 69

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Assault Threat ol 1mm1nen t physical harm by disturbing someone's sense ol security.

Battery

Intentional infliction of harmful or offensive physical contact.

False Imprisonment

Un lawful detention or physical restraint or coercion by psychological means .

Legal authority

The autho1ity by law to detain under section 494 of the Cnminal Code.

R v Chen, 2010 ONCJ 641, [2010) OJ No 5741

THE BUSINESS CONTEXT: The retail industr y loses a considerable amount of inventory to shoplifters every year. For example, the Retail Council of Canada (in 2012) estimated that "shrink rates" in Canada (i.e., retail theft rates) translated to approximately $4 billion in annual losses to retailers. Though the problem of inventory shrinkage is therefore rampant, store owners and employees who encounter shop- lifters must be careful not to violate the Criminal Code or commit the torts of false imprisonment, assault, and battery (discussed in the previous section of this chapter).

FACTUAL BACKGROUND: David Chen, owner of Lucky Moose Food Mart in Toronto, and some of his employees were charged with assault and forcible confinement (unde r the Criminal Code) after they chased down a shoplifter, tied him up, and held him in a delivery van to await the arrival o f the police. The shoplifter, convicted thief Anthony Bennett, had arrived at Chen's store earlier that same day. Surveillance cameras showed him loading up his bicycle with product and then leaving without paying. As reported in the press, Bennett testified during Chen's trial that he had stolen plants from Chen's store and decided to return to the store one hour later to steal more product from Chen. This same media account notes that, during that return t rip to the store, Chen asked Bennett to pay for the plants he had previously taken. Bennett refused, cursed Chen with a racist epithet, and then ran away. It was at this point that Chen and his employees gave chase, eventually confining Bennett to a van.

According to Crown prosecutor Eugene McDermott, in a statement to the media:

O f course shopkeepers are entitled to protect their pro perty. Of course they are entitled to arrest people in the terms o f Articl e 494 (the justification or citizen's arrest provisio ns o f the Cri minal Code!. But that's not w hat hap - pened in this case. He (Chen} seized a person o ft the streets. tied him up. and threw him in the back o f a van. Once again. nobody calls the police. There are a number o f points that beggar belief.

302

David Chen

By way of contrast, Chen's lawyer argued that tying up the shoplifter, Bennett, and holding him in the van was similar to department store personnel bringing a shoplifter to a back room to wait for the police.

THE LEGAL QUESTION: Were Chen and his employees entitled to make a citizen's arrest under section 494 of the Criminal Code or are they guilty of the criminal offence of forcible confinement and assault? In the context of making a citizen's arrest, can they rely on sec- tion 25 of the Criminal Code?

RESOLUTION. The court concluded that Chen was entitled to make a citizen's arrest under s 494 becal\Se he had found Bennett committing a theft on the video tape. Section 494 of the Criminal Code states: "Anyone may arrest without warrant: A person whom he finds committing an indictable offense." That Chen purported to arrest Bennett one hour later- when Bennett brazenly returned to steal more product from the Lucky Moose--was perfectly fine, said the court, because he regarded the orig inal theft and Bennett's subsequent return as "one transaction."

An important related issue was whether Chen had brought h imself within section 25 of the Criminal Code which provid es that, in making a citizen's arrest, one is only entitled to use "as much force as is necessary" for that purpose. According to Chen's evid ence, he had to tie up Bennett because Bennett was kicking and punching. He did not want to let Bennett

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go, but instead wanted to get back to his store so he could call the police. Bennett gave an entirely clifferent account of events, suggesting, inthe court's words, that "he stood by meekly as they [Chen and his employees]laida beating on him." Based on this and otl1er incongruities, the court expressed concern about the creclibility o f the evidence offered by Mr. Bennett, Mr. Chen, and his employees.

The court ultimately entered a verdict o f not guilty against the accuseds because, accorcling to the judge:

It is impossible for me to say that l am satis- fied o n the material evidence before me that I know w hat happened that day. lt follows therefore that the only conclusion that I can c ome to is that I have a reasonable doubt. All such doubts must always be resolved in the favour o f the defence.

In the meantime, Chen has advised the meclia that he will no longer attempt a citizen's arrest:"! [will] just take the picture and call the police", he said.

CRITICAL ANALYSIS: Do you think the Criminal Code provides enough protection to a business

Deceit

owner trying to d eal with a shoplifter? Note that the government of Canada recently enacted an amendment to ilie citizen's arrest provisions under 494(2) of the Criminal Code iliat states: "The owner or a person in lawful possession of property ... may arrest a person without a war- rant if they find iliem committing a criminal offence on or in relation to that property and (a) they make the arrest at that time or (b) they make ilie arrest within a reasonable time after the offence is committed and they believe on reasonable grounds that it is not feasible in the circumstances for a peace officer to make the arrest" [emphasis added). ls this amendment to the Criminal Code necessary?

Sources: Rel<')l Councl of CanOOa. C/N'laciian Retail Seo.Jnty Suf\'E¥ {2012) al 4 on(100 <hnps//w • .,.,,,.pv,'C com/c.a/01/1etal·COr.sumer/ pub(1Ca1tons/pv..oe:-s~cur11y..survey·2012·10·29·en ~f>, Pe1e1 1<u1tel)o brouY.-er, 'Grocers 10 tne Oefe"K:~·. ~t/OnbJ Posr 126 ()C1obe1 2010) A3; and Pctei Ku tenbrouv.-e1, -Stev<.'!r. Ha1pe1 PjjS aViSit Lo Luck.y Moosa David Crten-,Nt#iOnaJPosi U7 fet>ruary 20Ut ontloe <l"lllP // niews.Mt1onatpost.com/20ll/02ll 7/stephert-M1pe1·pays•tii•viS•1· to •davd·Ch<!n/>; Pc1e1 KollenbrOo\Y1!f, ·i,ve Too A1e V iCLim..o;· Chines~ G1oc:Qrs Sh0v1 Suppcrt al ~Vld Chen Tri.lr Natiana' Pos1, (25 Oc1oom 2010). M aten.al rt'!Pl:Jbtis!')ed with lha €!XOress permiSSiOI\ ol· National P~t.. a dtviSIOll ol Pos1med1a NCL\•..O•k Inc.; I? v Chen, 2010 ONC.J 641, 12010) 0.J No 5741

The tort of deceit or fraud arises out o f misrepresentations, causing loss, tl1at are made eiilier fraudulently or wiili reckless disregard for their truth. When deceit arises in a contractual context, one of the remedies available is release from the contract (see Chapter 8) in adclition to any other damages in tort iliat the plaintiff can establish. Though ilie tort o f d eceit is not confined to the contractual area, this is where it is most commonly found from a business perspective.

Deceit or fraud

A fal se representation 1ntentiona lly or reck lessl y made by one person to another that causes damage.

Business-to-Business Torts Passing off The tort o f passing off occurs when one person represents her goods or services as being those of anoilier. While it may be common to think of ilie tort in terms o f the "clirtytricks" some businesses might adopt to compete unfairly with others, the tort can also be committed inadvertently or inno cently.

The tor t of passing off arises, for example, when a business name is used that is so similar to an existing business name that the public is misled into iliinking that the businesses are somehow related. It also may occur where a competing company markets a prod uct iliat is similar in presentation or overall look to a product already established on ilie market.

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Passing off

Presenting another"s goods or services as one"s own.

Ciba-Geigy Canada Ltd v Apotex Inc, (1992) 3 SCR 120, 143 NR 241; 95 DLR {4th) 385

THE BUSINESS CONTEXT: Manufac turers of a product generally become concerned if a com- petitor starts to copy the look or "getup" of their prod uct. This is because consumers will assume that the goods of the competitor are actually those of the original manufacturer.

FACTUAL BACKGROUND: The plaintiff, Ciba- Geigy Canad a Lt d, manufac tured and sold the drug metopmlol tartrate in Canad a. The defen- dants later began to manufacture and sell the same d rug in Canada. The parties' products were officially designated as "interchangeable", meani ng that the pharmacist could, in fi lling a prescription, give the defend ant's product in place of the plain tiff's prod uct provided the pre- scription did not contain a "no substitution" notation.

The plaintiff brought an action in passing off against the d efendants (Apotex and Novopharm) on the basis that the d efendants were copying the plaintiff's" getup" in relation to the size, shape, and colour of the pills. The plain- tiff claimed that this was creating confusion that the Apotex/Novopharm prod uct was actually a Ciba-Geigy product and sued for passing off.

THE LEGAL QUESTION. What must the plain- tiff prove in order to succeed in its action for passing off? More specifically, the issue in this aspect of the litigation was as follows: in seeking to prove that there is confusion caused by the d efendants, is the plaintiff limited to showing confusion in the m in d of profes-

sionals (such as d octor s and pharmacists) or can it also rely on confusion in the mind of the ultimate consumer (j.e., the patient)?

RESOLUTION: The Supreme Court of Canad a confirmed "that competing laboratories must avoid manufacturing and marketing drugs with such a similar getup that it sows confusion in the customer's mind." The court also confirmed that there a re three steps to proving the tort of passing off:

1. the existence of good will" (e.g., in this case, the plaintiff must show that there is goodwill in respect of the "look" or distinctiveness of the product).4 6

2. d eception of the public due to a mis- representation by the defendant (the misrepresentation may be intentional but it also includes negligent or careless mi srepresentation).

3. actual or potential damage to the plaintiff.

Under step 2, the plaintiff must show that the competing product is likely to create a r isk of confusion in the public min d. On this latter point, the Supreme Court was clear that the plaintiff is not limited to showing confu sion in the mind of professionals. Confu sion in the m ind of the patient who uses the prod uct may also be includ ed . The trial judge's ruling on a point of law was ordered to be adjusted accordingly.

CRITICAL ANALYSIS: Do you think it is r ight that a manufac turer should receive legal protection for the features of its prod u ct , including colour?

Based on the Supreme Court of Canada's analysis above, Ron (whose best- selling figurine is being im itated by a competitor) will need to establish the following in order to prove passing off:

1. goodwill or a reputation is attached to his product. Ron's "Old Man of the Sea" prod uct already has a well-established and valuable reputation among the relevant buying public. In other words, he holds goodwill in

4 5 GOOdv111eri'!1s 10 1he f(>~latlOr\Of 1he ti.Js1nessand 11se:xooc1a1:onor !)<'.)t!Of\c"lg e in tne fu ttue 40 This mea~ t hat the p1oducl Msa ·seconda1y me.lning· in t'le mine o f l~ putl(ic:

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the product, and that good will, or ability to attract buyers, flows either from the look of the prod uct or from its name, or from both.

2 . a misrepresentation- express or implied- by the maker of the cheap replica has led or is likely to lead members of the public into believing that it is Ron's product or a product authorized by Ron. Whether the competitor actually intend ed to confuse the public d oes not matter. Given the similarity in appearance and name of the two figurines, the competitor will make many of its sales by falsely associating itself with the established reputa- tion of Ron's "Old Man o f the Sea" product . Ron could prove his point by commissioning a survey o f the relevant sector of the buying public.

3. he has suffered or will likely suffer damages. Ron must show that he has lost sales, or is likely to lose sales, because of the replica prod uct.

While the award of damages is one remedy for a passing-off action, businesses claiming they are being harmed in this way will often seek an injunction forbid- ding the d efend ant from continuing the d eceptive copying. In the case of Walt Disney Productions v Triple Five Corp ,47 for exa mple, Walt Disney Productions secured a permanent injunction prohibiting the use of the name Fantasyland at West Ed monton Mall's amusement park.48

The Trademarks Act49 contains a statutory form of action that bears a strong resemblance to the tort of passing o ff. Such legislation will be considered more thoroughly in Chapter 18 .

Interference With Contractual Relations The tort of interference with contrac tual rela tions is known by a variety of names, including interference with contract , inducement of breach o f contract , and procuring a breach of contract.50 l t ha s its origins in the employment relation- ship. The common law made it actionable if one employer attempted to "poach" the employee o f another. In legal terms, the "poacher" was seen as enticing the employee to break his existing contract of employment, which, in tum, caused economic harm to his current employer. Over time, this tort extend ed beyond the employment relationship to any form of contractual relationship.

The tort prohibits a variety o f cond uct, including conduct whereby the defen- dant directly induces another to breach her contract with the plaintiff.

In Ron's business, the tort of interference with contractual relations could be important in at least two different contexts:

Ron employs a skilled potter who makes the "Old Man of the Sea" prod uct. The potter has a three-year employment contract . A competitor approaches the potter in the second year of the contract and convinces the potter to work for him with promises o f higher wages and better con- ditions. The competitor's conduct is tortious because he knew about the contract and acted with the objective of convincing the potter to join h im. Since this could happen only if the potter were to breach his contract with Ron, the tort has been made out.

Ron's la rgest and most lucrative supply contract is with one of the leading tourism organi zations in Nova Scotia. The owner of the competing

47 W>ll Disney P1"duaiO'>s v Tl1pleFNe Co'!'.1994AOCA120.11994).17 A!Ul LR i3oJ 225. 4il 11><1. 49 RSC 1985. c T·l3 50 P Burns 1'orl ln.:U1y 10 Cco'lOmiC: ln1eres1s Some r.Y-'ets of Legal Response· {1980J 58 Caon Btu fl& 103

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Interference with contractual relations

Ind ucing someone to break a contractual obligation owed to another

Defamation

The public utter a nee of a fa lse statement of fact or op1 nion that harms another's reputation.

Justification

A defence to defamation based on the defamatory statement being substantially true.

QuaUfled privilege

A defence to defamation based on the defamatory statement being relevant. without malice. and communicated only to a party who has a legitimate interest in receiving it

business making "Man of the Sea" products approad1es the tourism orga- nization and suggests that if it breaks the contract wjth Ron and buys from her, she can offer them a mudl better d eal.

In both cases, then, Ron could likely make out the tort of interference wjth con- tractual relations. While he will sue for damages, he may also seek an injunction to prevent a breach of contract o ccurring if he find s out in time. A court would never ord er the potter to work for Ron- courts will not award specific performance with contracts of personal service-but it can order damages against the potter for breach of contract and damages and/or an injunction against the competitor for the tort o f interference wjth contractual relations.

An example of a successful tort action is Ernst & Young v Stuart." A partner left the accounting firm of Ernst & Young to join the firm o f Arthur And ersen. In so d oing, the partner violated a term of the partnership agreement requiring one year's notice o f intention to retire from the partnership. Ernst & Young sued both the partner and the new firm, the latter for interfering wjth contractual relations. Both actions were successful.

Defamation The tort of defamation seeks to "protect the reputation of individuals against unfounded and unjustified attacks."" Though all jurisdictions in Canada have legislation modifying the common law of d efamati on to some extent, the fund a- mentals of the common law action remain.53

Common terms for d efamation are slander (typically for the oral form) and libel (usually the print fo rm). These terms are not always consistently applied but, regardless, both slander and libel can simply be called defamation.54 The key ing redients to the tort, as recently confirmed by the Supreme Court of Canada, are as follows:

the defendant's words were d efama tory in that they would "tend to lower the plaintiff's reputation in the eyes of a reasonable person."

the statement did in fact refer to the plaintiff.

the words were communicated to at least one other person beyond the plaintiff.55

The plaintiff will then succeed if the defendant is unable to establish a defence to the action. For example, if the d efendant can show that the impugned state- ment is substantially true, he has a complete d efence of justification.56

From a business perspective, a potential defamation scenario o ccurs when an employer provid es a reference for an ex-employee. If the letter contains a d efam- atory statement that is true, tlle employer may have tlle d efence of justification described above. Other d efences in this scenario includ e qualified privilege. That is, if the employer's oilierwise d efamatory statement is relevant, made wjthout malice, and communicated only to a party who has a legitimate interest in receiving it , ilie defence is established. Malice includes ill-wjll or dishonesty, for example.57

SJ 11997) 144 DLR 14111) 328 iBCOJ. IJ997J 5 WWR 253 52 SuP<• r>01e 2 al 899 53 ll>d ., 9ll0. 54 Thed!ShllClbn belv .. eenfioetano !Aa!lder has bee'!labotls~d oystattJte in<'l number or ::novi')Ci'?S. 55 Gr.>ru v Tors1"1 C0<p, 2009 SCC 610I oaro 28. 120091 3 SCR 640 !Grand 56 Jmd at pa1a 32. 51 I-IN vChutehof &:"1ntobgyol Toromo 11995}. 2 S.C.R ll30ot P<"a 145. 1199715 '<'IWR 253

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Another defence is fair comment. Thi s d efence permits a person to offer com- mentary on "matters of public interest" despite the commentary being d efa ma- tory.•• The d efence o f fai r comment req uires the defendant to show that the comment (a) concerned a matter of public interest, (b) was fa ctually based, and {c) expressed a view that could honestly be held by anyone."' The defence will then succeed unless the plaintiff can show the defendant was motivated by express malice.'"' In Sara'sPyrohy Hutv Brooker."' fo r example.a broad cast journalist raised fair comment as a defence to a restaurant review containing d efamator y content. The court agreed that the d efence had been made out, noting that "opinions, even if ad verse, may be expressed so long as the fac ts are not distorted or invented. Here . .. the review was an expression of opinion without malice, even though some of [the] opinions were unfavourable."62

Responsible communicat ion on matters of public interest is a d efence recently recognized by the Supreme Court of Canad a. It will apply to members o f the tradit ional media where (1) the publication is on a matter of "public interest" and (2) the publisher was diligent i n trying to verify the allegation.63

The d efence can also presumably be invoked by blogger s, Twitter-users, an d others who publish on the Web64 because the Supreme Court agreed that the d efence should be available to anyone "who publishes material of public interest in any medium."65

The Supreme Court of Canad a offer ed an extensive list of factors which help determine whether the d efence is available, including whether the publi- cation sought the plaintiff's reaction or input, the steps taken by the publisher to verify the story, and the importance o f the subject matter from a public perspective.

If the plaintiff in a defamation action can prove actual monetary loss as a result of the d efendant's defan1ation, this loss is recoverable. The law recogn izes, how- ever, that much of the damage suffered is intangjble. Therefore, the court is per- m itted to assess d amages from an alternative perspective. Th is includes considering the seriousness o f the defamation, how w idely the d efa mation was published, the malice of the d efendant, and the extent of the d amages that have been caused ."' Where the defendant's cond uct has been particularly reprehensible and oppressive, a court is entitled to award punitive d amages, as the box below illustrates.

Absolute pr ivilege is another defence to defamation which applies in the ver y limited context, including parliamentary or judicjaJ proceedings.67 The notion is that freedom of expression is so vital in such venues that no successfu l defamation action can be brought.68

58 KU..r & Jellries, !J.Jpra nc1e 2 al 950. 59 Jb.U al 951 and Cmn: SU(>n> !\Ott'! SS at para 31. 60 lbKI. 6 1 Sara's Pyrohy Hui v Brooker [1993), 141 AR 4 2, 1993 ABCA 95 iC.nllO. 6 2 Ibid a t pa1()6 63 Gmtu. Su{>lh oote 55 a t oa1a 126 6 4 Je.llieyVieq, 'New ~lamll io!\ Defences S~!lef1 t 1ha Tv111 wise· L.1",..l)<ets ~Veek~' 112 reb1uary 2010) IOU 65 Cr ant, rupr/J llOI<.'! SS a1para96. 66 Kla1 & Jefhie$. SJ.JpttJ note 2 a1 960. 67 Ibid 01926. 68 lb.'(/

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Fair comment

A defence to defamation that is established when the plaintiff cannot show ma lice and the defendant can show that the comment concerned a matter of public interest. was factually based, and expressed a view that could honestl y be hel d by anyone

Responsible communication on matters of public interest

Defence that applies where some facts are incorrectly reported but (1) the publication is on a matter of "public interest" and (2) the pu blisher was di ligent in trying to verify the allegation

Absolute privilege

A defence to defamation in rela t1 on to parhamemary or JUdrcral proceedings.

E-TORTS: DEFAMATION ON THE INTERNET

A growing objective for business is to guard against online defamation, from email to biogs to bulletin boards to social networking sites, to name some

examples. The online publication of n egative reviews is of particular concern because con sumers might choose to conduct an online search before hiring a service provider or purchasing a particular

product. As a result, negative reviews can have a devastating consequence forthe business invclved.

This certainly was the experience of the plaintiff in the 2018 decision of Hee Creations Group Lrd v Chow.69 The plaintiff corporation (Hee Creations Group Ltd, d o ing business as Amara Wedding) was based in Richmond, BC, and provided large wedding packages, including photography, makeup, hair, flow ers, t uxe dos, and a master of ceremonies. The d efendants,

Edward Chow and Emily Liao, entered into a contract with the plaintiff for just such a package but Liao, in particular, was tremendously dissatisfied with the photographs taken at a pre-

wedding shoot. The plaintiffs efforts to resolve the complaint failed. In the meantime, and for about a year, Liao published numerous, highly negative reviews online regarding the plaintiff's wedding services, including on Facebook and

Weibo- which is described by the court as a "a Ch inese rnicroblogging website and social media network with 1 00 million daily users.""" The court reproduced several of Liao's n egative reviews, including this one:

I caution everyone who is needing wedding photogra phy services to stay away from Amara Wedding. you·d be throwing your money away. They are two-faced and dishonest depending on Whether the contract has been signed or not. engagng in bait and s\Mtch tactics. and you 1111111

need to be prepared to l1t1gate any disputes with them because their owner has tons of excuses. Once money passes to these fraudsters. don't expect to get your money back. They will disavow a ny responslbl llty fo r anything that goes wrong.

They e ngage in dirty tactics to cover up their misdeeds ... they don't understand that if you don't wish for your dirty laundry to be aired. the n don't do these scams. These types of people are cursed never to haveoffspring.71

Subsequently, Hee Creations sued Llao and

Chow for defamation because of these negative online reviews. By this point, Hee Creations's business had dropped significantly72 and the busi- ness itself dosed d own because the owners "had lost faith, confidence and energy" to continue

running it.13

The court agreed that Hee Creations had established d efamation, thou gh against the d e fendant Liao only. First, and as required by

the three-step test outlined previously, the defendant Lia o's words were defamatory. As the court stated:

The plain and ordinary meaning of the English-language and translated Publoc:ations. in their totality. was that the plaintiff was a major scam shop and deceitful pholography m1U busi- ness engaged in extortion. dishonesty. unfair practices. bait and switch and other dirty tactics, lie s to ~s customers who it tricks and coerces to e nter into contracts which it breaches and attempts to fa lsify. had provided raw unfinished photographs under the guise of the finished product. had destroyed evidence, used a secret fictio nal identity a nd had threatened the defendants.7'

Second, the posts referred to the plaintiff75

and third, were published or communicated to at least one other person other than the plaintiff.76

69 Hee Ctl'31.on.'> Group Lid" Chow 2018 BCSC 260 10 Ibid at para 32 71 Ibid a l oora .33 '!2 Jbki para 45 73 lbJd <ll p.lltl 46 74 Jbld a t 71 75 Ibid a t pa1a 13 16 .bid a t pa1a 8~

308 HEL

The court dismissed all of Liao's d efences, includingtruth(herposts were not true~ as well as fair comment (because Liao could not prove that the facts upon which she based her com- ments were "generally true""'). Beyond this, and even assuming a fair comment d efence, it would be defeated because of Liao's malice,79 as und er- stood as embod ying "spi te" or "ill-will."80

According to the court: "I fi nd that Liao was motivated by malice towards the plaintiff which led to her intentional use and publication of the word s 'extortion', 'fraud ', 'scam', 'bait and switch scam', 'dirty tactics', 'lying to consumers', 'con- tempt o f court', 'd ece it', 'perverted justice', 'destroyed evidence' and 'use of a secret identity', among others."1"

In assessing d amages, the court accepted that Liao's defamatory reviews began to have "a d ev- astating effect on the plaintiff's business" and caused its "precipitous drop."82 For loss o f good will, loss o f reputation, and resulting financial loss, the court awarded $75 000.83 But beyond these compensatory damages, the court award ed aggravated d amages (discussed in Chapter 10 o f

this text), to "take into account the additional harm caused by the d efendant's outrageous and malicious cond uct."84 The court awarded $15 000 und er this heading.85 Additionally, the court took the unusual step of awarding punitive damages (also discussed in Chapter 10 of this text) in order to punish her for her online attacks.86 Thi s is because Liao engaged in "conduct that is so malicious, oppressive and high-handed that it offend s the court's sense of d ecency."87 Und er this heading the court awarded $ 25 000.

In total, the plaintiff received judgment in the amount of $115 000.

Critical Analysis: How does d efamation law protect businesses from online d efa mation? How d oes it fail them?

Sources: Keven Drev..s. ·ris"'t-F"arm Fi1m A\Wi1o eo $75000 1n Deftall"l<'t· tiOn Ruling· The Gabe and fvl;J.V l22 July 20131 ont!ne. <rittp -//wv.-,,, .1oe9l0tmndmal.com/oev1s/tnil:Sh·Cdumba/act.'viu·must·P.tri•ltSh ·fa1m·7SOOO.bc:•CCUfl·ru~s/a11ctel3348016/>; CBC Nevis, ·sc Fisl\- ra1m F"oe T.akes f"l9hl Aga tns t lodostiy to Scottal'td Don S.tan;lord Novi Lcaos an O•ganiZ:alion Know n ~ P101ec1 \Vld Scollao.d· (24 D~cember 2013), ontine: <http//wvN1.cbe.cafnews/ca~Ma/ br t sh·Coh .. mt>ia/b·c·l.sh-la•m-foe·1akes·fight·a9ains1 .. inousl1y-to •:SCcttand•l247S380>

Injurious Falsehood or Product Defamation Injurious or malicious falsehood concerns false statements made not about a person but about the good s or services provid ed by that person. Sometimes the distinction between injurious falsehood and defamation is subtle; for example, if the statement is made that a particular company routinely provides shoddy main- tenance, is this a negative reflection on the quality of the people doing the work or on the company's services? In such a s ituation, the complainant would sue for both d efa mation and injurious falsehood.

Injurious falsehood requires the plaintiff to establish that the statement about the goods or services was false and was published (or uttered) with malice or improper motive. It is not necessary to prove that the d efendant intend ed to injure the plain- tiff. A reckless disregard for the truth or falsity of the statement is sufficient.

77 Jtnd al para 90 18 Jb.U at pa1a 93. 79 lmd <ll par~ 97 SO Jtnd al para 98 81 Jb.U at pa1a 106 82 lmd <ll par~ 119 83 Jtnd al para 124. 84 Jb.U at pa1a 126 85 lmd <ll oar~ 130 86 Jbkt at pa1a 132. 81 lb:d at par~ 131

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Injurious or malicious falsehood

The utterance of a false statement about another's goods or services that 1s harmful to the reputation of those goods or services

OF THE LAW

PROTECTION OF PRIVACY

In the 2017 decision of Douez v Fac.ebook, Inc, the Supreme Court of Canada reiterated the importance of privacy rights, noting its "role in protecting one's physical and moral autonomy ..... For these kinds of reasons, the common law has historically protected privacy interests in a variety of ways. The tort of def- amation protects reputation. The torts of trespass and nuisance protect the right to enjoy one's prop- erty. The torts of assault, battery, and false impris· onment protect the person's right to dignity.89

Beyond this, the Ontario Court of Appeal has recognized a new tort which pennitsa person to sue for invasion of privacy. [n Jones v T~e."° the appel- late court ruled that when the defendant electroni· cally accessed the plaintiff's personal banking records (on at least 174 occasions), she had also comrnHted a tort. This new tort helps to recognize that technological change, in the judge's words, "poses a novel threat to a right of privacy that has been protected for hundreds of years by the common law under various guises and that, since 1982 and the Charter, has been recognized as a right that is integral to our social and political order.""' Most importantly, such a tort responds to "facts that cry out for a remedy given that thedefendant'sactions were "deliberate, prolonged and shocking."'°

To succeed in establishing this new tort- also called the intrusion upon seclusion tort- the plaintiff must prove as follows: (1) that the de fen· dant's conduct was intentional; (2) that the defen· dant invaded the plaintiff's private affairs without

lawful justification; and (3) that a reasonable person would regard such conduct as "highly offensive causing distress, humiliation or anguish."93 More specifically, victims will have a legal remedy when someone wrongfully accesses their "financial or health records, sexual practices and orientation, employment, diary or private cor- respondence.""" In Tsige, the plain ti ff was awarded $10000 in damages,95 with the court suggesting a ceiling in this kind of case of $20000.'"

Government has also sought to protect privacy through legislation that deals with the collection, use, and disclosure of personal infor- mation by organizations in the course of com- mercial activities.97 For example, in Chitrakar v Bell TV, 2013 FC 1103, the court ordered Bell Canada under federal privacy legislation to pay Mr. Chitrakar damages in part for failing to secure his permission to do a credit check.

In addition, certain provincial governments have passed legislation that creates the tort of breach of privacy.•• British Columbia's Privacy Act,99 for example, states that "it is a tort, actionable without proof of damage, for a person, willfully and without a claim of right, to violate the privacy of another." In Hollinsworth v BCTV, lOO the plaintiff successfully relied on this statute to bring his action against Look International Enterprises for releasing to BCTV a videotape showing the plaintiff undergoing an operation to have a hairpiece surgically attached to his head. Since Look

Intrusio n u.po n seclus io n

88 201-7! 1SCR75l 2017 sec 33 lC~LIJ.ai ca•..l 59 Fora b".el Sl..'T'UT\l")'OI l"'\C4'\e,. \«? Cnapk!• 4 ~) fOt ITIC)!W .l"\al)1S. S~ fUa• b Jeff,~$,. supr~ rote 2 aE 101 a"'1 lolOwng

lntent1 anal. o· ens1ve 1nvas1on of another's personal affairs without lawful JUStlf1cat1on

~ l.lOL!I 108 OR l.lal 24l 2012 ONCA 32. )1 bid .:it C).l•.a 68 )2 Ibid <o)t ~·.,') 69 n lbid .)( ().l•a 11 )4 bid .:ll C),l•d 73 15 Ibid at pa•,) J'J. )6 Jbid .ll 8~ Nok! t~t I~ COl'fl"n011 law rtlrtJs 011 «Jpc>n seduson to•t has not occn r<!COCJf'l.Z.CO •1 .Jtt PIOV'"IC<'.)

ror (';c.Jrnrite. o Br Lsh Colurnbia,. Dcmca>. vVo. 2013 BCSC 89:Jd:f'(!cts tnal .nvasonof prvocytlll<q~ton·1 be! Ptif1ued tJ!')de1 IN! P1N<K.y A.cl of 61 :hSh Columb'.a ratl')er IM'l as a common 1.lw octori

':)7 ror d SCtJS!oOn ol lh~ Pctsa:'ti).1 Jnlo11t1:n1on PtoU!ClKln i'Jf?d £1ct!ttOnK: O:::lcu.'l'K'll!S A.:! .iooo s<. 2000. c ~ l"PIPCDAl soo Cl>.lP"" l 8. 12. •<>0 20.

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~- PnWJ<y Act nsoc 1996, c 373 100 113 B<.AC 304 119'181 BCJ No 2451

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International Enterprises had done so without the plaintiff's knowledge and consent, this amounted to a willful invasion of privacy, a clear viol ation of the statute. In response, the court awarded the plaintiff $1 5 000 in damages. Likewise, when a landlord secretly set up a video camera whlch captured on film everyone who entered the plaintiff's apartment, tl1e

court found that the Privacy Act had been violated and awarded $3500 to the plaintiff. See Heckert v 5470 In vestments Ltd. 10'

C,.itlcal A1urlysi•: Does the tort of intrusion upon seclusion improve the law? Do you think that d1e $20 000 ceiling on damageawardsset by the court in Tsige is too low?

See Figure 12.1 for a summary of tl1e torts discussed in this chapter.

FIGURE 12.1 Summary of Chapter 12 Business Torts

I. Torts and Property

Occupiers· Liability: liability that occupiers ha"" to those who enter onto their land or property.

Nuisance: Liability for interference with someone's use or enjoyment of land that is both substantial and unreasonable.

Tort of Rylands v Fletcher. liability because something from the defendant's land escaped onto the plaintiff's land due to the defendant'sdangerousand non-natural use of her Land.

Trespass: Liability for v1rongful interference with someone's possession of l;lnd.

II. Torts From Business Operations

Torts Involving Customers:

Assault: liability for threatening imminent physical harm.

Battery: liability for intentional infliction of harmful or offensive physical contact.

False Imprisonment: liability for unlawful detention or physical restraint or coercion by psychological means.

Deceit: hability for a false representation 1ntent1onallyor recklessly made ~one rson to another that causes.dam£ge.

lntrusion Upon Seclusion: intentional. offensive invasion of another's personal affairs without lawful justification.

Business-to-Business Torts

Passing Off: Uability for presenting another's goods or services as one's own.

Interference Wrth Contractual Relations: liability for inc1t1n9 someone to break his or her contractual obligation.

Defamation: liabihty for a publicly made, false statement of fact or opinion that harms another's reputation.

Injurious Falsehood: liability for a false statement about another"s goods or services that is harmful to the reputation of those goods or services.

101 2008 BC$C l29B.12008J BCJ No 1854

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Managing the Risk of Diverse Commercial Torts Each of the torts djscussed in thls chapter exposes a business to liability. A risk management analys js should address the fund amental problems that may arise, always taking into account that business activities are usually engaged in by employees j n the course of employment. As discussed jn Chapter 1 0, an employer is respons jble, und er the doctrine of vicarious liability, for the torts of its employees.

An occupjer's liability risk management plan would include the follow ing questions:

a re there d angers on the property? Are adequate warnings and protections given to visitors?

are there known trespassers- in particular, cruldren - who come onto the property?

what could be d one to eliminate or reduce the r isk flowing from the dangers?

has the occupier complied with all legislative obligations? Examples jnclud e provincial legislation concernjng workers' health and safety, as well as municipal bylaws providing for snow and ice removal.

is ad equate insurance in place?

Although the classifi cation of entrants un der the common law of o ccup jers' liability may be a useful exercise after an jn cident occurs (it helps determine lia- bility), from a r jsk management perspective the process js not particularly helpful since the business that occupies property cannot easily predict what class of entrant will be injured on jts property. Majntainjng safe premises as a preventive measure is much better than having to debate, after the fa ct, what class of entrant the jnjured plaintiff is and what stand ard is owed.

For each additional tort discussed in thls chapter, asimilar ljst of questions could be generated . For example, if the bus jness designs and creates consumer goods:

d o the staff understand that they cannot j nnovate by copying others?

is a program in place to review new product ideas, including all aspects of d esign, to ensure there js no passing off?

is a climate in place that allows a manager to step jn and say, "Trus cannot be d one because I believe we have crossed the line"?

Tort law evolves to reflect changing social values. What once might have been acceptable behaviour may no longer be considered appropriate. Thls can be seen, for example, ju the changing approach to the environmental effects of commercial activities. When a business is assessing jts tort exposure, jt cannot assume that existing legal rules will apply ju perpetuity.

BUSINESS LAW IN PRACTICE REVISITED

1. What potential legal actions does Julie have against Ron's business?

Ron is an o ccupier of the building. As such, he is responsible to different classes of people who come onto his property both lawfully and unlawfully. The extent of the responsibility varies dependjng on why the person is on the premises and whether the premises are in a common law or statutory jurisdiction.

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In Newfoundland and Labrador, common law principles apply. Julie is clearly an invitee and, as such, Ron owes a duty to warn of "any unusual d anger [of] which he knows or ought to know." [n this case, it appears he was aware of the inad equate, temporary repair job on the elevator, and therefore had the requisite knowledge.

If these events occurred in a jurisdiction where statute law has replaced the common law o f occupier's liability, the responsibility to Julie, a person on the property legitimately, would be very similar to that of the tort of negligence. In all likelihood Ron would still be liable.

2. What is the responsibility of Elevator XL Services?

Elevator XL Services is an o ccupier, since it had control over the elevator in order to cond uct the repairs. This was also the time when t11e harm occurred. Following the same analysis as used in Question 1 above, Elevator XL Services will be liable to Julie under both common and statute law. Julie was on the property lawfully and, at common law, was an invitee.

3. Does Ron have any recourse against the manufacturer of the replica figurine?

Ron can take action based on the tort of passing off. He can claim that the actions of the competitor meet the conditions of the tort of passing o ff, and as such he will seek eit11er an injunction to stop any furt11er action by the competitor, or damages, or both. He will need to prove that his "Old Man of the Sea"' fi gurine existed prior to the "Man of the Sea"' prod uct , that it had an established reputation that was of value, that the products' names and appearances are similar enough to result in con- fusfon in the minds of the potential purchasers, and that the confu sion has resulted or will re.suit in loss of sales or harm to Ron's business. It is sufficient that the d efend ant's conduct compromises Ron's control over his own business reputation.

4. How can Ron manage the risk his business faces of potential tort liabilities?

Ron, as owner/occupier o f the premi ses, should d o a safety audit of all parts of the building to ensure that neither his tenants nor his visitors (lawful or otherwise) could be harmed by any hazards. Ron should consider all aspects of his business operations, including the building itself, obvious hazards such as the kiln, main- tenance of elevators, clearing of sidewalks, hiring and training of all employees, and insurance coverage .

In terms of Ron's prod ucts, Ron should

• monitor the activity of competitors and potential competitors to ensure that there is no inappropriate copying of his designs.

• ensure that the glazes and materials he uses are lead-free and other- wise harmless.

• hire staff who know how to treat customers well and are trained as to their obligations should they have to handle shoplifters.

CHAPTER SUMMARY While negligence is the most common tort a business will encounter, various other commercially relevant torts merit analysis. These torts can be categor ized and assessed according to whether they would arise because t11e business is an

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occupier o f property or because it provid es a prod uct or service. Furthermore, tor ts that could be committed against a competitor can be grouped separately from those more llkely to involve a consumer. Though these distinctions are not defi nitive, they provide a useful way of organizing the variety of torts that affect the commercial world .

As an occupier, a business must be sure to keep its property safe so that people coming on-s ite are not injured, other wise it faces occupiers' liability a ccording to a regime that classifies the entrant in question und er common law or by statute. To avoid committing the tort o f nuisance, a business must not unreasonably and substantially interfere with the right of its neighbours to enjoy their property. The law governing trespass gives o ccupiers a right to exert control over who comes onto their premises, subject to human rights cod es.

Torts arising from business operations in relation to customers are false imprisonment, assault and battery, deceit, and intrusion on seclusion. Through these torts, the law seeks to ensure people's right to move about as they please, to have their bod ily integrity respected, not to be m isled about the q uality of a prod uct or service, and to be free from offensive invasion o f their personal affairs.

Torts more likely to be committed against a competitor includ e passing off, interference with contractual relations, d efamation, and injurious falsehood or product defa mation. These torts endeavour to protect a business's property and its own reputation.

Given the diverse and w ide-ranging nature of a business's potential liability in tort, preventing torts from ever occurring should be one of management's top priorities.

CHAPTER STUDY

Key Terms and Concepts absolute privilege (p. 299)

assault (p. 293)

battery (p. 293)

contractual entrant (p. 285)

deceit or fraud (p. 295)

defamation (p. 298)

fair comment (p. 299)

false imprisonment (p. 293)

injurious or malicious falsehood (p. 301)

interference with contractual relations (p. 297)

intrusion upon seclusion (p. 302)

invitee (p. 285)

justification (p. 298)

legal authority (p. 293)

licensee (p. 286)

nuisance (p. 288)

ocrupier (p. 284)

passing off (p. 295)

qualified privilege (p. 298)

responsible communication on matters of public interest (p. 299)

trespass to land (p. 290)

trespasser (p. 286)

Questio ns for Review 1. How d oes the law define the occupier o f a

property?

2. Who is an occupier?

3. What are the four different classes of visitors in the law o f occupiers' liability?

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4. What is the standard of care owed to each of the four classes of visitors?

5. What is the major change made by legislation in many provinces of Canada to the common law of occupiers' liability?

6. What is nuisance in tort law?

7. The courts have developed pragmatic rules for resolving inherent conflicts that arise in applying the tort of nuisance.Give two examples of these rules.

8. Under what conditions can trespass arise?

9. What are the limitations to the ability of a store detective to detain a customer who is suspected of shoplifting?

10. Describe how a false imprisonment claim might arise, other than by a person being physically restrained.

11. How can a business manage the risk of retail theft and frau d?

12. tdentify what must be established to prove deceit.

13. What is "passing off", and what practices was this tort created to prevent?

14. Describe a situation that might amount to the tort of interference with contractual relations.

15. What is defamation, and what are the defences to this tort?

16. When is a court entitled to award punitive damages for the tort of defamation?

17. What is injurious falsehood?

18. What is the tort of intrusion upon seclusion?

Questions for Critical Thinking 1. The law defines "occupier" very broadly such

that it extends beyond just the person who owns the property to anyone who has some degree of control over the land or building in question. Is this reasonable or is the law reaching too far? For example, an auctioneer conducting an auction in a barn belonging to someone else has been held to be an occupier. This made the auctioneer liable to the plaintiff who was injured when the barn floor

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collapsed -"" Is such a broad understanding of "occupier" a reasonable one or is the law going too far?

2. What can businesses do to manage the risk of slip-and-fall incidents?

3. The tort of fal se imprisonment places important limitations on any action the retailer can take to detain suspected shoplifters. What are the pros and cons of these limitations? Are they fair? What are the countervailing interests at stake? How can retailers reduce the risks associated with apprehending suspected shoplifters?

4. Consumers who purchase products online are often asked to review or rate the product. Does the law of defamation pose a risk to providing such a review? Explain.

5. The tort of interference with contractual relations means that a prospective employer is liable if he induces an employee to breach her employment contract with a tl1ird party and start working for him. Does this tort interfere too much with recruionent efforts in the marketplace? Why or why not?

6. Do you agree that the intrusion upon seclusion tort should permit damages for distress, humiliation, or anguish, or should the tort be limited to financial loss, if any, that arises from the tort?

Situations for Discussion 1 . Jason owns and operates a company, ABC Ltd,

which he wanted to position to bid successfully on a contract to supply security in federal prisons. In its caU for tenders, the Department of Supply and Services included a condition that tenderers such as ABC Ltd were to provide the names and qualifications of at least 25 senior security personnel who would service the contract. (The government's goal with this condition was to ensure that the bidding company had the resources to deliver on the contract should it prove successful.) ABC Ltd had no such employees but a leading company in the fi eld, Prison Security Services Lt d, had 45 highly qualified security personnel on staff.

102 Couch v McCaM 11971l 71DLR13d) .181 {0nl CAJ

On the side, Jason convinced these employees of Prison Security Services Ltd to permit their names to be included in his company's tender and to come to work for ABC Ltd immediately if the tender were successful. When Jason's company proved to be the successful bidder, these 45 employees promptly joined his company. What tort has Jason committed? Explain. •m

2. Mr. Favo slipped and fell on a small patch of ice outside a popular car wash. Mr. Favo was late for an appointment and was walking somewhat faster than usual just prior to taking the tumble. Ms. Daby, the owner of the car wash, was proud of the 10-year safety record she had established up until this point. She attributes this safety record to being acutely aware of the problems ice causes in winter when wet vehicles exit the car wash, leaving puddles in their wake. On a related front, Daby also held frequent staff meetings in order to emphasize how important it was to prevent ice formation and to salt the s id ewalk according to a very strict schedule. The supervisor on shift when Pavo fell was adamant that the area had been salted prior to the incident. He also conducted an inspection of the area immediately after the fall and found only a very small patch of ice had been missed. Is Daby liable? Is Favo contributorily negligent?'°'

3. Mr. Smith is the owner and operator of a consultation company. Due to a downturn in business, he decided to terminate the employment contract of Ms. Jones. Smith softened the blow by giving Jones three months' pay to end their contract. This was all he was required to do by law and is not subject to criticism on this front. Smith had always held a very good opinion of the quality of Jones's work, but he learned subsequent to her departure that she was combative with junior employees and even somewhat of a bully. The source of this negative information was an employee of his consultation company who had personally witnessed, on a few occasions, that

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104 Based '"pall on foicy v JtnP<YAll 01 J.td JOJO BCSC 197. 11 BC.LR t51nJ 18 • ff o 20U BC.CA 262. 307 BCAC 34

Jones treated support staff poorly. Meanwhile, Jones immediately began looking for a replacement job and held out high hopes of being hired by a company called Consults With Results, Ltd (Consults). This is because after her interview with Consults, Jones was told by the HR manager that she was ranked the first candidate for the job but had to check out Jones's references before an official offer could be made. Jones gave Smith's name as a reference. When the PR manager contacted Smith, he passed along the negative information regarding Jones's treatment of junior employees and also that the quality of Jones's work was generally up to standard. Additionally, he advised the PR manager that there was "no way" he would hire Jones again. Concerned about Jones's interpersonal skills, the PR manager of Consults did not make an offer of employment to Jones. Jones has now sued Smith for d efamation. What will Jones h ave to prove to succeed? What d efences does Smith have?""

4. J amie and Shannon live adjacent to a golf course. Portions of their backyard are unfenced so that they can enjoy an unobstructed view of the ninth hole. Several matters are causing them increasing concern. First, the golf course is refusing to take steps to prevent golfers from driving golf balls into Jamie and Shannon's yard. Numerous golf balls crash into their garden and house every day, causing damage to the house and making it impossible for the couple to sit outside in their backyard during golf season. Beyond this, some golf cart drivers are taking shortcuts over Jamie and Shannon's property to get to the next hole. The golf club has refused to stop its patrons from doing so. You may assume that the law makes the golf dub responsible for the conduct of its golfers.'°' On this basis, what action or actions canJamie and Shannon take against the golf dub and why?""

S. Randall was enjoying an evening at a local BC pub but end ed up drinking too much and

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71.1200817 WWR 517

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becoming obnoxious with the wait staff. He was cut off from bar service. Next, Rachel (a notorious troublemaker who also had been refused service at the bar) walked up to Randall and his girlfriend and insulted them both. Matters went downhill from there. Randall's girlfriend and Rachel began to scuffle, at which point Randall started yelling. There were two bouncers at the pub that night, Reggie and Joe. The bouncers, who were both considerably larger than Randall, overreacted to the situation. With great force, they both pushed Randall out the door of the pub onto the landing of the stairs leading down to the street. As Randall stood there on the landing, Joe struck Randall with tremendous force, knocking out his front teeth. (Being otherwise underemployed, Joe wanted to impress Reggie with his toughness that n ight, hoping to secure more shifts.) Randall fell down the stairs to the street, hit his head on the sidewalk, and was seriously brain injured. Discuss the tort principles that arise, based on Chapters 11 and 12. Who will be sued and for what?">S

6. Mandrake Ltd owns and occupies an office building. Mandrake complains about the noise and vibration coming from the nearby subway system of the Toronto Transit Commission .",. Will Mand rake be successful in an action for nuisance? In particular, would the ordinary and reasonable resident of that locality view the disturban ce as a substantial interference with tlle enjoyment of land? What factors will a court consider in determining whether there is nuisance or not? At what point should legitimate activities be curtailed because of the unavoidable consequences to other nearby businesses?

7. Ms. Jayakaran i s a director and shareholder of Spicy Greens Restaurant Ltd . For the last 10 years or so, the company has operated three restaurants in Prince George, BC, each called Spicy Greens Restaurant and all three specializing in South Indian, Sri Lankan, and Singaporean cuisine. Jayakaran was distressed

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Transil CorrYT?!SSion, [19931 OJ NO 995, 62 OAC 202

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one day to see a new restaurant operating in Pr ince George called Kirish Spicy Greens. This new restaurant had a prominent awning with the name "Kirish Spicy Greens" emblazoned across it and, like the awning for Spicy Greens Restaurant, a yellow and orange bell pepper was prominently depicted. This new restaurant also specialized in South In dian, Sri Lankan, and Singaporean cuisine and its menu featured dishes similar to those of Spicy Greens Restaurant. Jayakaran is particularly concerned because some of her regular customers have recently congratulated her on opening a new restaurant, referring to Kirish Spicy Greens. Jayakaran has since told the owner of Kirish Spicy Foods that she is going to sue hi m for the tort of passing off. What will Jayakaran have to prove in order to succeed in a passing off action? Do you think her action will be successful?"0

8. Mr. Bahner was hosting a dinner fo r friends at a restaurant in the Bayshore Inn, Vancouver. The group ordered one bottle of wine and, at 11:30 P.M., the waiter asked if they would like another, to which they agreed. There was still w ine i n the first bottle however. At 11:50 P.M., Bahner was told by the waiter that, d ue to a law in force in British Columbia at the time, all the w ine on the table had to be consumed before m idnight. The plaintiff considered this to be impossible witl1out resulting in drunkenness and therefore asked if they could simply take tlle second bottle away witl1 tllem at tile end of the evening. Bahner was ad vised by the waiter that this, too, was against the law. The plaintiff paid for the dinner i tself and the first bottle of wine but refused to pay for tile second, saying he would just leave it on the table. The second bottle was open but had been otherwise left untouched. In response, the hotel manager called a security guard . Bahner and his guests stood up and tried to leave. The security guard blocked the main restaurant exit, saying, "You cannot leave." When Balmer again refused to pay, the security guard called

UO Based, in part, on Sp:cy Ctoo-ns Resraurant Lid v Stng¥tts;,, 2016 BCSC 987

the police. Since Bahner was not being permitted to leave the restaurant, he sat down at a table nearer the door and waited with his guests. He was then arrested and spent the night in jail before he was released. Does

Mr. Bahner have a successful action for false imprisorunentagainst the restaurant owner? Why or why not? How could such an unfortunate situation have been avoided to begin with ?ill

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CHAPTER The Agency Rela tionship

CHAPTER Business Forms and Arrangements

CHAPTER The Corporate Form Organizational Matters

CHAPTER The Corporate Form: Operational Matters

ENTREPREN EURS WITH SERVICES or products ready for market need to select a business vehicle-or ownership structure- through whk h to offer them. Thi s choice, essentially limited to three basic forms, has broad legal consequences because each kind of business vehicle comes with a specific set of r ights and liabilities:

a sole proprietorship refers to an ind ividual carryjng on business alone. The actual business activity may be cond ucted by others, such as agents or employees, but ownership remains the responsibility of one person.

a partnership involves two or more persons sharing ownership responsibilities either eq ually or in some proportion among the partners.

a corporation is a separate legal entity that is owned by one or more sharehold ers.

Regardless of its form, the business will almost cer· t ainly rely on agency and employment relationships for its d ay-to-day operations. An agency relationship involves the business relyjng on someone else to act on its behalf. In law, the actions of the agent are often treated as the actions of the business itself.

319

I-- er::: <t o_

OBJECTIVES After studying this chapter. you should have an understanding of

• the agency relationship and its relevance to business

• how an agency relationship comes into being

• agency duties and liabilities

• how the agency relationship ends

BUSINESS LAW IN PRACTICE

Sonny Chu is a university student majoring in entrepreneurship and international business. Two years ago, while on a student exchange program in China, Sonny came up with an idea for an Internet business. In China, Sonny had been able to purchase tailor·made silk suits for $ 250 to $400. The equivalent suits cost $1 500 to $1800 in Canada. Sonny believed that he could offer the tailor-made silk suits to Canaruans at dose to the same price that he had paid for the suits if he could solve the rufficulty of having customers take their own strit measurements.

Back in Canada, Sonny worked w ith a design student, and together they were able to develop a simplified method of tal<lngstrit measurements. With this problem solved, Sonny set up a website for his business called "This Strits Me." The website featured several suit styles, a range of silk fabric swatches, and instructions for taking measurements. Customers could easily order suits by d icking on the style and fa bric and sending in their measurements by following the simplified instructions provided.'

To handle the Chinese end of the business, Sonny employed Dong Lee, a student he had met on the exchange t rip. Dongwas born in China and is very familiar with the fa bric industry, as both his mother and father are d ressmakers. HisjobforSonnyinvolves purchasing silk fabric, engaging the services of Chinese tailors, and delivering the customers' selections and measurements to the tailors. The arrangement proved to be very profitable, and, within six months of establishing the website, Sonny was meeting all of his sales targets. However, a couple of recent developments threaten the success of Sonny's business:

Dong agreed to pay $1 00 000 to a Chinese supplier for several bolts of silk fabric. Although the fa bric is beautiful and will make wonderful suits, Sonny believes that Dong has agreed to pay too much for thefabric and, further, he does not think that his business can afford the purchase at this time. Sonny wants to cancel or renegotiate the contract. He is also very angry with Dong because Sonny had expressly told Dong that he could not enter into any contracts on his behalf in excess of $ 25 000 without getting hi s permission first.

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Sonny has also discovered that Dong has been purchasing fabric and engaging tailors on behalf of some of Sonny's competitors. When confronted with this information, Dong stated that he clid not see any problem with his actions as he had not signed any exclusive representation contract with Sonny.

1. What is the nature of the legal relationship between Sonny and Dong?

2. ls Sonny bound by the expensive fabric contract Dong entered into with the Chinese supplier?

3. Has Dong breached any duty owed to Sonny by representing other businesses in China?

The Nature of Agency Agency is the relationship between two persons that permits one person, the agent, to affect the legal relationships of another, known in law as the principal .'

These legal relationships- most notably contractual relationships- are as binding on the principal as if that person had directly entered them herself.

Agency is about one person representing another in such a way as to affect the latter's relationships with the outside world. In business, agency is a common relationship, as is shown in the following examples:

a sports agent negotiates a multimillion-d ollar d eal on behalf of a hockey player.

an insurance agent sells fire and theft insurance on behalf of several insurance companies.

a travel agent sells tickets, cruises, and vacation packages on behalf of carriers and ho tels.

a booking agent negotiates fees and d ates on behalf of entertainers.

a stockbroker buys and sells shares on behalf of individ uals and companies.

In each case, the agent is acting for someone else (the principal) and is doing business on that person's behalf. This kind of relationship is essential to the suc- cess of the prin cipal, who may not necessarily have the expertise to handle the given matter- as may be the case with an athlete or an investor- or who cannot manage and promote his business single-handed ly. For tlus latter reason, insur- ance companies, hotels, carriers, and entertainers rely on agents regularly.

In the Business Law in Practice scenario at the beginning of this chapter, Dong was need ed for just these kinds of reasons. He was familiar with China and had connections in that part of the world. Sonny also required his assistance because Sonny could not run his business alone. Consequently, Dong became Sonny's agent.

Many of the examples of agency given so far are familiar because they involve businesses engaging external specialists or experts to act on their behalf in various transactions. The scope of agency, however, is considerably broader than these examples would suggest.

In fact, in almost every business transaction, at least one of the parties is acting as an agent. A corporation enters into a contract through the agency of one of its directors or employees. A partnership is likewise bound to a contract through the agency of one of its partners or a firm employee. Even in a sole proprietorship,

2 CHL f 1oma!\ Cantldmn AgMcy L> w 3o t'!d {Ma1k~m, O N LexisNexis. 201 ... 7) a t 4

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Agency

A rel at1onsh1 p that exists when one party represents another party in the formation of l ega l relations.

Agent

A person who is au th ori zed to act on beha lf of another.

Principal

A person who has perm itted another to act on her behal f.

Outsider

The party with whom the agent does business on behal f of the principal.

the owner may hire others, such as offic e managers and sales clerks, to carry out cr itical tasks on the owner's behalf. In short , the agency relationship- which formally recognizes the delegation of authority from one party to another- is a cornerstone o f business activity. It is a relationship that makes it possible for businesses to conduct a wide array of transactions.

Agency Defined Agency relationships, like contractual relationshi ps in general, operate for the most part with few difficulties- agents simply represent principals in transactions with others. This is not to say, however, that problems cannot occur. The fact that parties use agents instead o f dealing with each other face to fac e can result in complications and q uestions. There aretwokeyrelationshipsatplay in an agency situation. The first is the relationship between the agent and the p rin cipal (see Figure 1 3.1).

FIGURE 13.1 The Agent-Principal Relationship

Oi+•------+• 0 (Principal) (Agent)

This aspect of agency raises numerous q uestions, such as the following:

how d oes A become an agent? When is one person considered to be an agent for another?

what is the authority o f A? What types of transactions can A enter into on behalf o f P?

what are A's duties?

what are P's obligations?

The second relationship in agency is between the prin cipal and the party with whom the agent d oes business (see Fi gure 1 3.2) . Such a party is known as an outsider because she is "outside" the agency relationship between principal and agent. The outsider is also sometimes called the third party.3

FIGURE 13.2 The Outsider- Principal Relationship

; ;

;

; ;

;

(Outsider or Third Party)

This relationship raises questions, i ncluding:

when is the principal liable to the outsider?

• when is the agent himself liable to the outsider?

322 NEL

The complications resulting from these relationships have necessitated rules of law to regulate and resolve them. These rules are known as the la w of agency, whi ch, in turn, is derived largely from tort and contract law. There is very little legislation pert<rirung to agency as such, other than special statutes that govern the duties and responsibilities of specific kinds of agents. 4

The rem.Under o f this chapter will explore how the common law of agency has dealt with the kinds o f questions and problems posed above.

Creation of Agency Agency relationships are created in a variety of ways. Most often, particularly in a business context, the relationship arises by contract between the parties. At other times, the relationship arises by conduct. The parties do not specifically agree to an agency relationship but, by words or actions, outsid ers are led to believe that the relationship is one of agency.

Agency by Agreement An agency relationship created by contract normally involves the principal autho- rizing an agent to act on her behalf and the agent agreeing to d o so in return for some fee or other remuneration. This often occurs through a contract created expressly and only for tl1at single purpose, as illustrated in this example:

a retired public figure who wishes to earn income by speaking about his experiences in offic e may engage an agent to contact organizations, negotiate fees, and book engagements on his behalf. In return, tile public figure will pay the agent a certain sum, perhaps a percentage of his fee. Similarly, Sonny hired Dong to purchase fabric and employ t<rilors in China.

In other situations, the agency relationship may arise as part of anoilier, broader contract:

an employment contract may provid e for a person to be p <rid a salary in return for carrying out cer tain duties, including entering into contracts on behalf of the employer. For example, a sales clerk, besides greeting and assisting customers and stocking shelves, would have the authority to enter into sales transactions- at least at the sticker price- on behalf of his employer.

Of course, not all employees are agents for the businesses that employ them. A clerk/typist is not normally an agent, but, if asked to take money from petty cash and purchase a gift fo r a departing employee, ilien in this situation and for tllis purpose, tl1e clerk/typist is an agent for the employer.

The agency agreement may be express or implied, oral, in writing, or in writing under seal. If the agent is to issue promi ssory notes or sign cheq ues in the name o f the principal, ilien the agency agreement should be in writing.' A special type of express agency agreement is the power of attorney. It is a grant of authority under seal and it permits tl1e agent to sign d ocuments on behalf of the principal under seal.

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5 13'1s Of Exchange Act. RSC 198~ c B·4

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Law of agency

The law governing the relationship where one party. the agent. acts on beha lf of another. the principal

Power of attorney

An agency agreement in writing and under seal.

Actual authority

The power of an agent that derives from either express or implied agreemenl

The Concept of Authority The authority of the agent is a key aspect of t11e agency relationship. It deter- mines whether there is a contract between the principal and the outsider. When an agent acts within the scope o f the agent's a uthority and negotiates a contract for the principal, the principal i s bound by the contract, whether the prin cipal likes it or not. However, even when the agent has acted outside the s cope of her authority in entering into the contract- that is, by exceeding the powers she has been given - the contract may still bind the principal.

The principal will be obligated by the contract when the agent has actual authority or when the agent has apparent authority.

Actual Authority An agent's actual authority can be both express and implied. Express authority is the written or oral authority granted by the principal to the agent an d is an authority tha t the agent actually has. Implied authority is also an authority that the agent actually has, but it is present by implication only. An agent will have implied authority when that authority

is infe rred from the position the agent occupies.

is reasonably necessary to carry out or ot11erwise implement the agent's express authority.

a rises by virtue of a well-recognized custom in a particular trade, industry, or profession.

Like other contracts, then, the agency contract can contain implied terms concerning the nature and extent of the agent's authority. It i s i mportant to remember that these terms are not any less "real" than express terms. They just exist i n another, less tangible form .

In the Business Law in Practice scenario, it is dear that Sonny's agent, Dong, has the actual authority to engage t ailors and to buy fabric up to $ 25 000 per contract . Above that amount, he is required to secure Sonny's approval before proceeding. What kind of implied authority might Dong have? This is always a fa ct-specific inquiry, but since Dong is empowered to purchase fabric and engage t ailors, he almost certainly has the power to arrange for the transportation of the fi nished product to Canad a. This, in turn, would also include the power to acquire insurance to cover any loss or danlage to the suits while in transit. For thi s reason, transportation and insurance contracts will be binding on Sonny.

In a similar vein, the 111anager of a business may have aspects of his authority expressly recited in his employment contract or job d escription. To the extent iliat these do cuments are not exhaustive on the subject, other components of his authority exist d ue to the nature of his position and as a result of what is reasonably necessary to manage the business. For example, if he were the general manager of an automotive dealership, he presumably would have the implied power to purchase merchandise, order office supplies, arrange for appropriate ad vertising of ilie business, and hire and fire employees.A manager ofa noilier kind of business- a fast-food outlet or a convenience store- would have less implied power.

The nature of the authority given to the agent is inherently flexible and easily customized. For example, it can be:

very broad or ver y narrow.

• for only one transaction or for several.

NEL 324

for a short, long, or indefinite period of time.

very fo rmal, as in the case of a power of attorney, or very informal, in that it is included in the job description of an employee or merely consists of oral instructions.

Dong has entered into a contract on behalf of Sonny. Was the contract bin ding on Sonny? This contract was not concluded with in Dong's actual authority, as Sonny had limited Dong's authority to contracts of $ 25 000. Dong acted outside his actual authority, but nevertheless, Sonny will be bound by the contract if Dong has the apparent authority to enter into contracts over that monetary limit.

Apparent Authority Sometimes called ostensible authority, apparent autho rity is the authority that a third party or outsider would reasonably believe the agent has, given the cond uct of the principal. For example, as Dong is acting as Sonny's purchasing agent, it would be reasonable for the outsider to infer that he had the usual authority of someone in such a posit ion. It would not be reasonable to expect fabr ic suppliers to guess that Dong's authority to contract on Sonny's behalf had been limited to contracts for less than $25 000. Sonny is using Dong's senrices as his buyi ng agent without telling outsiders that his authority

Purchasing agents are ofte n part of dte fashion sr.ene. What is dteaudtorityof a purchasing agen t:?

is in any way limited. He must bear the risk of Dong exceeding Apparent authority

The power that an agent appears to have to an outsider because of conduct or statements of the principal

the monetary limit he has privately set for him. In sum, so long as an agent is acting withi n his apparent authority, the prin-

cipal will be bound by the transaction unless the third party knew or ought rea- sonably to have known of the lim itation on the agent's authority.

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BUSINESS APPLICAl:ION

AGENT'S AUTHORITY TO ENTER AGREEMENT TO SHARE PRIZE

MacDonald Auto Group of Sydney, NS, offered a $100 000 prize as part of its fiftieth anniversary celebrations. The names of those who purchased a car in the previous year were entered into a d raw with five selected as finalists. One of the fi ve would receive the grand prize and the others would receive gift certifi cates for car detailing.

Darin Seymour of Glace Bay was one of the five fi nalists. On the day of the draw, his spouse, Kim Seymour, attended on his behalf. Prior to the d raw, one of the fi nalists suggested that they

325

should split the prize so that each would be guar- anteed $20 000. All five (including Kim Seymour) agreed to this proposal, although Kim later stated that she did so reluctantly. The fi nalists met with the accountant for the MacDonald Group and each signed a waiver indicating they each rep- resented a named finalist. At this time, the par- t ies again confirmed their agreement to split the prize. The finalists returned to the showroom where the draw took place. Darin Seymour- who was represented by his wife, Kim- was the winner. When the winner did not share the prize, the runners-up claimed a share in the prize.

Kim Seymo1tr (centre)

The court determined that the case hj nged on agency, that is, whether Kim had the actual, implied, or apparent authority to agree to share Darin's prize. Kim attend ed the d raw as her husband's agent but Darin did not give Kim any authority other than to pick up the cheque. She did not have any actual authority to enter into the agreement with the other finalists. The finalists may have assumed that because Kim was there for her husband, she could agree to the sharing d eal on ms behalf. The court held that it was not reasonable for the plaintiffs to assume Kim could commit Darin to the deal without specific authority from hi m. An agent

has implied authority to do ever ything necessary and ordinarily incidental to carrying out express authority. The making of an agreement to give away 80% of a $100000 prize is not in any way incidental to Kim's express authority to receive Darin's prize. Apparent or ostensible authority exists when the prin cipal creates a situation where it is reasonable to infer and rely on the apparent authority of the agent. In this situation, Darin did nothing to give anyone the impression that he authorized his spouse to do anything more than recei ve his prize. Therefore, Darin and Kim were not obligated to share the prize.

Critical Altnl.,sis: Why would Kim's signing a waiver at the car d ealership indicating that she was representing Darin not constitute apparent authority to enter into the agreement to share the prize?

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Agency by estoppel

An agency relationship created when the principal acts su ch that third parties reasonably conclude that an agency relationship exists.

Agency by Estoppel In the preceding section, one of the r isks of agency was illustrated: a n agent may exceed his actual authority but act within his apparent authority and thereby bind a principal to a contract against ms wishes. Sonny is bound to pay fo r the expen- sive fabric even though the contract is for an amount above Dong's authority. This is because the contract was within Dong's apparent authority and the fabr ic sup· plier was unaware of the limitation on Dong's authority. Thls is an application of what is known in law as agency by estoppel . The relationship between Sonny and Dong has been broad ened or extend ed, not through thei r mutual consent but by conduct. Sonny is not entitled to deny Dong's apparent authority unless he actu· ally info rms the outsider in advance that Dong's authority is limited .

A less common situation in wmch an agency relationsmp can be created by estoppel involves one in wmch the prin cipal indicates that another is hjs agent when, in fac t , no agency relationship exists. Forexan1ple, suppose thatthe owner of a business- in a burst of effusiveness - introd uces a prospective employee to a customer, saying, "I want you to meet Terrence, my new vice president of mar- keting." It would be usual and reasonable fo r the customer to infer that Terrence has the authority to act on behalf of the owner with respect to selling, promo- tions, and advertising. Suppose, however, that ultimately Terrence is not mred and, unfortunately, the owner forgets all about having introduced him as the new

NEL 326

vice president of marketing. Terrence- now sorely disappointed and wfahing to exact some revenge- contacts the customer and enters into a transaction wjth him, pretenrung to act on behalf of the owner. [s the owner liable? Assuming the contract is marketing or sales-related and assuming the customer was unaware of the truth, then the owner probably wjll be liable. In such a situation, the prin- cipal's actions (introd ucing his "new vice president of marketing") created the appearance of an agency relationship. The principal will therefore be estopped from denying the relationship and be bound by the contract wjth the customer. Put another way, the principal is not permitted to avoid the contract by claiming- albeit truthfully- that no agency relationship existed, because the principal gave every appearance that one did.

Is it fair to place all responsibility on the owner like this? The difficulty is that someone- either the owner of the business or the customer- Mil end up being adversely affected by Terrence's conduct. That is, either the owner will be stuck with a contract that she never wanted or the customer will be denied the benefit of a contract that he negotiated in good faith. Between these two competing claims, the law sides Mth the customer through estoppel. In theory, at least, the owner can sue Terrence for misrepresenting himself as an agent, but this can be of little value if Terrence has few assets.

A third situation in which agency by estoppel may operate to bind a principal is that in which an agency relationship has been terminated or an agent's authority has been curtailed. In both situations, the agent had at one time the actual authority to bind the principal, but now the authority has been taken away or reduced.

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Rockland Industries Inc v Amerada Minerals Corporation of Canada, [1980) 2 SCR 2, [1980) SCJ No 37, rev'g [1979) 2 WWR 209, (1978), 14 AR 97 (Alta CA)

THE BUSINESS CON1'BXT: This case concerns an agent whose authority has been reduced. The same general principles will apply where the agency relationship has been completely severed.

FACTUAL BACKGROUND : Rockland was a textile manufacturer that also engaged in the purchase and resale of sulphur. Amerada was a producer of natural gas. One of the byproducts of the gas-processing proced ure is sulphur. Mr. Kurtz was the manager of Amerada's petrocl1em ical prod ucts wjth responsibility for domestic and foreign sales and the marketing of petrochemicals, inclurung sulphur. He reported to Mr. Deverin, a senior vice president and a member of the executive operating committee.

After protracted negotiations between Amerada, represented by Kurtz, and representa-

327

tives of Rockland, an agreement was reached for the sale by Amerada to Rockland of SO 000 tons of sulphur at $8 per ton. This agreement was concluded by telephone on September 5, 1974. In the meantime, on September 3, 1 974, Dever in had informed Kurtz that he would need to get the approval of the executive operating com- mittee for the sale to Rockland. In other words, Kurtz no longer had the authority to conclude the sale on behalf of Amerada .

The agreement, concluded on September 5, was not per formed by Amerada, and Rockland sued for breach of contract. Amerada argued that there was no contract between the parties, as Kurtz rud not have the authority to act on Amerada's behalf.

THE LEGAL QUESTION: Was Amerada bound by the contract negotiated by Kurtz?

RESOLUTION: The court determined that Kurtz had actual authority to act on behalf of Amerada i n negotiating and entering the contract Mth Rockland up until September 3. At that time,

Ills actual authority was curtailed. This lim- itation on Kurtz's authority, however, was

not communicated to Rockland. The court held that the onus was on Amerad a to notify Rockland of the lim itation- it was not up to Rockland to in q uire as to Kurtz's authority. Amerad a, by permitting Kurtz to act in its

business by cond ucting negotiations, had rep- resented to Rockland that he had perm ission to act. In shor t, there was a representation of authority by Amerad a on wh ich Rockland relied.

CRITICAL ANALYSIS: How could Amerada have prevented tills situation?

Agency by ratification

An agency relationship created when one party adopts a contract entered into on his behalf by another who at the time acted without authority.

The situations d escribed in this section illustrate several of the risks associated with agency. The onus is on the principals to inform outsiders when a person ceases to be their agent; otherwise, the principals continue to be liable for the agent's actions. Similarly, the principals have a responsibility to inform outsiders of any limitation on tl1eir agent's usual autl1ority; otl1erwise, tl1e principals run the risk of being bound if the agent exceeds his actual authority but acts within his apparent authority. A principal can inform outsiders by contacting them by letter, telephone, or other means; by taking out adver tisements in trade publica- tions and newspapers; by clearly indicating on company for ms what constitutes necessary approvals; and by otl1erwise indicating that only properly d ocumented transactions will be binding.

Agency by Ratification Agency by ratification occurs when a person represents himself as another's agent even tl1ough he is not, and when tl1e purported principal ad opts the acts of the agent. For example, suppose Ahmed is keenly interested in obtairung a franchise for a certain fast-food restaurant, and his friend Frank is aware of this interest. An opportunity comes on the market, but Frank cannot reach Ahmed to tell him about it. Feeling pretty sure of himself, Frank goes allead and purchases the franchise on Ahmed's bellalf although he d oes not have any authority to do so. Though Frank acted with good intentions, Ahmed has no responsibilities unless he chooses to adopt the contract. When and if he does adopt the transaction, an agency relationshi p will be created between Frank and him . The result is that Ahmed's r ights and duties under the franchise contract are identical to what they would have been had Frank been properly authorized to act as Ahmed's agent all along.

In both agency by estoppel and agency by ratific ation, the agent has no authority to do what he d oes. What distinguishes the two d octrines is whether the principal has conducted himself in a misleading way. Agency by estoppel forces the principal to be bound by the unauthorized contract because the principal has represented someone as his agent and must live with the conseq uences when that agent purports to act on his bellalf. Under agency by ratifi cation, the agent is perhaps eq ually out of line but not d ue to any fault of or m isrepresentation by the principal. For this reason, the law d oes not force the principal to adopt the contract, but rather permi ts him to make that decision for himself, according to his own best interests.

NEL 328

ION OF THE LAW

REAL ESTATE AGENTS

The real estate agent is one of the most familiar and common types of agents. Most sales of property, especially those involving residential property, involw the services of a real estate agent The real estate agent, however, is somewhat of an anomaly in agency law. Unlike most other agents, usually a real estate agent has no authority to make a binding contract of sale on behalf of his principal, the homeowner. Normally, the agreement between the owner of property and the real estate agent- often taking the form of a standard listing agreement- does not confer any authority on the agent to enter a contract on behalf of the property owner. The real estate agent's role is usually limited to listing and advertising the property, showing the property to prospective purchasers, a nd introducing and bringing together the parties. [n short, a real estate agent usually does not have the actual authority to contract on behalf of the principal. As well, a real estate agent does not have the apparent authority to enter a contract on behalf of a homeowner. A principal could, of course, grant actual authority to a real estate agent to enter a contract on her behalf. However, such a grant of authority, to be effective, would need to be conferred by very clear, express, and unequivocal language.6

D<>fia realestateagentaa /Or <N 11tndoror thtp11 rchastro{proputy?

The case of real estate agents illustrates an important point. The term "agent" is often used very loosely to refer to anyone who represents another, and it is not always restricted to rela- tionshlps where the agent enters into contracts on behalf of the principal. ft is always necessary to look at the essence of a relationship rather than merely relyjng on what the parties call themselves. Just as agents are not always agents in the strict legal sense, so too, there may be an agencyrelationshlp even though the parties have not labelled it as such.

Critical .tftaf ..n · How is the authority of a real-estate agent determined?

It should be noted that a principal cannot ratify every contract that his "agent" enters. A principal can only ratify a contract if Ratif y

he does so within a reasonable time, To au hor 1e or appro11e

the principal had the capacity to create the contract at the time the agent entered into it and at the time of ratification, and

the agent identified the principal at the time of entering the contract.

A principal's ratification may be express or implied . For example, if a principal accepts a benefit under the contract, the principal will be bound by the contract.

Figure 13.3 summar izes the points contained in the preceding sections .

6 WUiam I r oc.t(lr RC"rJi Csfdf(\ Ag(.'ftCY law Jn CM1Jdtl, 2d ~d !Toronto Cars .... ett J9'-'.)4) at 99

NEL

329

FIGURE 13.3 Summary of Creation of Agency and Agent's Authority

Fiduciary duty

A duty imposed on a person who has a special relationship of trust with another

Fiduciary

A person who has a duty of good faith toward another because of their relationship.

How It Is Created

P. expressly or impliedly, appointsX as an A

Repn?sentation of Auth<>rity P represents to OS that Xhas authority to act as an A even though no actual authority given

Ext en sum of Existing Authority P represents to OS that A has authority in excess of actual authority given

Termination or Reduction of Authority P terminates or reduces Ks authority but does not give notice to OS

Actual: Expressand/orlmplied Apparent

Apparent

Acrual Apparent

Apparent

P adoptsactionsofX, and X retroactively becomes .an A

No authority until P adopts X's actions

Duties in the Agency Relationship Duties of the Agent An agency relationship created by contract imposes on an agent cert ain duties to perform . If the agent fail s to perform these duties, he is in breach of the contract. An agent is required to perform in accordance with the principal's instructions. In the event that the principal has not given any instructions as to how the per- fonnance is to be carried out, performance must meet the standard of the partic- ular trade or industry. For example, a real estate agent's duties would normally include appraising property, estimating the revenue and expenses of property the principal wishes to acquire, checking the dimensions of proper ty, advising the principal of the financi al implications of transactions, and ensuring that proper- ties the principal wishes to acquire d o not contravene bylaws or other municipal regulations, among other matters.7

Normally, it is expected that the agent will personally perform the obligations. However, there may be an express or implied provision for delegation- that is, the agent may be permitted to "download" responsibility for performance onto someone else. Forexample,itmaybethat Sonny and Dong have an understanding that Dong can have members of his extended family contact fa bric suppliers in remote regions of China.

An agent also owes a fiduciary duty to the principal. This duty requires the agent to show what the law d escribes as "utmost good faith to the principal." This duty is often expre.ssed as a "profit rule"- a fiduciary must not personally profit by virtue of her position-and a "conflict rule" - a fiducia ry must not place herself in a position where her own interests conflict with the interests of the principal. It is a breach of his fiduciar y duty for Dong to act as a buyer for both Sonny and Sonny's competitors. This is because Dong may be tempted to put the interests of the competitors a bove the interests of Sonny.

7 lb.</ at 218-219.

NEL 330

BIJSINESS APPLICATION OF' THE LAW

AN INSURANCE AGENT'S DUTY OF CARE

An insurance agent acting on behalf of an insur- ance company owes a duty of care to the insurance company. The insurance agent also owes a d uty of care to a client who relies on her to access insurance products . The content of the duty of care varies a ccording to the agreement between the agent and the client, and the surrounding circumstances.

In the leading case" on an agent's duties, the court identified two types of situations to con- sider in d etermining an agent's duty o f care to a client:

specific request: Where a client asks fo r specific coverage, the agent is obligated to exercise reasonable care and skill to get the coverage requested. [f the coverage i s not available or the agent cannot obtain it, the agent must in form the client so that he can take appropriate steps.

full coverage: Where a client asks an agent what insurance he should buy to be protected , the agent must in fo rm herself about the client's business, assess the foreseea ble risks, and insure

What an? the duties of an insurance agent?

the client against all fo reseeable risks. If there i s available coverage wh ich would have protected the client and the agent failed to obtain the insurance, the agent would be responsible for any loss tha t ensued .

Critical Analysia: What steps should an insurance agent take to red uce the risk of liability for breaching the d uty of care?

The content o f the fiduciary d uty will vary with the circumstances. However, as a general rnle, an agent has the d uty to

make full disclosure of all material info rmation that may affect the principal's position (e.g., Dong must disclose to Sonn y any good d eals or bargains on fab rics that he discovers).

avoid any confli ct of inte.rest that affects the inte.rests of the p rincipal (e.g., Dong must not go on a buying trip fo r Sonny a nd acquire clothes for a store that he is secretly running on the side).

avoid acting fo r two principals in the same transaction (e.g., Dong must not represent both Sonny and a fab ric seller in a sales transaction) .

avoid using the p rin cipal's property, money, or information to secure personal gain (e.g., Dong must avoid using contacts that he has

8 Fme·s P.<JytefS i'd v GCtleraJ AccKient Assurhrtee Co of CMada ll 977j Ol No 2435, 81 Olf~ (3d) 139 (Onl C.6. l.

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gained through acting as Sonny's agent to set up his own business, and he must not sell or use Sonny's customer lists and records for personal gain).

avoid accepting or making a secret commission or profit (e.g., Dong must avoid taking payments from fabric suppliers for d oing business w ith them).

There is not, however, an absolute prohibition against conflicts such as acting for two principals or using the principal's property. The agent simply must not do any o f these activities secretly, and he must obtain the fully informed consent of the principal prior to the event.

A fiduciar y duty is not unique to the relationship between a principal and an agent. This duty is present, as a matter of course, in many other relationships found in business such as the relationships between

lawyers and their clients.

accountants and their clients.

partners.

directors and senior officers of a corporation and tl1e corporation.

senior employees and employers.

The categories of fiduci ary relationships are not dosed. A fiduciary relationship can exist outside the settled categories and has been found to exist, in some circumstances, in other relationships Stich as the relationship between fina ncial advisors (e.g., bankers, stockbrokers, and investment counsellors) and their clients. A fiduciary duty can arise in any relationship where the facts indicate sufficient elements of power and influence on the part of one party and reliance, vulnerability, and trust on the part of the other.9 This is not to say that all "power-dependency" relationships are fiduciar y. In addition to the discretionary power to unilaterally affect the vulnerable party's legal or practical interests, there must be an express or implied undertaking to act with loyalty.1° For example, the relationship between an investor and a broker will not normally give rise to a fiduciary duty where the broker is simply a conduit of information and merely takes orders. However, where the client reposes trust and confid ence in the broker and relies on the broker's ad vice in making business decisions, and the broker has undertaken to act in the client's best interests, the relationship may be elevated to a fiduciary relationship.

Raso v Dionigi [1993) OJ No 670 , 100 DLR {4th) 459 {Ont CA)

THE BUSINESS CONTEXT: As a general rule, an agent is preclud ed from acting for both the vendor and d1e purchaser in the same transac- tion. There is, however, an exception to the rule. An agent may act for both and not be in bream of fiduciary d uties if full and Wrdisclosure of all

material facts has been made to the prin cipals prior to any transaction.

FAClUAL BACKGROUND: Raffaela Sir ianni and her husband wanted to invest in income-producing property. They informed her brother-in-law, Guerino Sirianni, who was a real estate agent, fuat they were prepared to invest $250 000 to $300 000. He located a sixplex owned by Mr. and Mrs.

~ HDdgkmson v Simms, U9!14J 3 SCR 371 ll7 DLR 14th) 161 JO Gillambos v Pe,<z. 2009 sec 48. 120001 3 sc~ 247

332 NEL

Dionigi. The sixplex was not for sale; however, Sirianni actively prevailed upon the Dionigis to sign a listing agreement. Eventually, they did s ign an agreement with Sir ianni's employer, a real estate agency. The listing price was $299900. Sirianni presented an offer of $270000 on behalf of "R. Raso in trust." Raso is the m:tiden name of Raffaela Sirianm. Sir ianni never told the llionigis that the purchasers were h is brother and sister-in-law. The Dionigis made a counteroffer of $290000, but this was not accepted. Sirianni persisted, and the llionigis ultimately accepted an offer of $285 000. A few d ays later, the llionigis became aware of the purchasers' relationshlp with the agent, and they refu sed to complete the action. Raffaela Sir ianni sued for specific performance of the contract, and Sirianni and the real estate agency sued for their commission.

THE LEGAL QUESTION: Did Sirianni owe a fidu- ciary d uty to the llionigis? If so, did he breach the duty? Would a breach preclud e rum from claim ing a commi ssion?

RESOWTION: Sirianni was not a mere middleman in the sense of introducing the parties; rather, he took an active role in the transaction. A real estate agent who acts for both sid es of a transaction has a fid uciary duty to both h.is principals to disclose all material facts with respect to the transaction. Sirianni breached his fiduciary duty to the llionigis

by f:tiling to disclose that tlle purchasers were his brother and sister-in-law and by f:tiling to advise of the amount of money that the purchasers had av:tilable to purchase the property. A fiduciary who breaches hls duty of disclosure of material facts is not entitled to prove that the transaction would have concluded had disclosure been made. In other words, it is immaterial whether the transaction is fa ir, and it is irrelevant whether the principal would still have entered the transaction if disclosure had been made.

Where an agent has breached a fiduciary d uty in thi s m a nner, the agent is preclud ed from claiming any commission. It also follows that the purchasers are not entitled to specific performance, as they not only had knowledge of the agent's breach but also actively participated in the scheme.

CRITICAL ANALYSIS: What are the distin- guishlng features of a fid uciary relationship? What consequences flow from the d e.signation of a relationship as a fiduciary one? If Guerino Sir ianni had disclosed to the llionigis just how much money M r. and Mrs. Sir ianni had avail- able to purchase the property, would this disclosure have been a breach o f h is fid uciary d uty to the Siriannis? What does this tell you about the perils of acting fo r both parties to a transaction?

Because professional relationships can be easily categorized as fid uciary, it is incumbent on those who offe r their services to others to understand the indicia of the fiduciary relationship. In addition, it is noteworthy that where fiduciary d uties are found to exist, the innocent party can look to a wider range of remedies than fo und in contract or tort. The whole range of equitable remedies is av:tilable, and with the spectre of these remedies, it is important for businesspeople to comprehend not only when a fid uciary relationshlp exists but also the full scope of the duties.

Duties of the Principal A principal's duties usually a re not as onerous as a n agent's and normally are set out in the contract creating the agency relationshlp. Such contracts usually obli- gate the principal to

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pay the agent a specified fee or percentage for services rendered unless the parties have agreed that the agent would work fo r free.

assist the agent in the manner described in the contract.

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rejmburse the agent for reasonable expenses associated with carrying out his agency duties.

jndemnjfy against losses incurred jn carrying out the agency busjness.

Insuran ce broker

An independent business that deals with severa l insurance companies and advises clients on the appropriate insurance coverage

In the example jnvolving Sonny and his buying agent, Dong, it may be that Dong has had to travel to various parts of China to make necessary purchases. In the absence of any agreement to the contrary, Sonny would be required to rejm- burse Dong for his travel expenses. This is a cost that rightfully belongs to Sonny since Dong incurred it on a buying trip that Sonny jnstigated and sent him on. Similarly, Sonny has an obligation- either express or implied- to rejmburse Dong for meals, hotel, and other reasonable expenses associated with the buying trip.

ETHICAL CONSIDERATIONS

COMPENSATION OF LIFE INSURANCE BROKERS

Until the early 1 990s, most major life insurance compan i es sold thei r produc ts through in-house sales agents. Now the majority of life insurance polid es are sold through indepen- dent insurance brokers.11 An insurance broker is an intermediary who represents several insurance compan ies and at the same time, provid es clients with advice on the best insurance product for tl1eir needs.

the retention of the broker's entire portfolio of business with the insurance company, the more likely the broker is to receive a contingency com- mission. f jnally, the insurance company may reward brokers with perks such as d eluxe trips to exotic locales for themselves and their spouses. These perks are often characterized as "educa- tional" as they are an opportunity for insuran ce companies to provide brokers with information about insurance products, but usually only a few hours during a week-long trip are set aside for this purpose.

Insurance companies provid e a number of incentives to get brokers to direct business to them. An upfront commission is paid when the sale is made. The commission is a percentage of the cost of the insurance and can vary depending on the type of life insurance, company policy, and the province. Life insurance has always been considered a tough sell; therefore, the upfront commission is high, often amounting to 30- 70% of tl1e price paid for the insurance. This commis- sion may be the only compensation received by the insurance broker. However, the broker may also receive a contingent commission based on the volume of business done with the insurance company, or based on the loyalty of the cus- tomer directed to the insurance company. The greater the profita bility and size of the business directed to the insurance company and the longer

Do~" see any problems with the incenti11es provided to insrll'ance brokers by insr1ron£e companies?

11 Tile terms insuran<x! ~en1 a'ld bfOket are o ften used interchang~bty. An 11tst.11a')Ce agen1, h0wev£!r. ls ge~ra!ly an e-noby.o?e 01 representat:\e of an inwraoce companyar'IO sotiC1ts Ous1 ness on behaU ol the company . . b. broker 1$ an 1ndepanden1 btJS1oess that deats v1 th SEo:ve1a1 insurance oompan~ and advises 11s dianis on appropriate 1nsu1()ncE! cover()Qe

334 NEL

Critical Analysis: Should there be limits or caps on compensation for brokers? Why or why not?

Source s: Gran1 Ror>ertson b Tar.'.) l='er!rnl:s, "V/Mt YO!H li»J1aoce Broker Doesn l "Vant You to K:lOY/- The Gobeand Mail (21 OeCQrnter 2010),

ontine <l'illp·//wvo1w.lhegbbeandrnt),tCOm!report•Orrbusiness/\•1Mt ·ya.i1·1~raoce,01cker-dc~nl·w~nl•you•tO•kOO\Y/arl :dct846Sl3/>,

C1a·g Harns, ·ccmm:ssion Controversy Ctiting for Cta1ily on Broker Compensation:· C<JtladiiNl Utlderwn:er 11 October 2004), O!\f,oe- <t\ttps //ww-N.caM1ian\Jnde1v,rit~r .<:a/f Mtures/comm :s-sicn -con tt'OVe rsy-ca1 l1~· lo1 <4.l1 .ty·ol't-b:o !E 1 -corn p(!rl'Sat On/>

Contract Liability in the Agency Relationship Liability of the Principal to the Outsider The most signific ant result of an agency relationship is that, when an agent enters into a contract on behalf of a principal with a third party, it is the principal, not the agent, who ordinarily is liable on the contract. To a large extent, discussion o f this point is simply tl1e flip side of a discussion regarding an agent's actual and apparent authority. Put another way, the principal's lia bility to the third party depends on the nature of the agent's authority.

As we have alread y seen under the discussion of an agent's authority above, Sonny is liable on the expensive fa bric contract even though Dong exceed ed h is actual authority. Dong went over the monetary limit his principal had placed on hi m, but the do ctrine of apparent authority applies. The outsider did not know about the limitation on Dong's authority so, on th is basis, Sonny is bound.

Liability of the Agent to the Outsider An agent who acts without authority and contracts with an outsider is liable to the third party for breach of warranty of authority. In this situation, there is no contract between either the prin cipal and the outsider or the agent and the outsider.12

For example, Sonny would not be bound by a contract Dong enters into on h is behalf to purchase a private jet. He could adopt- that is, ratify- such a contract, but otherwise he is not bound because such a contract is not withi n Dong's actual or apparent authority. Dong may be sued by the vend or of the jet because he wrongly claimed to have the authority to act on Sonny's behalf in the purchase of a jet.

An agent may also be bound when he contracts on his own behalf to be a party to the contract along with his principal.13

For example, if Dong negotiated the contract such that both he and his prin- cipal were ordering the fabric and promising to pay for it , then he has as much liability to the outsider as Sonny. They are both parties to tl1e contract - Dong is contracting on his own behalf as well as on Sonny's behalf.

12 SuPf> r>Ote 2at 159- 162. 13 Pe1e1 'Nalls !:.- rMB R<2yr.dds, Bow!>!edd b Re)'ndds on Agmicy, 20th ~d (London Sv.~el .f:: t~xv.~l

2014) at 540

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335

Warranty of authority

A representation of authority by a person who purports to be an agent.

Undisclosed principal

A pnnc1pa l whose 1dent1ty 1s unknown to a third party who has no knowledge th<l t the agent 1s acting in an agency capacity.

Liability of an Undisclosed Principal An agent may incur liability when he contracts on behalf of an undisclosed principal. A prin cipal is said to be "undisclosed" when the third party d oes not know that she is d ealing with an agent at all and assumes that the pa rty she is dealing with is acting only on his own behalf. From the perspective of the outsider, there is no principal waiting in the background.

When the agent is acting fo r an undisclosed principal, the general rule is that the principal is still liable on the contract so long as the agent is acting within his authority."' The agent has no liability, however.

For example, assume that, in negotiations with outside rs, Dong represents hi mself nei ther as an agent nor as a prin cipal an d that he could be acting in either capacity. In such circumstances, Sonny will generally be liable on the con- tract , but not Dong. This is a simple application of the general rule stated above.

The general rule, however, has been subject to qualific ation that may operate to render the agent liable on the contract in certain circwustances.15 One such qualific ation relates to representations mad e by the agent.

Suppose that for the purposes of buying some special fabric, Sonny wishes to keep his identity a secret. He thinks that Dong, his purchasing agent, will get a better price if the seller (the outsider) is unaware o f his identity. '6

If Dong pretends to be the principal- representing to the outsider that he is actually the owner or proprietor of the suit business- and d oes not disclose the existence of Sonny, hi s principal, then Dong runs the risk of being personally liable on the contract that is conclud ed . For example, if the written contract expressly in dicates that Dong is the prin cipal, the parol evidence rulel7 may operate to prevent the admi ssion of evidence of an undisclosed principal."' In such circumstances, Dong is liable.

A variation on the undisclosed principal is the unnamed principal. "' If Dong tells the seller that he is acting for a principal but thathe is not at liberty to reveal that person's identity, Sonny will be liable on any contract he enters into with the seller. In such circun1stances, Dong himself has no liability on the contract because the outsider was fully aware of his status. The outsider did not know the identity of his principal but d ecided to enter into a contract anyway. If the outsider did not want to d eal with an unnamed principal, the outside r could simply have refused to enter the contract in the fi rst place.

Liability of the Agent to the Principal When an agen t exceeds his authority, the prin cipal can sue the agent for breach of thei r contract- assuming that there is such a contract in place. Because Dong exceeded his authority in purchasing tl1e fabric, Sonny could sue him for breach of their agency or employment agreement.

Figure 13.4 summarizes the points contained in the preceding sections.

14 Supra no1e 2 at164 ... 165. This 1\J\e ha!> been suo.iec1 to ~vyc1 llCiSmas being iocom.1s1en1 with thegener~ priocipt.es or contract ltrw.

15 Supril note 2 at 166-168. 16 This is a not uncomlT'IOn. prac tce ,n 1ne 1ea1 es ta!(! inous11y, partic:ut.l1ty v1nen a deveklper wishes to p. . .ucnase

seve1~ tracts of ta:\d. 11 Tn.a pa rot ev1dmce rule tS dlfl:ussed in CMple1 ?. 18 Supra no1e 2 a1166-l 68. Tha tarw tStJllSt?ll~C 11l this~rM 11 isundea1 when t'la t.lv1v11t pennil evid~oce o f an

tindiSdOSOO princ:ipat. 19 Supra no1e 13 a1 33. As Bov1S tea:J no1es. t(!1rnin0k>gy in this a1~a is 001 con.'>ISl(!ndyempbyOO by the JtJC~iary

aoo ~gal v111 ters

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FIGURE 13.4 Su mmary of Contract Liabi lity in Agency

(1) actual authority !, 0 .... ....

.... .... ....

.¥ .... ....

....

• A acts within actual au thority. Pis liable to outsider.

(2) 0 actual authority ... ........ .... ........ ........

.... ........ ........

,...!-0

A exceeds actual authority but acts within apparent authority. Pis li able to OS u nless OS knew or ought to have known of any limitation on A's au thority. A is liable to P for breaching authority.

(3) 0 actual authority 0 ---- apparent authority -----1~

A exceeds both actual and apparent authority. A is liable to OS for breach of warranty of authority.

(4) .... .

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........ ....

• .¥ ....

.... .... .... ....

A acts without P's au th ority. Pis liable to OS if P adopts contract.

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Krawchuk v Scherbak, 2011 ONCA 352, 332 DLR {4th) 310

THE BUSINESS CONTEXT: In the early 1 990s, the Ontario Real Estate Association (OREA) cre- ated a seller's disclosure form, the Seller Prop- erty Information Statement (SPIS) 20 to be used in residential real estate transactions. Although the form is voluntary, the OREA strongly encourages its use (and some local real estate boards will not list property without the SPIS form). The form, with 49 q uestions about the condition of a home, is controversial. I ts propo- nents argue that it protects the public and real estate agents. Others argue that the form is too complex, req uiring sellers to accurately answer questions of a technical and legal nature.

FACTUAL BACKGROUND: In 2004, T imothy and Cherese Scherbak listed their house for sale with real estate agent Wendy Weddell of Re/Max Sud bury Inc. The house, built on a peat bog, had experienced significant settling over the years. The floors were sloped and the foundation showed signs of cracking and repair. In addition, in the basement, there was a pit covered with a steel plate. The sewage from the house flowed into the pit and then drained into the municipal sewage system. The Scherbaks, with the assistance of Weddell, completed the SPIS form. In response to the question: "Are you aware of any structural problem?" they disclosed the following: "NW corner settled- to the best of our knowledge the house has settled . No further problems in 1 7 years:· In response to the question, "Are you aware of any problems with the plumbing system?" the answer was, "No."

Zoriana Krawchuk, a fi rst-t ime buyer, attended an open house conducted by Weddell. She retained Weddell as her agent (with the consent of all parties) and purchased the house for $110 1 00. After mo\ring in, she discovered that the foundation walls were sinking into the ground, resulting in the failure of proper support for the floor joists and the building above. Consequently, tl1e house had to be lifted off the foundation, the foundation had to be

replaced, and the house was placed on the new foundation. This work also caused signifi cant cracking to the interior walls. The cost of the remedial work, including the cost to address plumbing problems, was $1 91 414.94- almost double what Krawchuk had paid for tl1e house. She sued the Scherbaks, Weddell, and Re/Max Sud bury for m isrepresentation in failing to dis- close the defects in the house and Weddell and Re/Max for negligence for failing to ensure that she got a home inspection.

At trial, the court found the Scherbaks liable for negligent m isrepresentation. Even though the SPIS form stated that representations in the SPIS were not warranties, the Scherbaks were making representations about the prop- erty that were meant to be disclosed to buyers and it would be reasonable for buyers to rely on these representations. In these circumstances, ther e existed a special relationship between the Scherbaks and Krawchuk that gave rise to a d uty of care. The Scherbaks had breached the duty of care by not fully disclosing the extent of the structural problems. They knew the

~\That are the risks for the agent in a real estate transaction?

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338 NEL

problems were not restricted to the northwest corner and were more serious than disclosed. Also, they breached the d uty of care by fa iling to disclose that they regularly experienced problems with their plumbing, including sewer backups once or twice per year.

The court dismissed tl1e clai m against Weddell and Re/ Max. The court stated that Weddell had merely relayed in fo rmation told to her by the Scherbaks , had no reason to doubt the veracity o f tl1eir representat ions, and had no obligation to in q u ire about in fo rmation relevant to the con dition of the house. Further, the trial ju dge rejected the a rgument that she breached her d uty of care by faHing to recommend professional advice on structural problems, as Krawchuk knew a nd accepted the r isk of not having a satisfac tory inspection. Krawchuk and the Scherbaks appealed.

THE LEGAL QUESTIONS: Are the Scherbaks liable for negligent m isrepresentation? Are Weddell and Re/ Max liable for negligent mis- representation and were tl1ey negligent in their representation of Krawchuk?

RESOLUTION: The Court of Appeal upheld the trial court d ecision with r espect to

tl1e liability of tlle Scherbaks fo r negligent m isrepresenta tion. However, it reversed the trial judge's d ecision on the liability of the real estate agents and held them equally liable with the Scherbaks for Krawchuk's damages. The Court of Appeal refer red to the Real Estate Council of Ontario's Cod e of Eth ics, wh ich states that an agent is required to "discover and verify the pertinent facts relating to the property .. ." and an agent "shall encourage the parties to a transact ion to seek appropriate outside professional ad vice when appropriate." Applying these principles, the court held that Weddell had breached her duty of care i n that she should have done more to protect her client. Given her awareness of the settling problems, she should have inquired into the sellers' disclosure that the foun dation issues were resolved years earlier. She also should have recommend ed, in the strongest terms, tlrnt Krawchuk either get an in dependent inspect ion before submitting an offer or make the offer conditional on a satisfactory i nspect ion. "The failure to do either was an egregious lapse."

CRITICAL ANALYSIS: Do you think this case creates any new d uties of real estate agents?

Tort Liability in the Agency Relationship As a general rule, an agent is personally liable for any torts that she commits. The fac t that she may have been acting on behalf of another is no defence in a tort action.21

The principal is liable fo r any tort committed by the agent while the agent is acting within the scope of the agent's authority.22 Put another way, a principal is vicariously liable for an agent's actions so long as the agent is acting within express, implied, or apparent authority."

For example, assume that Dong is given the responsibility for selling Sonny's inventory of returned suits to discount outlets. Suppose that Dong represents to a discount house that some of these suits are from a fa mous d esigner's latest

21 SuPf> r>Ote 2 at 202 22 Sup111 n01~ 2 al 195 ... J96. 23 Tile ~uest10f\ of viCariOus l1abl1ly arising from a;iency priocip(es overtaps v.lith 1ne appf1Gail.OI\ of the doc::t1i~

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1n r{4~tiO!\ to 1heac1s of empby(!es al'K'i indeoendent con1r.x:101s. r-01 exam~. a principal is t1a!'>le ror 1he octs of an agent ollly I Lile agent v1as achn-;i v111hin his <>:ltJ~ and apparent <l!;tho1Hy, hcweve1, 11 t~ agent has the s1.a1us of anempt-Y;oo. 1heempioye1 is f 1ab4a 11 ti'M:! oct v1c)S comm ued in the cou!Se of empklyrrcn.1. Atlhough a p1iocip.-'l1 may 001 betiabfe fo11heagenrs aclS bec&Jse they~re outside the agent's auth01ity, too em~yer may batable IO! the.YJtlnls acts 11 tha a-,Je?!ll was an~m040~eacting \ ... ithin t~ scope or h>:S (!ltipbyrmnt. Tile tabf1ty ol cmp(O)"(!rs (or 11'x:! tieliOl\S of em~es and independent con1rac1orS iS ex~1ed ii\ Cnaota1 20.

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collection and, based on this representation, the discount house purchases a large number of suits. In this situation, Dong has committed the tort of d ecejt by representing the suits as suits from a famous designerwhen in fact t11ey are Sonny's old stock. Dong is personally liable for committing a tort. Sonny is also liable for Dong's actions since they were commjtted within the s cope of his authority.

BUSINESS APPLICATION OF THE LAW

MANAGING THE RISK OF USING AN AGENT

The agency relationship creates considerable risks for the principal in both contract and tort law. As illustrated in this chapter's Business Law m Prac- tice scenario featuring the owner of an Internet tailoring business, a principal may be liable on contracts that a re unwanted . Thjs may occur when an agent actswithln his actualauthoritybut the principal d oes not like the resulting contract, and when the agent exceeds his actual authority but acts within his apparent authority. A principal is also liable for torts committed while the agent is acting within actual or apparent authority.

While it is impossible to totally elim jnate the risk associated with using an agent, a prin- cipal may manage the risk by understanding the nature of the agency relationsh ip and how it exposes the principal to risk. The principal can reduce her risk by do ing t11e followmg:

act with care in engaging an agent. Check the background of prospective agents and only hire t11ose who can be trusted to act within thej r authority.

clarify the agent's authority. Spell out the agent's aud10rity in the agency agreement so that t11e agent und erstands what he can and cannot do on behalf of the principal. monitor the actjvities of the agent. Require the agent to report on her activities to help

What is the best way of managing the risk of using an agent?

ensure that she stays within the limits of her authority.

review communications with third parties. Make sure both direct and indirect interactions with third parties d o not create apparent authority for the agent.

inform third parties o f the termination of an agency relationship. Ensure third parties know that an agency relationship no longer exists so that the ex-agent cannot bind the principal.

0-ftical AnalysiQ· Since the agency relation- ship creates considerable risk for the principal, why not simply forgo the use of an agent? In other words, why not e)jminate the r isk by not engaging the services of an agent?

Termination of Agency Agreements An agency agreement can come to an end in a number of ways:

the parties may agree to bring thejr relationship to an end. For example, Sonny and Dong may simply agree to end their relationship.

one party may give notice o f termination to the other. 24

24 As Oor19 1s Sof\n'}..-s em~e. the 1u~s or 0011ce in >?mptoymen1 retationsh•ps ari.'! app(1~b&'.! Too~ rutes are diSC\JS~d 1nChapl<!r 21

NEL 34 0

an agency relationship can cease by operation of the law. Most commonly this occurs due to the death, dissolution (in the case of a corporate agent and/or principal), insanity, or bankruptcy of one of the parties.

When an agency agreement is terminated by the parties, the principal should give notice to third parties so that customers do not assume that the rela tionshlp is continuing. In the absence of such notice, the principal may face liability to outsiders, based on hls agent's apparent authority.

BUSINESS LAW IN PRACTICE REVISITED

1. What is the nature of the legal relationship between Sonny and Dong?

Dong is an employee of Sonny's busine.ss. He was granted the power to purchase fabric and engage tailors in China on Sonny's behalf. Therefore, he is considered in law to be an agent, a nd the relationshlp between Sonny and Dong comprises both employment and agency.

2. Is Sonny bound by the expensive fabric contract Dong entered into with the Chinese supplier?

M uch of thls chapter has been d evoted to Sonny's liability on the contracts Dong m ade on hls behalf.Agency law states that the principal, Sonny, is one party to the contract , and that the other party is the outsider, the fabric supplier. The agent, Dong, is merely the means by which the parties enter the contract. Sonny would not be liable for Dong's purchase if the supplier knew or ought to have known that Dong was not authorized to make the purchases he did. But a manufacturer is not expected to know or suspect that Dong was lim ited to entering into contracts not exceeding $25 000. Sonny is bound, but he can hold Dong liable for breaching hls agency agreement in that he exceeded hi s authority. As noted, however, this will not relieve Sonny of hls liability to the fa bric supplier, and it is probably not an attractive course of action, as Dong may not have the means of satisfying the debt As well, suing one's agent can create a lot of ad verse publicity.

3. Has Dong breached any duty owed to Sonny by representing other businesses in China?

Dong is an agent for Sonny, the principal. An agent automatically owes a fidu- ciary duty to hls principal. There is no requirement that the d uty be specified in the agency agreement or in an exclusive representation contract. The fiduciary d uty requires Dong to avoid conflicts of interest unless he has fully disclosed hls conflict to Sonny and Sonny has agreed to the conflict. By acting for competitors w ithout Sonny's consent, Dong is in a conflict o f interest and in breach of hi s fid uciary d uty.

CHAPTER SUMMARY Thls chapter introd uced one of the cornerstone relationshlps in business. Agency is a relationshlp that allows one person's actions to be attributable to another. In thls way, agency permits one party to represent and b ind another in contractual matters. Thus a business may use agents in many fac ets of its operations, such as buying, selling, leasing, and hiring. As a practical matter, without the advantage of agency relationships, business could not be cond ucted on any sigrufic ant scale.

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The agencyrelationshlp most commonly comes into existence when a principal grants authority to d1e agent to act on her behalf. The law, however, recognizes an agency relationship when the principal represents to another that she is repre- sented by an agent- agency by estoppel- or when the principal adopts a contract made on her behalf by someone who is not her agent- agency by ratific ation. In thls area, it is the substance of ilie relationship that is impor tant, not what parties call d1eir relationshlp. An agent's authority to act on behalf of a principal varies. An agent may have actual authority. This is the authority that he is actu- ally given by the principal o r that is implied from his position. Alternatively, an agent may have apparent authority. This is the authority th.at a thlrd party would reasonably believe the agent to have based on the principal's representations. The scope of an agent's apparent authority is fact -specific and therefore varies with the circumstances.

An agent has both express and implied d uties to hls principal. Most impor- tantly, an agent has a fiduciary duty to act in ilie best interests of ilie principal. The principal also has express and implied duties, particularly the duty to com- pensate the agent for ser vices rendered and for costs associated with the agency relationship.

Agency operates in such a way iliat the principal is generally liable on contracts entered into by the agent on her behalf. A contract is formed between the prin- cipal and the outsider, and the agent drops out of the transaction. Though there are a number of potential problems, the agency relationshlp generally functions well and according to plan. However, it is possible th.at agency can operate in unde- sired ways. For example, the principal may be liable on unwanted contracts, as when the agent negotiates a poor contract or exceeds his actual authority but not his apparent auiliority. So, too, a principal may be liable for torts committed by an agent. Thus, ironically, the same person who can help a business grow and prosper can lead that same enterprise to financial loss. The key point is d1at agency, like other aspects of a business, needs to be managed and monitored: businesspeople must choose an agent wisely, instruct rum carefully, and review hls work regularly.

CHAPTER STUDY

Key Terms and Concepts actual authority (p. 316 )

agency (p. 313)

agency by estoppel ( p. 3 18)

agency by ratification (p. 320)

agent (p. 313)

apparent authority (p. 317)

fid uciary (p. 322)

fiduciary duty (p. 322)

insurance broke r (p. 326)

law of agency (p. 3 15)

outsider (p. 3 14)

power of attorne y (p. 315 )

principal (p. 313)

ratify (p. 321)

undisclosed principal (p. 328)

warranty of authority (p. 327)

Questions for Review 1. What is agency? Give an example.

2 . Why would a business use an agent to act on its behalf?

NEL 342

3. How is an agency relationship entered into?

4 . What is the difference between the actual and apparent authority of an agent?

5. When will an agent have implied authority?

6. What is meant by agency by estoppel? How does agency by estoppel arise?

7. How is an agency by ratifi cation created?

8. Is a principal permitted to ratify any contract entered into by an "agent"? Explain.

9. Is a real estate agent a typical agent? Explain.

1 0. What are the duties of the agent?

11. What are the duties of the principal?

12. Do all business ad visor s owe fid uciary duties? Explain.

1 3. When can an agent be personally liable on a contract entered into on behalf of a principal?

1 4. Describe how an agent can be liable to the principal.

1 5. When is a principal liable for torts committed by an agent?

1 6. How can a principal manage the risk of using an agent?

1 7. What is an undisclosed principal?

1 8. How may an agency relationship be terminated?

Questions for Critical Th inki ng 1. A real estate agent may sometimes act for

both the buyer and the seller in a real estate transacti on. What are the advantages and disadvantages of an agent acting for both parties?

2 . Is it reasonable to hold principals responsible for contracts formed with only apparent authority? What are the tradeoffs?

3. Is a "real estate agent" an agent in law? Explain.

4. In the Ethical Considerations box on page 3 26,

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it was noted that life insurance brokers may receive a variety of compensation from insurance companies for the business that they direct to them. In the standard disclosure letter gjven to consumers at the time of purchasing a life insurance policy, there is usually a line stating that some companies may provide compensation to the insurance broker such as travel incentives

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or educational opportunities, in addition to commissions. Does disclosure in this manner address the criticism that such travel incentives and ed ucational opportunities amount to a conflict of interest?

5. Do professionals such as financial advisors, stockbrokers, banker s, and investment counsellors owe a fiduciary d uty to their clients? Explain.

6. The agency relationship creates considerable r isks for the principal. What is the nature of these risks in both contract and tort? How can these r isks be managed? Does the agency relationship create risks fo r the agent? Explain.

Situat ions for Discussion 1 . Perry Logan owned a small office building

in suburban Halifax. As he was nearing retirement, Perry listed his building fo r sale with Alice Marshall, a real estate agent. While Perry was on an extended visit to Florida looking for a retirement property, he authorized Alice to sell the building on his behalf provided the offer was for at least $600 000. Alice showed the property to Dee Shannahan d uring the ter m of the listing agreement but Dee did not make an offer.

Two weeks after the listing agreement between Perry and Alice expired, Dee made an offer to purchase the property for $625 000. Alice accepted the offer on behalf of Perry. Is there a contract between Perry and Dee? Explain.

2. RCD Lt d sells household appliances, including washers, dryers, dishwashers, stoves, and refrigerators. Most of RCD's customers are developers of apartment buildings and condominium complexes. RCD's sales representative is Alastair Du. He is authorized to make contracts with buyers provided the value of each contract does not exceed $100 000. Alastair ignored the restriction on his authority and concluded a contract to sell SO sets of washers and dryers to BES Developers at a price of $500000. BES placed its order on RCD's application form, which states that contracts over $1 00 000 require written approval of RCD's vice president of sales, and Alastair on behalf of RCD accepted

the order. RCD delivered the 50 sets of washer and dryers, and received payment from BES. Within a month of delivery of the washers and dryers, BES complained that the washers vibrate excessively and the dryers overheat, and they have caused damage to the apartments in which they were installed. RCD claimed to be protected from any liability for the faulty machines because Alastair had no authority to bind RCD to this contract. Does RCD's argument constitute a valid legal defence to a claim against RCD by BES? Explain.

3. Greg and Erin Downey sold their home and invested the net proceeds of $100 000 with Wayne Davis. They contacted him as he had previously placed their life insurance and RRSPs with Manulife Financial and was known to them as a Manulife investment advisor. The Downeys were unaware that Davis had a non-exclusive agency agreement with Manulife, wh ich provided that he could not bind Manulife without written authorization. The Downeys gave Davis a cheque for $100000 and Davis filled in the payee as Darwin Capital Corporation. The Downeys believed that they were investing in a Manulife product or one guaranteed by Manulife because they believed that Davis was a Manulife employee and sold only Manulife products. When the investment became due, the Downeys received a cheque from Darwin Capital, which was dishonoured. It turned out that Dan<lin Capital was a sham, and the Downeys lost their entire investment. In a subsequent legal action, Manulife was held liable for the Downeys' losses even though Davis was not an agent of Manulife and had no actual authority to bind Manulife.l> On what basis do you think that Manulife was liable for the investment losses of the Downeys? What would the Downeys have needed to establish to hold Manulife liable for their losses? Explain. How can companies like Manulife minimize the risk of liability for the actions of salespeople like Davis? How can companies gain the benefits that accrue from representation without incurring the risk of liability?

4. Kelly Gregson (a real estate agent) contacted Rhonda Meadows (a corporate lawyer) to get a

25 Dohbn v °"'"" C•'PI'•~ COip 2003 A6CA 3.16. 20 AltaLR 141 hJ 11

listing for the sale of Meadows's home. Meadows did not list the property but allowed Gregson to show it to potential buyers. Immediately following a showing, Gregson announced that she had an offer to purchase but would not provide the details until Meadows agreed to give her the listing. Meadows agreed and subsequently entered into an agreement of purchase and sale with the buyer. Ultimately, however, she refused to proceed with the transaction. Gregson sued for the lost commission of almost $18 000, relying on a clause in the listing agreement that provided for payment of the commission for an aborted deal so long as the non-completion was not due to the fault or neglect of the agent. Meadows argued that she was not liable for the commission as Gregson was in breach of the listing agreement by failing to d isclose that she was representing the buyers. Gregson countered that the listing agreement contained a clause allowing the agent to act as a dual agent in the transaction. Meadows noted that the clause requires the agent to inform the seller in writing of the dual agency at the earliest opportunity and prior to any offer being submitted and that Gregson had not done so. Gregson argued that she had made it clear to Meadows that she had a relationship with the buyers as she had stated she had a "buyer under contract" who had approved financing and a commitment to purchase. Also, she had left a package with Meadows that included an agency brochure and in any event, as Meadows was a corporate lawyer she should have known about the dual agency. Further, Gregson argued that any breach of the agreement was not material and not prejudicial to Meadows and was not the cause of Meadows cancelling the transaction as there was no evidence that Gregson favoured the buyers to the de trim en t of Meadows. 26

Evaluate the strength of both parties' arguments. Which party has the strongest arguments? Explain.

5. Mollie Morrow was a real estate agent working for Commercial Properties. She was approached by Shane Jacobs to find a commercial building in downtown Halifax. She did some investigating

26 PartMrsRea!ty Lldv MOl'lo"'· 2014 ONSC ! 24 236ACWS 1301 531

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344

and found a sujtable property owned by Haldane Properties (HP). She approached the owners about selling, and they agreed to pay a commission of 2% jf she acted as their agent jn the sale of the building. After considerable negotiations, the sale was concluded for $6 million. Unknown to HP, Mollie had agreed to pay half of her commission to Shane. When HP learned about this, it refused to pay the commission. Mollie argued that HP had received what it wanted out of the deal; she had made a sacrifice by giving up part of her commission; and her sacrifice ensured that the deal went through. In short, her actions helped, not harmed, HP.27 Is Mollie entitled to the commission?

6. Hamilton Utility Inc. appointed Juan Abrams as one of its corporate officers. Juan rented cars from Quality Cars Ltd, a car rental business. The rental agreements named Juan as renter, and he signed the agreements descr ibing himself as company secretary of Hamilton Utility. Juan, however, used the cars for personal purposes and not for company business. Hamilton refused to pay the charges, as Juan had not been given any authority to enter contracts on its behalf.28 Is Hamilton liable to pay the car rental charges? Explain. What would be the result if Hamilton appointed Juan to a secretarial position?

27 Ba~d on Oca>n 0ly Ret1Uy Lrd v A fJ M J-klld.ings Ud et tJJ {1987), 36 DLR {4th) 94, U987] BCJNo 593 lBC<'A).

2S Pt1nor;)lf'Jt1 ~.'optner'ltS K;u1kJ!o1dJ Ud v F1del:s Furn1Sh1ng ftlbncs Lid, fl97U 20B 7ll U971) 3WLR440 ICAI

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7. Sriru Nair owns and operates a grocery store in Fort McMurray, AB. He has a number of employees including Ragiru Sharma, who is his assistant manager. Ragini has very limited authority to act on Sriru's behalf. One day while Sriru is out of town, a distributor of prod uce offers Ragiru a great deal on fiddleheads, a de]jcacy from New Brunswick . Due to tl1e perishable nature of fid dle heads, tile deal is only available for one day. As Sriru's grocery store caters to many transplanted New Bnmswickers, Ragini places an order. When Sriru returns the next day and the fiddlelleads arrive, he rejects them on tile basis that he has never heard of anyone ever eating fid dle heads. ls Sriru bound to accept and pay for the fid dleheads? How should businesses like Sriru's deal with the r isk of employees exceeding their autllority to act on behalf of the business?

8. Ty Sharim has been employed as an agent for Farley's Game and Fishing Lodge Inc. for tile past 10 years. Farley's r uns an exclusive hunting and fi shing camp in northern Ontario. Ty's contractual duties include advertising tl1e camp and soliciting customers at fish and gun shows and conventions in North America and elsewhere. One weekend while on a fi shing trip with his family, Ty came across a small fishjng camp that was for sale. As Ty has always d reamed of owning and operating his own business, he is thinking of putting in an offer on tile camp. Is Ty entitled to put in an offer to purchase the camp, or must he inform Farley's of the camp? Would tile answer differ if Ty terminated his relationship with Farley's before offering to buy the camp?

OBJECTIVES After studyi ng this chapter. you should have an understanding of

• the charac teristics of the m ajor forms o t business organization

• the advantages and disadvantages ot the m ajor forms o t busi ness organiz ation

• the legal consequences of a partnership

• methods of arranging business activity

BUSINESS LAW IN PRACTICE

Luke Bailey grew up in rural Saskatchewan and dreamed of playing in the National Hockey League (NHL) . Unfortunately, after a few years of playing semi-professional hockey in the southern United States, Luke was forced to give up on his NHL aspirations because of a chrome injur y. He returned to Canada and settled in Calgary. Luke maintained his love for the game but it was now channelled into playing with a very active pick-up league that was populated by a wide circle of friends, colleagues, and other like-minded individuals. Luke was soon prevailed upon to also manage the league but quickly became overwhelmed by orgaruzational headaches and fi nancial stresses associated witl1 the job. Aside from the time commi tment required to contact people in advance and at the last minute (to see if they were going to show up) and the financial cost of no-shows, Luke noticed that confusion over ice times led to spotty attendance and the fol ding of teams. Luke thought there had to bea better way. Not being technologically savvy, Luke contacted a friend of his, Raina El Khoury, a computer engineering grad uate, to help devise a solution to the problems he had observed .

For the next 18 months, Luke and Raina worked on the s cheduling issues facing pick-up hockey leagues in general and came up with a very prom ising solution.1 Their program design permitted the con- tact information ofleague players, as well as each team's schedule and roster, to be uploaded on a web platform- otherwise known as a con- tent management system. Once the data was uploaded, managers, orgaruzers, and coaches could essentially put their team on autopilot. Contacting players became easy, including by text messaging. Col- lecting registration and d rop-in fees also went more smoothly. And since the system also integrated with mobile devices and desktop cal- endars, players had read y access to their sched ules at all times. Excited by their innovation, Luke and Raina began marketing their product byword-of-moutl1 to various pick-up leagues in we.stern Canada . The results were amazing. They soon had several dozen hockey leagues' teams interested and paying for the service. But most encouraging was that teams in other sports were also interested, as well as orga- nizations as diverse as church groups and poker players. For the next

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34 6 NEL

six months, Luke and Raina ran the team management system out of Luke's base- ment. Rajna hand led the techrucal s jde of the service, and Luke handled the cash from the subscrjptions and djd a bjt of marketing. The bus jness grew rapjdly with inquiries from other parts of Canada, the Uruted States, and overseas for the ser- vice. It actually became more business than Luke and Raina could handle.

Believing that they had a hit , Luke and Raina contacted a business incubator for ad vice on further developing and marketing their prod uct. Sandra Higgins, of Envision Business Labs, metwith Luke and Raina and introd uced them to Roger Wiley, a retired businessperson who was willing to invest a maximum of $ 200000 from his retirement fu nd. He was also willing to help out in the business as he had considerable contacts with various organizations that might be interested in the product. Within thjs context, Sandra obser ved to Luke and Raina that they were apparently runrung their business as a partnership but such a business vehicle was unlikely to be the best form for an expansion, especially given Roger 's require- ments. She suggested that they evaluate together how best to proceed .

1. What forms o f business organization are available for carrying on Luke and Raina's business?

2. What are the major considerations in choosing a particular form?

3. What form is best for Luke and Raina's business?

Forms of Business Organization Choosing how to own a business is a critical d ecision because it determines in large part who

is financially liable for the business.

shares in business profi ts and other assets.

makes and is accountable formanagement d ecisions.

The Sole Proprietorship The sole proprietorship is the oldest form of business organization and the one most often used by small businesses. It is a particularly popular choice for the home- based enterprise. From a legal perspective, it also represents the simplest form of business 01ganization because there is no legislation pertairung to the sole propri- etorship as such. A discussion of tl1e legal consequences of tlus form of business is a discussion of the rights and liabilities of an individ ual. Luke, Raina, a nd Roger could run their business as a sole proprietorship with one being the sole proprietor and the others bejng employees and/or creditors. The following considers the implications of a sole proprietorship (and assumes Luke to be the sole proprietor).

Financial Liability The financial consequences to Luke should he conduct !us business as a sole pro- prietorshjp are both straightforward and sigruficant: any obligation of the busi- ness is Luke's personal obligation. Consider the following examples.

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The bank loan. If Luke decides to borrow money from the bank, it is Luke who promises to repay tl1e loan, not Ills business. This is because a sole proprietorshjp, unlike a corporation, is not legally capable of borrowing money on its own. Luke is the business; Luke is the d ebtor and is responsible for the debt.

347

Sole proprietorship

An unincorporated business orga niza ti on that has only one owner.

Unlimited Uability

Unrestricted legal responsibility for obligations.

Suppose that the business begins to falter and the loan cannot be repaid . The bank will take the appropriate legal steps- discussed in more d etail in Chapter 26- to recover as much as it can on the loan. All of Luke's business and personal assets are subject to the d ebts of the business. Also, any judgment against him can be kept alive in d efi nitely unless he de d a res b a nkruptcy, in which case, most judg - ments against him will be discharged. However, Luke's personal creclit rating will be ad versely affected, now and in the future. This may make it next to impossible ever to start another venture that would depend on Luke's creclitworthiness.

The breach of contract. If at some point the busine.ss supplies a defective system to a customer, Luke is in breach of contract. This is because, as noted above, the business cannot enter into a contract. As in the prececling example, Luke is the one who will be sued, and it is Luke's assets that are at r isk.

In short, a sole proprietor has what is known in law as unlimi ted liability. Regardless of what the owner has invested in his business, his personal assets- and not just the business assets- may be seize d to pay the outstancling debts of the business. Unfortunately, these d ebts can far exceed anything anticipated when the business was started.

Profit Sharing The sole proprietor not only bears the risk of fai lure, but also enjoys this advan- tage: all the profits after taxes a ccrue to the sole proprietor alone. If the business is a runaway success, Luke reaps all the benefits. The profit motive can be a strong in centive for the sole proprietor to seek to ensure the success of the business.

Decision Making The sole proprietor, having no partners and no board of clirectors to report to, can make business decis ions very quickly and in dependently. She has a lot of personal freedom to d o exactly as she pleases concerning all aspects of the business, even if it means decicling to cliscontinue business activities altogether. Should the owner clie, the busi- ness is terminated- in other words, the sole proprietorship has a limited life span.

What all the disadvantages of a sole proprieto rsh ip?

NEL 348

There are, of course, disad vantages to working alone in this way: few people are good at everything, yet the sole proprietor is responsible for ever y aspect of tl1e business, from buying and selling to financin g and advertising. Anoilier serious consideration is iliat ilie sole proprietor's absence ilirough illness or incapacity can adversely affect ilie business because so much of ilie enterprise revolves around this one individual. Though the sole proprietor may hire employees, such as Raina or Roger, he has linlited opportunities for advancement, since by d efinition a sole proprietorship is a one-person show. As a result, iliese workers may not be particularly motivated or able to provide a high level of commitment.

Sources of Capital A major difficulty wiili "going it alone" is that the sole proprietor has linlited access to capital. Since the proprietor has no business partners, he is limited to his own assets and whatever credit he can draw on to finance tl1e operation. Usually this is less than what would be available if more than one person was involved, as in a partnership, for example.

Taxation Because a sole proprietorship is not a legal entity separate from the owner, there are no formal or specialized tax rules governing it. Profits and losses are simply reported on tl1e owner's personal income tax return. This may be favour- able or unfavourable d epending on ilie taxpayer's circumstances, including wheilier the owner's marginal tax rate is higher or lower than ilie applicable corporate tax rate.

Transferability A sole proprietorship cannot be transferred or sold to another because it has no legal status. There is, in effect, nothing to transfer. However, ilie assets associated with the proprietorship- such as inventory- are transferable.

Regulations The legal requirements for establishing and conducting this form of business orga- nization are minimal- one simply commences business activity. There is no gen- eral need to incur legal fees to create the business vehicle. In short, doing business ilirough ilie sole proprietorship is simple and inexpensive.

This is not to say tl1at sole proprietorships are unregulated. They are subject to ilie same general legislation as any oilier business form. One important require- ment is tl1e registration or licensing of ilie business. Requirements vary from province to province but, generally, persons who offer specialized services to ilie public must be licensed to practise ilieir particular skill. Thus, lawyers, doctors, dentists, and electricians, for example, are required to follow provincial legislation governingilieir activity before providing services. Some businesses, such as iliose involving interprovincial trucking, require a federal licence to operate. Other types of business, such as door-to-door selling and the transportation of goods, are subject to specialized rules. The fees associated w iili licensing and registration are generally not substantial.

In addition to the regulations put in place by ilie fed eral and provincial governments, municipalities often impose ilieir own registration or licensing

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requirements. For example, taxi bufilnesses freq uently req uire municipal licences to operate withln municipal bound aries.

A sole proprietor who wishes to use a name other than her own for con- d ucting the bufilness must register the name at the local registry office o r other government o ffic e designated by the province, where such reco rds a re kept and mad e available to the public.2 The objective is to enable a person who deals w ith such a business to d etermine the identity o f the proprietor o f the bufilness. Fai lure to register may result in a fi ne or other penalty and the inability to sue fo r an obligation incurred in connection with the business except with leave o f the court.3

Aside from these requirements, the sole proprietor is subject to laws o f general application. Local zoning bylaws may require sole proprietors to locate in certain areas, provincial tax laws may require them to obtain a permit to act as a collector of sales tax, and health legislation may require them to maintain a high degree of cleanliness where food service or procesfilng is involved . As well, a sole proprietor who hires employees must comply with all applicable legislation, such as that reg- ulating employment standar ds, employment insurance, workers' compensation, and occupational health and safety.

A sole proprietor (unlike a public corporation) is not required to publish the business's financial statements. Success or failure in the business is a pri- vate matter, restricted to the proprietor, the business's a ccountant, the Canada Revenue Agency, and perhaps the local bank manager.

The pros and cons of the sole proprietorship are sun1marized in Figure 1 4.1.

FIGURE 14.1 Pros and Cons of the Sole Proprietorship

Pros Cons

Simplicity: There are few licensing and registration requiremenrs. The sole proprietor just starts doing business and is free to discontinue business activities at any time.

Speed and independence: Since the sole proprietor has no partners and is nor answerable to a board of directors, he can make decisions quickly and independently.

Profit motive: Any after· rax profit or other assets that accrue go entirely to rhesole proprietor.

Lower costs: The fees for provincial and municipal licences are relatively small, varying according to the nature and size of the business and the municipality in which it is located. Generally, there is no need to incur legal fees .

Tax benefits: Profits and losses are reported on the owner's personal income tax return. This may be favoura ble or unfavourable, depending on the taxpayer's circumstances.

Unlimited personal liability: The sole proprietor carries the risk of the business failing and losing both business and personal assets.

Working alone: The sole proprietor is responsi ble for all aspects of the business operation. Though a sole proprietor can hire employees, it is diffkult to retain high-.:alibre people b«ause of the limited opportunities available to them in a sole proprietorship.

Limited aa:ess to capital: The capital available to the business is limited to the assets of the proprier:or and the exte.nt of her credit.

Limited life span: Th e owner's death terminates the business. The proprietorship cannot be transferred.

Tax disadvantages: See tax benefits.

2 The t.1seof t1adeo1 o.us1ness names is discussed 1nChap101 18 3 See. tor exam;*.>. Business Na!YX!.'> Aa. RSO 1990, c B·17. s '!.

NEL 350

The Partnership When two or more persons want to pool their resources and carry on business together, one of the most common options is to form a partnership (a second common option is to create a corporation as discussed below4) . A partnership is much like a sole proprietorship in that neither has a legal personality- or legal existence- separate from the people who comprise it . There are no special steps to create a partnership. It is simply the legal relationship that automatically arises when two or more people d o business together with the objective of making a profi t. Luke and Raina are carrying on their business as partners; an option for them is for Roger to join them as a partner.

The rules governing partnerships come from three sources: partnership legisla- tion (in place in every province), contract law, and agency law. Later in the chapter, these sources will be analyzed in some d epth. What follows is a general account of the basic principles that govern partnershi ps.

Financial Liability If Luke, Raina, and Roger join forces to market the time management system through a partnership, each has unlimited liability for partnership d ebts and other obligations. Consider the following examples.

The bank loan. If the partners borrow money from the bank (say, $100000 plus interest) and fail to repay it, Luke, Raina, and Roger are liable for the full amount outstanding. This is because- like a sole proprietorship but unlike a corporation- a partnership is not legally capable of borrowing money on its own. The partners are the partnership. The partners are the debtors and are responsible for the d ebt.

A very important feature of partnership law is that each partner is fully respon- sible for all the d ebts and obligations of the partnership and not just for some appropriate proportion. Accordingly, the bank can proceed against the partner with the most assets- perhaps Roger- and collect from that one individual the entire amount owing on the debt. In law, this is known as joint liability.5 The liability is considered to be joint because responsibility is not in relation to the partner's share in the partnership; rather, each one of the partners has full and complete exposure on each and every obligation incurred. However, if the bank proceeds only against Roger for repayment of the bank loan, Roger is entitled to be reimbursed by his partners for their share o f the d ebt. Of course, if the other partners have no assets, Roger will end up bearing the partnership debts himself.

The breach of contract. If the partnership supplies a defective system to a customer, each o f the partners is liable for the entire amount of the damages. The contract is between the customer, on the one hand, and all the partners, on the other.

The key point from a liability perspective is that each partner's personal assets can be sei zed and sold through the judicial process if the partnership assets are insuffici ent to satisfy partnership obligations. This legal reality should give Roger particular cause for concern. Since Roger wants to limit his financial exposure to

4 There can be 1eslnc1ions on orofessiOnalS. such as acoount.')1'Hs a!'ld ta,•.yers. 1nco:ooia11ng comp.ttn~s ~e Chcloter 22 for detai

5 ~e. 101 exam;.'.li{a PMtttersl'11pAcl. RSNB 1973. c P~4, s 10 "£veiy pa1tne1 1na mm is h~t'lle;o1ntty\ ... 1Lh the othe1 partners for al deblS and otilig3l!0"5 ol the r11m v1h;~ he is a pan~r ... :

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Partnership

A business carried on by two or more persons with the intention of making a profit

Joint llablUty

liability shared by two or more parties where each is personally liable for the full amount of the obligation

$200 000 because the money is from his retirement fund, he will probably not find the partnership to be a feasible business vehicle through which to market the team management system. This is because a partnership, like a sole proprietorship, puts all of Roger's assets at risk, not just his capital contribution. Luke and Raina also have cause for concern. Although they may have less at risk, they still need to consider the impact of a judgment on their assets and their future.

Profit Sharing It is the partners t11emselves who d ecide how profits and ot11er firm assets are to be divided . If iliey fail to agree on this point , partnership legislation requires them to share profits equally.•

Luke, Raina, and Roger may d ecide to divide the partnership into unequal inter- ests because ilie contribution of earn partner varies. Since Luke and Raina have been d eveloping and marketingilie product, they may have a majority interest, for example 40% earn. Since Roger may only be helping out and be unlikely to have much involvement in the day-to-day operations but contributing considerable capital, his interest in the firm may be set at 20%. The point is that the relation- ship among ilie partners themselves- including profit sharing- is someiliing iliey are free to d efin e in any way iliey see fi t.

Decision Making Because a partnership comprises two or more persons pooling ilieir resources, the management base is potentially strong. Luke's ideas and vision, Raina's tech- nical expertise, and Roger's bllSiness experience will all assist in making ilie busi- ness a viable operation. If one of the partners becomes sick or ot11erwise unable to d evote suffici ent attention to ilie business, the oilier partners are in place to carry on.

The downside is that managing the business will require consultation among ilie partners, and they may not always amieve consenSlls. A dispute or disagree- ment between ilie partners can be extremely disruptive. Even t11ough t11e partners may have agreed in advance- through a partnership agreement- on a meiliod of dispute resolution, sum clauses can be subject to varying inter pretations and can be the source of ill feeling among the partners.

Just as iliere is the danger of disagreement, iliere is also the danger of divided auiliority, which may imped e decision making. Although the partners may have determined iliat they will have authority in different areas, instances are bound to arise in whim responsibility overlaps. This too can result in conflict and d elayed decision making.

Sources of Capital Because a partnership is composed of two or more persons, it provid es more sources of capital ilian a sole proprietorship. The partnership looks to each partner for a capital contribution and can rely on ilie creditworthiness of each one to secure financing from other sources, including ilie bank.

6 lb.id. s 2S~J "Tile inle!eSI S ot ~rl!X!!S in lhe pt)tll'lerShip properly and t l'x:!i1 r9h1.S .lnd dutes ii\ 1e\at l011 to IM part~rShi:> s!'W t bedet.:?rmined. su!>~cl to any agr~errP-nt ex.pres.~ 01 :mpt1ed bet .. ~~n lhe pa11ners, by the lolow1n-;i rtJ\e-s ·al parL!lers a1G ent1"'°d to shaie eoua!ty in lhe cao11.<)I aOO p1ohts ol l~ business. aOO must con trib:J t~ equ~ty 1ov1ards L~ bsses v11'1ether o f Cllp1t.'lt or 0 1neiv1ise susta i~d by t he firm ·

352 NEL

Taxation The partnership is not a separate legal entity, and therefore any income from the partnership business is allocated to the partners- on the basis of their interest in the partnership- and they must, in turn, include it on their individual taxreturns.7

Transferability The partnership does not provide for the ready transfer of interest from one owner to another. Partners do not individually own or have a share in specific partnership property. Each partner has an interest in all partnership property, from the photocopier to d1e laptops to its intellectual property.

Agency and the Partnership Act Partnership law is based in large part on contract law, agency law, and provincial partnership legislation, known in every jurisdiction as the Partnership Act.• The legislation in place in the common law provinces provides mandatory rules with respect to

when a partnership exists.

what the relationship of partners is to outsiders.

These acts have optional rules (i.e., the rules are subject to an agreement to the contrary) with respect to

tlle relationship of partners to one another.

how and why a partnership ends.

Some of these partnership concepts have already been introduced to give a sketch of how partnerships operate relative to otller business vehicles. The following sec- tion describes partnerslups from a more technical and detailed perspective.

When a Partnership Exists According to the Partnership Act, a partnership exists when two or more people "carry on business in common wid1 a view towards profit." The definition excludes charitable and not-for-profit endeavours. It does not, however, exclude unprofitable ventures that otherwise meet the definition of partnership so long as an intention to make a profit is present.

The statutory definition of partnership covers people who expressly intend to be partners as well as people who may not necessarily intend to be partners but act as if they were. That is, a person who conducts himselfasifhe were a partner- by sharing in profits, managing the business, or contributing capital to establish a business- is a partner in the eyes of the law. Such a person, therefore, has all the rights and liabilities of a partner.

The Partnership Act also sets out a number of circumstances that point toward there being a partnership but not conclusively so.9 For example, if two or more persons own property together, this does not of itself make them partners. However, if in addition to owning property together, tlle persons share profits

7 J An thony VanOuzer, The Law of Partft(!(Sfl!p:s tlttd Corparat/OflS, 3d ed !To10010. l1win l.a\Y, 2009) a t 12 8 Sae t ne Pt111ners!'t,'(> Act, supra note 5. Legislat iO!\ iS virt ualy IClenLicat ac1~s 1ne cornmonta-w p1ov1oces 9 Supra note 5 at s 3 The tegis\clliOn 01ovides 1na1 a ~mber o f sil1Ja t o!\S do not 0y themsetves create a

pa11oorsh1p. A 1dat .onsh:p IS no l :'K!cessa1lya ·pa11oorsh1p· 1n the ldk>wrlg srtuat·O!l$ the ~r1es,io1ntt1ov1n prooe1 ty; one i)i)rly receives repaym~nl o f a det>t ou1 or p1ol1LS, an: ernpk)y~1'H COl'\t1ac1'wi'lere1emune1a ti0n. varies with o•oltts; a toon wt')ere t M fcnd~r"s comoensation is to be a share o t prof t s. an annoity P<l'd ou t of p1ot1t s toa spcuSC! 01 ch•o o t ad~Ce.')s<:d pa1 tn.e1; and 1ect'!1p1 of a share of D1of11.S o l a ~s1ness p:iid to a vendor as ooiuiderat lOn for 1~ sale of a btlsi...ess

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associated with that property and restrict their ability to unilaterally sell their interest in the property, a court is likely to conclud e that a partnership exists. '0

Thls would likely be the result even though the parties have in dicated in tJ1ejr written agreement that their relationship is not a "partnership."" The court will look to the essence of the relationship rather than the labels used by the parties.

This means, for example, that if Roger wants to take an active part in the management of the business and share in the profits yet simultaneously avoid the joint, unlim ited personal liability that goes with partnersrup, he is unlikely to suc- ceed. If the business runs into fi nancial difficulties, creditors can come after Roger for the liabilities, even if Roger has a d ocument- signed by Luke and Raina- stating that Roger is not a partner. In classifying Roger's status, what matters is what Roger actually d oes in relation to the business, not what a d ocument says.

BUSINESS APPLICATION OF THE LAW

THE LOTTERY PARTNERSHIP?

Nineteen employees of Bell Canada won a $50 m illion Lotto Max prize on New Year's Eve. A short time later, nine of thejr colleagues whose names were not on the group form- and who had not contributed to the purchase of the winning ticket- claimed a share of the prize. The n ine claimants alleged tl1at they had been part of a group of lottery players at the Bell Toronto office that constituted a partnership. They claimed that the rules of their partnersrup proyjded that each of the partners would contribute an agreed-upon weekly amount toward the purchase of lottery tickets, and that partners who failed to contribute ona specific occasion due to a temporary absence for any reason would be permitted and expected to make their required payment at a later time. They further claimed that the 1 9 winners w ith- d rew from the partnership and formed thejr own group without any notice, ejtJ1er written or oral, of the unilateral dissolution or termination of the partnership arrangement.

The parties submitted thejr dispute to binding arbitration and ultimately, the arbitrator dis· m issed the claims of tl1e nine co-workers. The lawyer, representing the Bell 19, said the arbitra- tor's ruling boils d own to: "If you pay, you're in.

Ts dte relationship between dte members of a group of lottery players a partnership?

If we bought a ticket together last March and I win (with another ticket) in December, you can't say because we were together in Marcil, I'm a life- time partner."11

Criticrd An«fris: Do you trunk this d ecision preclud es a lottery group from being a part- nership? How could the parties have prevented this dispute?

Source: An~ Me ti.er P~perf'fy. 'Nine Sel E'.mpbyees Sue 19Co V/ork.ers Over -SSO·MliOn: Lo tteryJ.x:kpor, TheG.bbe tJnd M aN t.22 May 20ll). On(1ne• <hllp//www.l~9\0~00l'na~.com/oows/na.1to'lat/to1onto/ n1ne·bel·~mP40yeas•S\Je .. col~gues·aver·SO~ml!i0n.-tolto-ma1vw1nl artidel9'! 3556/>

10 r.01 a dlSCUSSiOI\ OI the d1ltere~ belv((lel'l: patt f)erS"iP a:'l<!" !'n~f<.'! CO•OW!\erS!'):~ ~E! /J£ LeP;,ge Lk1 v Ki'N'l?ex Deve.bpmems Lid 11977). 16 OR 12oJ 193. 78 DLR 13d) 223 ICAJ. affo 11979! 2 SCR 155. 105 DLR l3d) 84 ISCO.

11 Lans.ng Bu.'lding Supply /OntlNIO) Lid v Jef!Jl!O, 11989) 18 ACWS !3d) 1000. 71 OR !20) 173 lD~I CO. 12 Aty·shah Has Mm, 1'~ Bel 19 Get run $50 M1liol\ Le no Max Jacitpct After T\•K>·Yea1 Dispute·, The St<N

113 Nov"moe1 2012). oohne <h ttp//w,.,.,y 1hes:1a1.com/~\Ys/9tal2012111/13/the_bel_19_9e1_1uu_SO_mlon _btto_m~ckpc1_afl~r_1\royM1_diSP4-1te.ht!'l'll>

NEL 354

The Relationship of Partners to One Another ff Luke, Raina, and Roger become partners, the Partnership Act provides that they also become one another's agents as well as the agents of the firm in matters relating to the partnership's business. This is significant because it imports the law concerning agency, cliscussed in Chapter 13. [t also means that the partners owe fiduci ary duties to one another, which require a partner to put the interests of her partners above her own interests.

Accordingly, Luke cannot set up a secret business that competes with the part- nership he has form ed with Raina and Roger. He cannot tell a client of the firm to buy a time management system from him "on the side" and then proceed to pocket the profits, or use the firm photocopier at night to rw1 a duplicating ser- vice without hi s partners' perm ission. In short, the law does not allow a partner to make personal profit from the partnershi p property, to compete against the partnership, or to use a partnership opportunity for exclusive personal gain. Luke is required by law to put d1e interests of the partnership allead of his own.

Persons who wish to be associated in partnership should have a partnership agreement, preferably one drafted by a lawyer; Figure 14.2 summarizes the issues that the agreement should address. The partnership agreement provid es the par- ties with significant freedom to define their relationship. For exan1ple, a partner- ship agreement can provide for the clivision of profits among Luke, Raina, and Roger in any proportion tl1ey see fi t. If tl1ere is no agreement, the Partnership Act will clictate that Luke, Raina, and Roger will share in profi ts equally- a result that may be neither wanted nor intended.

As already noted, if the partners do not have a contract or if they have a con- tract that is silent on some points, the Partnership Act of the province in which the partners are resicling will govern the relationship.

FIGURE 14.2 Partnership Agreement Checklist

A partnership has been described asa "marriage without love" because many of the concerns that partners face are similar to the ones faced by spouses- sharing of work, financial matters, authority to make decisions, and resolution of disputes. And just as many marriages end in divorce, so too many partnerships fail. Just as a marriage contract cannot save a bad marriage. a partnership agreement cannot guarantee a successful partnership. An agreemenr can, however, help in avoiding costly licigationand person.al animosity if a "divorce" proves necessary. A par1nership agreement should address the following issues: Creation of the partnership: Name and address of partners, parmership name, tenn of parmership, if any, description of firm's business Capital contribution: Description of conrribution by each partner, how shortfalls are handled, how the accounts are managed Decision making: Description of the parmersJ duties, any limits on authority, dispute resolution mechanism Profit distribution: Description of how profits are to be shared, how and when they are to be distributed, rights of withdrawal Changes to partnership: Rules for changing tbe relationship, admission of new partners, retirement of partners, option to purchase partner's interest, valuation of interests Dissolution of partnership: Description of events that could trigger dissolution, how dissolution will be handled, valuation of assets A par1nership agreement should also be reviewed and updated periodically to reflect changes in circumstances.

Relationship of Partners to Outsiders While partners are free to enter into a partnership agreement in order to set out the rights and obligations between them, this will not modify the relationship between partners and outsiders, which

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is governed specifically by the Partnership Act and generally by partnership law, including agency law.

First and foremost , a partner is an agent of the firm. She acts for herself as well as for her partners, who from the perspective of the agency relationship are her principals. For thls reason, the fi rm is responsible for contracts she enters into with actual or apparent authority. For example, assume that Raina enters into a long-term contract with an advertising agency. Assume further that Luke and Roger are appalled, since it is not dear that advertising services are needed at this point, let alone for an extended period of time. They are still bound, how- ever, because Raina- as a partner and therefore as their agent- has the apparent authority to enter into contracts for marketing services for the purpose of the partnership. Between the disappointed principals (Luke and Roger) and the ad ver- tising agency that had no idea that Raina was entering into a contract unpopular with her partners, the law protects the advertising agency. Thls is because Raina's partners are in a better position to monitor and restrict her ability to do business on behalf of the fi rm, even to the point of voting her out of the partnership alto- gether. They must, therefore, absorb the risk o f her "going astray."

BUSINESS AND LEGISLATION

THE PARTNERSHIP ACT: THE RELATIONS BETWEEN PARTNERS All o f the common law provinces have a Partner- ship Act mod elled on the British Partnership Act. These Acts a re substantially similar from prov- ince to province and have been subject to little change since their original enactments.

The Acts have both mandatory and optional provisions. The mand atory provisions relate to the relationship between partners and outsiders. The optional rules with respect to the relation- shlp between partners can therefore be varied by agreement.

In each province, the Partnership Act provid es for the following optional rules:

1. All partners are to share equally in the capital and profits of the business and must contribute eq ually to the losses.

2 . Property acquired for tlle partnership shall be used exclusively for the partnership and not for the private purposes of individual partners. Property purchased with partnership money is deemed to be partnership property.

3. A partner shall be ind emnified by the other partners for any liability incurred on bellalf of the partnershlp. This means

that all partners are liable for partnership liabilities and that a partner who pays a debt is entitled to reimbursement from her partners.

4. A payment made by a partner for the purposes of thepartnershlp in excess of his agreed subscription shall earn interest.

5. Each partner may take part in the management of the business.

6. No partner is entitled to remuneration for acting in the partnership business.

7. No new member shall be admitted to the partnership without ilie consent of all the partners.

8. Disputes regarding the partnership business maybe decided by a majority, but the nature of ilie partnership may not be changed without the consent of all the members.

9. Partnership books shall be kept at the partnership's place o f business, and all partners shall have access to iliem.

1 0. No simple majority may expel any partner.

Critical Analysis: When are the optional rules appropriate for partners?

Souru : Pannetship Aa, RSNB 1'973. c P-4, ss 21U), 25, 26

356 NEL

Ind eed, because the relationsMp between partners is based on agreement, Raina's authority to enter into contracts on behalf o f the firm can be restricted. The parties can enter into an agreement whereby Raina promises not to enter into any long-term contract without fi rst securing her partners' approval. Raina will presumably respect and abide by this restriction. However, should she enter into a contract that exceeds her actual authority, the fi rm will still be bound unless the outsider knows or should know that her authority has been limited in tMs way. The fir m is obligated by virtue of the d octrine of apparent authority.

The Partnership Act and agency law also make partners responsible for one another's mistakes. For example, if Luke gives poor advice to an organization as to its time management needs and is sued for the tort of negligence, all the part- ners, not just Luke, are liable for any damages that result. This is because Luke was acting in the course of firm business and incurred a liability by comm itting a tort. He and his partners have joint and several liability.13 Each partner is in di- vid ually as well as collectively responsible for the entire obligation. TMs means that the client can recover all of the damages from any partner or he can recover some of the damages from each. A partner who pays the debt may, however, have a r ight of contribution from the other partners.

BUSINESS APPLICATION

RESPONSIBILITY FOR PARTNER'S DEBTS

In early 2012, friends and partners Rachel Con- duit and Bruce Dawson opened Handlebar, a bar on the southern edge of the Kensington Market neighbourhood in d owntown Toronto. The two entrepreneurs had previously owned and oper- ated a smaller place, the Avro on Queen Street east, but had outgrown its premises. The new site had salvaged, gold-painted bikes as part of its decor in a nod to Conduit, a die-hard-cyclist, and the menu featured a different dish each night courtesy of Dawson, an avid chef. The bar also offered a special d raft lager, The Handlebar, and a signature shot, The Tand em, wMch came on its own coaster built for two.

Rachel Conduit at dte Handlebar

Joint and several liability

Ind iv1dua I and collective l1abi lity for a debt. Each liable party 1s individually responsible for the entire debt as well as being collectively liable for the entire debt.

About three years into the bar's operation, Canada Revenue Agency contacted Cond uit to inform her that the bar owed $1 7 000 in HST

payments. TMs came as a surprise to Cond uit as Dawson was responsible for the partner- sMp's finances. After being informed about the

13 See, lor exam Mt!, Par:n&Sl'!1(> Act, su(>ltl oote S.. s 13, whiCn provides U'k'll every Mrt:"IE!1 is fial:l&2! pinlty

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wth co-partne1s and ~o seve1aty to1 v11orqfut oci.s or ornissom. or a pa1tne1 <>:ling v11lhin the cour~ or em~o;men1 The d1Uerenc:E!$ betv.-een ;oinl UaO,tity ano .b11u a!ld several tiabluy a1e suOll.e. Tooy mainfy affect 100 p1oced1HCS 101 ma1nlc')if')i!lQ the tight to sue a partr)e1 \ ... hiO v1as 001 ori91!'\,)\ty tnctuded 11\ a teg a1 act.on. £xcepl to lh1s exte11t.. Iha dilfa1~!lCE!s s1mP4y do 001 rnauor R(!'Ja•c~ss or v1~ther (~bi ty is;o1n1 or )O!nl aOO severat partners a1e both tl'ldVduaty and to the e.xte1u of tne pa11nershioasse1s accounta~ to ' "'rd ~rtk:?:s

357

debt, Conduit through her lawyer sent notice to Dawson that the partnership was dissolved. Unknown to Conduit, the Royal Bank of Canada (RBC) had previously obtained a $62 000 judg- ment against Dawson, for debts from another business venture. When that judgment was not satisfied, RBC got a court order against Han- dlebar for just over $70000. In addition, the bank sought to make Cond uit personally liable for this debt. After a story about the legal pro- ceedings was published in The Globe and Mail, RBC and Conduit settled the dispute for an undisclosed amount. The details of the settle- ment are confidential.

0-itiad Analyria: On what basis could Conduit be liable for Dawson's debts? Explain. What should Conduit have done differently in thi s situation?

Sources: S9ne La~ford, "11\troducing Haodk!ba1, The Avro 's N(!\'I Big Sist~r Ba1 in Kel\S11\9tOn Mark.er. Toronto Life (8 August 2012). onllne <http //1oron1ot1re.comlfood/1e.stau1an.1.slinl rOdtJcing •hand~barl>. Stla:'U">r') Kail, "B tJsiness Pa11:\ersh;p Turood Into a N i9h1rna1.:i 101 To!Onto Bai Owner· The C.bbe and Marl 12 rebrtJa1y 2017J, online <h1tps/v1ww.the9tobeandmal.corn/ repo1 t ·on-bus 1nessls m.lt ·bu Si ne-ssl s b•maMg 1~/ pa rt ne rs hio· tu roo:a ·nightm;ua·lo1·lO!OntO•ba1·owoor/a•tiC\e33856377/>; Shannon Kan. "Tor0n10 Bar o .. 1oor S~u4es Leg.lt Oispt.1 t~ Ove1 Partner's Debts· The Clobe tJnd Mau {11 rebruary 201n, ontil\e <htlps'.//\'IVAY l t')egto baand l'na 11.com/1epo1 l·O n·b!JS1nt'! ss ls matt· ous :aes s/

so-l'n.l M;i 11\9 !to rO nlo ·~ 1•ov1ne 1 -se Hie S•tegat·d iS ou 1 e-over • parLne 1 s ·d<?bts/arl idc:?3402927B/>

How and Why a Partnership Ends The Partnership Act provides for the termination of a partnership under certain circumstances:

if entered into for a fixed term, by the expiration of the term. if entered into for a single venture or undertaking, by the te1·mination of that venture or undertaking.

by any partner giving notice to the others of her intention to dissolve the partners hip.

following the death, insanity, or bankruptcy of a partner.

Nevertheless, these provisions may be varied by agreement.14 For example, many partnership agreements do in fact provide for the continuation of the busi- ness by the remaining partners even if the particular partnership entity is di s- solved. For example, large professional partnerships- such as accounting firms and law firms- have partners joining or leaving every year. Their carefully drafted agreements generally call for an immediate transfer of all assets and liabilities from the old partnership to tl1e new one.

On dissolution of a partnership, partnership legislation provides a process for dealing with partnership property. It must be applied in payment of the debts and liabilities of the partnership first and then to payment of what is due to the partners. In the event that the partnership property is insuffici ent to satisfy all of the firm's obligations, partners must individually contribute to tl1e obligations in proportion to their entitlement to profits or in another agreed upon proportion.

After all of the firm's debts are satisfi ed, any excess is applied, in the following order, to:

1. repayment of loans made to the fi rm by partners.

2. repayment of capital contributed by the partners.

3. payment of any surplus to partners according to tl1eir respective rights to profits.15

14 SGe t19u1e 14.2, P~1lr1iersh1p Ag1~ementCOOclt1lsl 15 T~~ provisons may be varied !)y t)Q1~n-enL

358 NEL

Regulations As Mth sole proprietorships, there are no legal requirements for the establish- ment and cond uct of a partnership. The partners simply begin their business activHy. While a lawyer may be required to assist in the preparation of a partner- slup agreement, doing business through a partnership is reasonably simple and inexpensive.

The pros and cons of partnership are summarized in Figure 1 4.3.

FIGURE 14.3 Pros and Cons of the Partnership

Simplicity: There are few lkensing and registration requirements for parmerships.

Lower costs: The fees for provincial and municipal licences tend to be small. However, a lawyer may be required to assist in drafting the partnership agreement.

Greater a ccess t o capital: The capital available to the business includes the assets of each partner and theexte.ntof each partner's credit.

Profit motive: Any after· r.ax profits or other assets accrue to the partners, according to their partnership interest.

Tax bene fits: Profits and losses are reported on each partner's personal income tax return, according to that person's share in the partnership. This may be favourable or unfavourable, depending on the taxpa}rer's circumstances.

Unlimited personal liability: Each partner carries the entire risk of the business failing. If it does, both the partnership assets and each partner's personal assets are at risk.

Loss o f speed and ind ependence: The partners must work together, and a consensus is not always a<'.hieva ble.

Limitations on transferability. The partner's interest in the partnership is not freely transferable.

Profit sharing: The partners must share profits equally or according co their partnership agreement.

Tax disadvantages: See tax benefits.

Partnerships are bound by all rules of general application, inducting the obligation to comply with laws concerning licensing, employment, tax collection, and public healtl1, for example. Adclitionally, most provinces require tl1e filing of a declaration of partnership that contains information on the partners, the partnership name, and the duration of the partnership. Failure to file a declaration is not fatal, but it can impede legal actions filed in the name of the partnership and can result in fines.16

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BUSINESS APPLICATION 0 I' l HE LAW

MANAGING PARTNERSHIP RISKS

The risks associated wjth the partnership form of doing business are not insignificant. First, each partner is the agent of the partnership, meaning tl1at each of the partners may bind the partnership when acting in the usual course of the partnership business. Second, each partner is fully liable for partnership obligations, meaning

359

that all his personal assets may be seized to sat- isfy them. In addition, a partner who leaves a partnership may be liable for partnership debts incurred after he leaves if credjtors are unaware of the partner's departure. Partners have both legal and practical methods of addressing lia- bility concerns. The partnership agreement may expressly limit and control a partner's ability to

b in d the partnership. For example, the agree- ment may provide that all expenditures above a certain amount require the approval of a majority o f partners. Such a measure will not be effective against th ird parties who are unaware o f the restrictions. It will, however, provid e a basis for a contractual claim by the partners against the partner who exceeded h is authority.

monitoring the activities of partners to help prevent partners from overreaching thei r authority or entering unwanted transactions.

notifying clients and customers o f the departure of partners so that the partnership cannot be held liable for d ebts contracted by the departed par tners. From a practical perspective, partnership

r isks can also be reduced by insuring against liabilities that might result from a partner's wrongdo ing. choosing partners with care (partner only

with people who can be trusted ).

educating partners on their authority Crftial.A-1,,.U: How do the partnership vari- ations discussed below reduce the risks associ- ated with a general partnership?

and limits, and the consequences o f exceeding them.

Limited partnership

A partnership in which the liabi lity of some partners is limited to their capita l contribution.

Partnership Variations There a re two variations of the partnershi p: the limited partnership and the lim- ited liability partnership.

Limited Partnership A limited partnership is a partnership in which at least one partner has unlim- ited liability while others have limited liability. General partners have unlimited liability, whereas the lim ited partners have a liability limited to the amount that they have contributed to the partnership capital.

This vehicle has been used mostly as an investment d evice. Limited partners put money into a business, in such sectors as entertainment (e.g., Cineplex Enter- tainment),publishing (e.g., FP Canadian Newspapers), or real estate (e.g., Century 21 Canad a) , in return for tax breaks and profits. The general partner manages the investment for a fee and carries the responsibility- assuming that the limited partner s have not mad e guarantees or commitments beyond their inve.stment.

This type of business entity cannot be created informally. A limited partner- ship requires a written agreement that must be registered with the appropriate provincial body. Without this filing, the limited partnership d oes not exist. The registration of the agreement is also important because it provides public notice of tl1e capital contribution o f tl1e limited partners and identifi es the general part- ners. This, in effect, allows members of the public to d ecide whether they want to d o business with the limited partnership.

General partners have substantially the same r ights and powers as partners in ordinary partnerships; limited partners have more narrowly d efi ned rights. They have the right to share in profits and tl1e r ight to have their contribu- tion returned on dissolution, but they cannot take part in the management o f the partnership. If they d o, they lose their status of limited partners and become general partners. Thi s is a significant consequence, since it puts all their assets- not just the amount of their capital contribution- at risk should the enterprise fail. Furthe1·more, what constitutes partaking in management

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is difficult to d efine and can be a contentious issue. In the end, the q uestion is resolved by courts assessing the extent and the nature o f the limited partner's involvement and d eciding whether, on the balance, the limited partner should lose protected status.

Because Roger wishes to protect his assets, he might want to suggest that Luke and Raina's prod u ct be marketed through a limited partnership. The a dvantage is that Roger 's losses as a limited partner will be restricted to his capital investment. For example, creditors will not be able to come after his per- sonal assets. The disadvantage is that Roger must not take part in management or he risks unlim ited personal liability.

Limited Liability Partnership A limited liability partnership (LLP) is a variation on the partnership form of business. It is designed to address concerns of professionals who are not permitted to use in corporation as a means o f achieving limited liability." All of the provinces and territories with the exceptions of Prin ce Ed ward Island , Yukon, and Nunavut have amended their Partnership Acts to allow for this variety of partnership.

An LLP has the characteristics of a general partnership, but with specific limitations on the liability of partners. The limitation on liability (the liability shield) varies d epending on the jurisdiction. 18 Some jurisdictions (Alberta, M an- itoba, Quebec, and Nova Scotia) provid e a partial shi eld that protects a partner from liabilities arising from the negligent o r wrongful acts o f her partners or employees (so long as she is innocent or uninvolved in the negligence or wrongful acts) , but continues to hold the partners liable for all other obligations o f the p a rtnership. Partners continue to be personally liable fo r their own a cts and omissions, and the partnershi p assets continue to be available with respect to the acts and omissions o f all partners.

In other jurisdictions (Saskatchewan, New Brunswick, Br itish Columbia, Ontario, Newfoundland and Labrad or, and the Nor thwest Territories), the leg- islation provid es a full shield that not only protects a partner from the negligent or wrongfu l a cts of her partners or employees (so long as she is innocent or uninvolved in the negligence or wrongful a cts), but also protects the partners from the contractual obligations o f the partnership, such as accounts payable and general debts. The liability sh ield means that partners' personal assets cannot be seized to satisfy these claims. Partners, however, continue to have liability for their own negligence,1' and partnershi p assets continue to be avail- able to satisfy claims agai nst partners.

The LLP may be used for the purpose of practising a profession (e.g., accounting or law), provided the statute governing the profession expressly permits its mem- bers to practise using tins vellicle.w An LLP must include the words "limited lia- bility partnershi p", its abbrevia tion "LLP", or the French e qu ivalents in the partnership name, and it must be registered as a limited liability par tnership. Also, the legislation may require professionals to have liability insurance to help ensure victims will be compensated for losses from wrongful acts.

11 Alberta l~ ... Relo1m l~lilote,um1uw u~•1ry Pa11.ne1sn.ps, fJna1R€(>0lt No7J l&1mo~lo~: A1t€:~ Lavi Re101m lnsl!tt.te. 1999) at 5.

18 Tile re a1e conside1ab4e d1ffo1encE!$ in 1he app«icaton 011ne tabf1ty sh;e(c ,n e~hjurisdiCton. 19 A oa11~r may tttso betiab(e to1 the ~gngen1 acls aoo om ssonsof a personwr.o isu!'Kler herdirec1

sopeivis1on and con11ot depending on the appSicab'la \<lv1 in each .1unSdiCl!On 20 6r1tishCdumbia d~s 0011es1riCI 1~ use of 1ne tim11ed tebi11ty partnership to "eb~pi:>!e profE?SSO"-'> •

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Limited liability partnership (LLP)

A partnersh1 p 1n which the partners have unlimited liability for their own malpractice but limited liability for other partners' malpractice

Shareholder

A person who has an ownership interest 1n a corpora ti on

Director

A person el ected by sharehol ders to manage a corporation.

Most laige accot1nting and law firms have registered as limited liability partne rships. What are the advantages of changing from a general partnership tJJ an LLP?

The Corporation The corporation is the most impor tant form o f business organization tod ay. Chapters 15 and 1 6 explore the corporation in d etail, including its formation, operation, and termination. The purpose of this section is to provid e a brief account of the corporation fo r the purpose of contrasting itwith the other busi- ness vehicles alread y ruscussed .

Financial Liability The corporation is the safest vehicle that Luke, Raina, and Roger could choose to conduct their business because a corporation is a rustinct legal entity in law and is therefore capable of assumi ng its own obligations. Luke, Raina, and Roger could each participate in the profits of the corporation as a shareholder and ma nage its operations as a rurector.

Consider the following examples.

The bank loan. If Luke, Raina, and Roger form a corporation, the corporation has the legal capacity to borrow money. This means that the corporation promises to repay the loan with interest, making the corporation, and no other entity. the debtor.

If the corporation cannot repay the loan, the bank will take the necessary steps to recover as much as it can from the corporation to make up the full amount owing. The bank will be in a position to seize anything owned by the corporation. However, the bank will not be able to seize assets belonging to Luke, Raina, and Roger. Even tl1ough they have a dose relationship to the corporation as its three shareholders, theyrud not promise to repay the loan That commitment came from the corporation alone. Put anoilier way, the corporation is the debtor; the shareholders are not.

There is an important proviso to this analysis, which concerns guarantees.21

When a corporation does not have an established track record of crerutworthiness and perhaps hold s few assets, the bank will seek personal guarantees from those involved in the corporation, such as the shareholders. There is a very strong pos- sibility that when Luke, Raina, and Roger approach the bank for a loan to the corporation, the bank will agree only if the three provid e personal guarantees. A personal guarantee means that if tl1e corporation fails to meet i ts obligation to

21 Set:! Chapter 26 for a OiSCusson of guarantees

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the bank, Luke, Raina, and Roger will be held responsible for that default. Then, as with a partner ship or sole proprietorship, all their personal assets will be at r isk. At such a point, it becomes irrelevant that a corpora tion is a separate legal entity capable of assuming its own obligations. Luke, Raina, and Roger would have no more protection than if they had proceed ed by way of a partnership.

The breach of contract. If the corporation supplies de fective time management systems to a customer, it is the cor poration and no other entity that is in breach of contract. It is the corporation that will be sued, and it is the cor porate assets that areat r isk.22

Again, re call the discussion of guarantees. Any entity that deals with a corpo- ration may d emand the personal guarantee of the corporation's shareholder s or directors.

The key characteristic of a corporation is that it provides limited liability to its sharehold ers. That is, should the corporation's financial health take a bad turn, the shareholder's loss is lim ited to what she p aid to purchase shares in the corpo- ration. Unless, in a ddition, the sharehold er provided a personal guarantee, she has no liability for the corporation's obligations, however they were in curred.23

Profit Sharing Profits of the corporation are distributed to shareholders through dhridends. That is, sharehold ers a re paid a return on their investment in the corporation, but only if there is profit, and only if the directors d eclare a dividend.

The cor porate form o f business organization is inherently flexible from an investment perspective, because it permits varying d egrees o f ownership and var- ious means for sharing profi ts.

Decision Making The corporation is managed by a board o f directors which, in tum, is elected by the shareholders.

In addition, officers- that is, high-ranking cor porate employees- can be hired by the board to assist in running the corporation. This provides a broad management base that allows the corporation to benefit from specialized and top-level expertise. However, it can also result in layers of authority that can delay decision making.

Sources of Capital A corporation can get its capital in two ways: it can borrow, or its directors can issue shares. The purchase price o f the shares is an important an d potentially large source of capital for the corporation. A share represents an e qu ity posi- tion in the corporation and provides the shareholder with the chance of making a profit through the d eclaration o f dividends, which it is hoped will be greater than the interest rate the sharehold er would have received had he simply lent the money. The disad vantage is that if the corporation fai ls, the shareholder is left with nothing while the creditor technically retains the right to be repaid . However, if the corporation is insolvent, that right is of little value.

22 or course, ii al\ em~e ot the corpo1alion m1Sreo1esen1ed t he p10duc1 or co1r1mtllcd a tort ol so rm descriOliOr\. tMt ~mpk)yeewould be r..,~_ This isa mau erd!Stincl lrom 1hecont roc1uattiabluyol t h'1 co1pora1•:>n. $~ CMpter 16

23 Of')ty 1n 1a1e s tual iO!l$, stJCll as lia;d 0!') the c1ed11ors. VI' I Iha courl.S llolO the sha1~h01ders 001sona!y respcmsir>!e 101 1ne co:oo~tiOft"S ac1ions. Se.e CMp1e1 16.

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Limited liability

Responsibility for obligations restricted to the amount of investment

Dividend

A division of profits payable to shareholders

Because the principle of limited liability protects investors against unlimited losses, the corporation is well suited to raise large amounts of capital.

Corporations that offer their shares to the public must publish information concerning their finances; this makes the corporation subject to greater outside scrutiny than the partnership or sole proprietorship.

Taxation Because it is a separate legal entity, a corpora ti on pays its own taxes. In other words, the income of the corporation is subject to taxation quite apart from the taxation of its owners. A shareholder of a corporation will be taxed if she earns a salary from the corporation, receives a dividend from it, or realizes a capital gain from the sale of her shares. Advantages in the form of reduced or deferred taxes may sometimes be gained through the appropriate splitting of distributions to shareholders between dividend and salary payments. For example, Roger could take a salary from the corporation and his family could receive income through dividends. This may produce a more favourable tax treatment than if Roger took both a salary and dividend payments himself. The ultimate effect of this kind of income splitting depends on a variety of factors, including the corporate tax rate and the marginal tax rate of the shareholder and employee. It is significant that the partnership and sole proprietorship enjoy no such options, since all income from the business is taxed at personal rates.

Transferability The fac t that a corporation has a separate legal identity often allows for easy transference o f an ownership interest represented by shares. A shareholder can sell or bequeath his shares with no interference from corporate creditors because the shareholder has no liability for corporate debts. The shares belong to him and he can do what he wants with them. Transferability is, however, subject to restric- tions in the corporation's incorporating d ocuments and may also be restricted by a shareholders' agreement.

Perpetual Existence Because the corporation exists independ ently of its shareholders, the death or bankruptcy of one or more shareholders does not affect the existence of the corporation. The corporation continues in existence perpetually unless it is dis- solved, either by o rder of a court for failure to comply with statutory regulations or tl1rough a voluntary surrender of its legal status to the government.

Regulations Like sole proprietorships and partnerships, a corporation must comply with laws of general application.

Most significantly. however, the corporation comes into existence only if proper documents are submitted to the government and it issues, in return, a certificate of incorporation. Thus, it is almost always more expensive to organize a corporation than a sole proprietorship or partnership because there are legal bills and additional filing fees to pay.As well, there are extensive rules contained in corporation statutes that govern many corporate decisions and result in the need for considerable record keeping. These extra requirements and expenses, however, can be more than offset by the protection provided to investors by the principle of limited liability.

The pros and cons of the corporation are summarized in Figure 14.4, and a com- parison of the major forms of business organization can be found in Figure 1 4.S .

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FIGURE 14.4 Pros and Cons of the Corporation

Limited liability: Because it is a separate legal entity, a corporation can assume its own liabilities. The shareholder stands to lose the amount he invested in the corporation, but no more.

Flexibility: A corp<>ration permits differing degrees of ownership and sharing in profits.

Greater access to apital: Limited liability makes the corporation a very suitablevehide through which to raise c.api ta.I.

Continuous existence: The life span of a corporation is nor tied to its shareholders.

Tax benefits: Though this is a fuct·spro6c issue, a corporation can facilitate greater tax planning, for example, by permitting income splitting.

Transferability: Ownership in a corporation is more easily transferable through shares.

Potentially broad management base: A corporation is managed by directors and officers, who can provide a level of specialized expertise to the-corporation.

Higher costs: Creating a corporation incurs filing fees and legal costs.

Public disclosure: When a corporation offers shares to the public, the corporation must comply with strict disclosure-and reporting requirements.

Greater regulation: Corporation statures govern many decisions, limiting management options and requiring specific kinds of record kttping.

Dis.solution: Ending a corporation's life can be complicated.

Tax disadvantages: A corporation may be subject to double taxation, depending on the circumstances. This is a fact· speci6c issue.

Possible loss of control: A corporation has diminished control because it issues shares with voting rights.

Potential bueaucracy: The many levels ofauthority in a corporation may impede decision making.

FIGURE 14.5 A Comparison of Major Forms of Business Organization*

Characteristic

Management

Limited by Life of owner

Net income taxed at personal rate

Only assets may be transferred

Owner manages

By agreement or conduct of the parties

Tenninated by agreement. death

Unlimited

Net income taxed at personal rate

Transferable by agreement

All partners manage equally unless otherwise specified in agreement

• • • • • By incorporation documents

Perpetual unless dissolved

Limited

Income taxed to the corporation; dividends and salary taxed to shareholders

Transferable unless incorporating docunlents restrict transferability

Shareholders elect a board to manage-the affairs of the corporation; officers can also be hired

•The!*! are t he lega1 dilteiences l'.>€1\•.'een t he mapr business forms. In: proctice, t)OVK?ve:r, there t)1e V.'<lys or m1rnm!ting the co~que<\C'::es o l t!')e!*! d1lfe1ences. "Vhel~r one l orm of busi~ss orgt)niza t on or anOl her is CIY.:')S<?nV.'I <lt:pend Oil 1ndwduat circums.1.a!\tes. A s V(llh a~ o ther teg<'lt coocerns, tegat accounl iog. and mal\agem~t advlc:e snould be sough1 ,n oroer 10 malle a11 info1med decis10n

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Franchise

An agreement whereby an own er of a trademark or trade name permits another to sell a product or service under that trademark or name.

Business Arrangements The preceding section introduced the basic forms of business organization. Sub- ject to some specialized exceptions, such as real estate investment trusts and mutual fund s, every business will use one of these forms.

There are additional ways to carry on the business activity itself. These ways are not distinct business organizations but are, for the lack of a more accurate term, arrangements. These arrangements do not have any strict legal meaning as such; most commonly they refer to some sort of contractual commitment between two or more business organizations. These relationships are important from a legal perspective because they involve agency prin ciples and fid uciary d uties, in addit ion to contractual obligations.

Luke and Raina, for example, may not be able to raise the cap ital necessary to expand their business. They may then d ecide to licen se rights to their prod uct or they may enter an arrangement with another business to sell their pro duct. The business may be extremely successfu l and they may want to expand further. One option is to grow internally by opening new branches, expanding existing branches, and hiring new employees. They may, however, for many reasons d ecide to enter an arrangement with another entity. Luke a nd Raina may want to cap- italize on the good will they have developed , or another organization may more easily be able to penetrate a market, or they may simply feel that they do not have the time and expertise needed to hand le an internal expansion. The following section explores the ra nge of options open to entrepreneurs like Luke and Raina.

T he Franchise A franchise is a contractual a rrangement between a manufac turer, wholesaler, or service organization (franchisor) and an ind ependent business (franchisee), who buys the right to own and operate one or more u nits of the franchise system. Franchise organizations are normally based on some unique product , service, or method of doing business; on a trade name or patent; or on good will that the franchisor has d eveloped.

What legal facto rs are imp<>rtont to the sucr.essof a fra nchise?

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Almost every kind of business has been franchised- fast-food restaurants, coffee shops, drug stores, tutoring services, tax services, and weight loss centres to name a few. Some familiar examples are Tim Hortons, Subway, The Second Cup, Shoppers Drug Mart, Kumon Math and Reading, H&R Block, and Weight Watchers. Luke and Raina, too, could potentially franchise their business if it is successful.

Franchising involves a contract between the franchisor and the franchi see. Wide variations exist in franchise agreements, but d1ey generally cover arrange- ments regarding such matters as how the business is to be run, where supplies may or must be purchased, royalty levels to be paid to the fran chisor for sharing its business operation plan and other benefi ts, and charges for management, advertising, and oilier corporate services. The agreement negotiated depends on the relative bargaining power of tlle parties and the issues brought to the table. Usually, however, the franchisor, having a great deal more information about tlle business, is in the better position to negotiate an advantageous agreement.

The Franchise Relationship The relationship between a franchisor and a franchisee is one of contract. The contractual relationship is governed by the general prin ciples of contract. In Alberta,24 Ontario,25 Prince Edward Island,26 New Brunswick,17 Manitoba,"' and British Columbia 29 the general principles are augmented by specific franchise leg- islation. The legislation is d esigned to provide protection for franchisees.

BUSINESS AND LEGISLATION

BRITISH COLUMBIA'S FRANCHISE LEGISLATION

British Columbia is tl1e sixth province to enact franchi se legislation, joining Alberta, Ontario, Prince Ed ward Island, New Brunswick, a nd Mani- toba. The Act, which came into force on February 1, 201 7, provid es a substantially similar regime to franchise legislation in other provinces. The basic elements of the BC statute a re a definition of franchise, a duty of fair dealing on all parties to the franchise agreement, disclosure require- ments of the franchisor, and a right of associa- tion for tl1e franchisee.

Definition of Franchise: The definiti on of fran- chise includ es both the "business format" fran- chises, such as fast-food outlets, and "prod uct

24 f.ratich1ses A.ct, RS.a. 2000, c r ·23 25 Atthur V"lishatt Ac! (FtbnehJ.'>e Qsck'JsureJ. 2000, SO 2000, c !i 26 FrtN?ChtS!!SAc.l RSPC:IJ998,c F·l4.l 27 Franch!Ses Ac.~ SNB 200/, c r ·23.5. 28 f1tNrch1ses Act, CCSM c f1Sb. 29 fr>r!Ch!S<!S A<:i SBC 2015. c 35

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distribution" a rrangements, such as vending machines. The elements common to the d efini - tion of a franchise are

the granting of a r ight to conduct business unde r a trademark;

the charging of some initial and/or ongoing fee for that r ight; and

the exercising o f substantial control over the franchise operations.

If one of these elements is not present in a business, tllen it is unlikely to be a franchise as defi ned by the legislation.

Fair Dealing: Parties to a franchise agreement have a duty of fair d ealing in the performance and enforcement of tlle agreement. The duty of

fair d ealing includes a duty to act in good fai th and in a ccordance with reasonable commercial standards. Thi s means, in effect, that both the franchisor and the franchisee have at least the obligation to consider the interests o f the other in making d ecisions and exercising discretion. The Act also establishes a r ight to sue fo r the breach of that duty.

Disclosure Requirements: Franchi sors are req uired to deliver a disclosure document to pro· spective franchisees 14 d ays prior to the fran- chisee entering into binding agreements or paying money. The disclosure requirements set out in the Act and regulations"' require the franchisor to dis- close all material fa cts relating to the franchise, includ ing risk warn ing statements, background information on the franchise and franchisor (i.e., bankruptcy and insolvency h istory, expected costs of establishing a franchise, contact particu- lars for current and former franchisees a nd adver- tising programs), and financial statements.

Franchisees have the right to rescind or cancel the franchise agreement within cert ain time

periods if the disclosure d ocument is la te or d oes not meet tl1e requirements of the Act (60 d ays), or if they do not receive it at all (two years). In such cases, they are entitled to receive everything they paid for the franiliise, as well as compensa- tion for any losses incurred. In addition, the fran- chisee has a right of action for d amages where it s uffers a loss because of a misrepresentation contained in the disclosure d ocument or as a result of a franch isor's failure to comply with its disclosure obligations.

Right of Association: Franchisees have the r ight to associate with one another and form or join an organization of franchisees. Franchisors may not interfere, either directly or indirectly, with tl1e exercise of tlus right. The franch isee has a right of action fo r damages for contravention of tlus sect ion.

Critical Analysis: The motivation often cited for enacting franchise legislation is the imbalance of power between franchisors and franchisees. How d oes the legislation address this concern?

The relationship between a franchi sor and a franchi see d oes not normally create fid uciary obligations.31 However, the legislation imposes on the parties a d uty of good fai th and fair dealing in the per formance and enforcement of the franchise agreement. The courts have also ad opted this concept at common law. 31

The following case discusses the d uty of good faith a nd fair d ealing.

Fairview Donut Inc. v TDL Group Corp., 2012 ONSC 1252, [2012) OJ No. 834, aff'd 2012 ONCA 867, [2012) OJ No 5775 leave to appeal refused [2013) 2 SCR viii (note) [2013) SCCA No 47.

THE BUSINESS CONTEXT: Franchise legislation has made class action lawsuits ver y prevalent.

30 BC Reg 238/2016. s 2

Many o f Canada's high-profi le franchises- Quiznos, Midas, Shoppers Drug Mart, Pet Valu, and Suncor- have all been involved in class action litigation.

FACTUAL BACKGROUND : A group o f T im Hortons franchi sees complained that two changes introd uced by the franch isor nega- tively affected their profi tability. The "Always Fresh" mod el required franchisees to purchase

31 J;rn;> Udv 1'Amtct Donut of Can/Id/I !.Id, [1975! 1 SC.R 2, 40 DLR l3dJ 303 32 SheL>nu Inc v PrITTI "Thr"" fr~h/Slfl9 Ca<poratiOn (2003). 64 OR 130) S33. 226 DLR 14 lhl 577 iCAJ

368 NEL

par-baked (half baked and then flash frozen) goods from a central bakery rather than baking the products in-store from scratch. This, they argued, resulted in higher costs and reduced profit margins. The second change, the "Lunch Menu", required the franchisees to provide various meal options to supplement coffee and baked goods. The franchisees argued that the franchisor charged unreasonably high prices for the ingredients for these items and that the Lunch Menu diverted resources away from more profitable items. Again, they claimed their profit margins were red uced . In their statement of claim, the franchisees alleged, among other things, that the franchisor had breached express and implied terms of the franch ise agreement and the duty of good faith and fair dealing. They claimed $1.95 billion in damages o n behalf of a class of between 500 and 800 franchise owners. The franchisees brought a motion to certify the class action and the franchisor brought a counter motion to dismiss the entire action.

THE LEGAL QUESTION Did the franchisor breach express or implied terms in the franchise agreement? Did the franchisor breach the duty of good faith and fairdealing?

RB.>OLUTION The Ontario Superior Court dismissed all claims against Tim Hortons. The court found that there was no breach of an express term as there was no requirement that a new product or model of doing business had to be profitable in its own right. The language of the franchise agreement provided Tim Hortons with wide discretion to make business deci- sions for the financial benefit of the franchise system as a whole. Evidence suggested that the Always Fresh model was beneficial to the fran- chisees and was a rational business decision by Tim Hortons as it addressed legitimate concerns about the long-term viability of the making from scratch method. The court also held that there was no implied term requiring T im Hortons to supply ingredients to franchisees at lower prices than they could obtain on the open market.

33 rt1NVK'YI Donur Jnc v TOI. C1oupCo1p, 2014 ONSC 776, 12014 j0J No 508.

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Why are {ranchisingcofrJ'anies a magntt for<lassa<tion litigation?

There was no evidence that franchisors in gen- eral, and Tim Hortons in particular, passed on to their franchisees the benefit of their purchasing power on every single item they supplied.

On the good faith and fair dealing argument, the court noted that the duty does not require the franchisor to consider the franch isees' interests at the expense of its own. Further, it does not create an obligation on the franchisor to ensure that a franchisee makes a profit on every item that it sells. The franchisor's con- cern is for the system as a whole and since the system remained beneficial to the franchisees overall, there was no breach of the duty of good faith and fair dealing. The duty of good faith and fair dealing must be assessed in the context of the entire relationship, not in relation to iso- lated incidents.

The appeal court endorsed the lower court decision and Tim Hortons was awarded costs of $1.85 million.33 Leave to appeal to the Supreme Court of Canada has been dismissed.

CRITICAL ANALYSIS. Once the judge dismissed the action, the question of certification was moot. He did, however, indicate that if the claims had not been dismissed, he would have certified the class action. He also stated that franchise disputes are frequently suitable for certification. Why do you think franchise dis- putes are suitable for class action certification? Once a certification is granted, the class action is

most often settled and does not proceed to trial. Why do you think that happens?

that acquired Tim Hortons in 201 4, and its top executives. The group is claimi ng $500 million for alleged misuse o f the franchisees' a d fund

and $850 million for alleged subversion o f the right to associate.34

POSTSCRIPT: A group of Tim Hortons franchi- sees h a s filed class a ction lawsuits against Restaurant Brands Internation al, the company

Joint venture A grouping of two or more businesses to undertake a particular project.

Strategic alliance

An arrangement whereby two or more businesses agree to cooperate tor some purpose

Joint Venture A joint venture is an association o f business entities- corporations, in dividuals, or partnerships- that unite fo r the purpose o f carrying on a business venture. Normally, the parties agree to share profits and losses and management o f the project. Ajointventure is usually lim ited to a specific project or to a specific period of time but not necessarily so. For exan1ple, the Osoyoos Indian Band o f the Okanagan Nation in a joint venture w ith Vin cor International In c. (Canad a's leading wine company) created Nk'Mip Cellars, the first In digenous-run winery in North America.35 Also, Cronos Group (a licensed cannabis prod ucer) and Phil Fontaine (the fo rmer national chi ef of the Assembly o f First Nations) have launched In digenous Roots, a joint venture to provide medical marijuana to First Nations patients.36 Luke and Raina could conceivably enter into a joint venture with another entity or in divid ual for the purposes o f marketing and selling their product to particular events such as an international trad e shows.

The joint venture itself can take a variety of for ms. The joint venture may be a partnership, in which case all the legal consequences associated with a partnership apply. It may also be an equity joint venture. This is when the p arties in cor porate a separate corporation for the project and each party hold s shares in that corpo- ration, in which case the consequences of in corporation apply. For example, Rogers Communications and Bell Canada forme d Inukshuk Internet Inc. to build and operate a national wireless network. A joint venture may also simply be a contractual a rrangement between the parties. In such a case, the contract may spell out the n a ture of the relationship between the parties. However, the law can impose d uties on the parties beyond those specifie d in the contract. 37 Most sig- n ificantly, parties to a joint venture can be held to owe fidu ciary d uties to one another in relation to the activities o f the joint venture.

Strategic Alliance A stra tegic alliance is a cooperative arrangement among businesses. It is an arrangement that may involve joint research , technology sharing, or joint use

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31 Supra note 1 at 20.

NEL 370

o f prod uct ion, for example."" Canadian Imperial Bank o f Commerce (CIBC) has entered into an alliance w ith the National Australia Bank (NAB) an d Israel's Bank Leumi to share prod uct d evelopment su ch as block chai n technology that enables banks to settle fi nancial transactions and to facilitate the exchange o f employee talent.39 Luke and Raina could fo r m a strategic alliance with another entity to d o joint research into applications o f their t ime management system.

Like a joint venture, a strategic alliance does not have a p recise legal meaning. The und erlying relationship between the parties is normally contractual. The contract or a series of contracts will spell out the parties' rights a nd obligations, including whether or not they are agents for each other. Whether the parties to a strategic alliance owe fiduciary obligations to each other is unclear.

Distributorship or Dealership A product or ser vice distributorship is very much like a franchise. A contract is entered into whereby a manufac turer agrees to provid e products and the distributor or d ealer agrees to carry prod ucts or perfo rm services prescribed by the manufacturer. This k ind of arrangement is often encountered in the automotive and computer ind ustries. Rather than selling their system themselves, Luke and Raina could engage a distributor or d ealer to sell their system.

The relationship between the parties is governed by the contract. There are no fid uciary obligations owed by the parties to each other beyond those spelled

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Distributorship

A contractual relationship where one bu siness agrees to sell another"s produ cts

out in the contract. As well, a distributorsh ip d oes not nor mally involve an agency relationship. [n fact, the contract may specify that the distributorship is not an agency.

INTERNATIONAL PERSPECTIVE

GOING GLOBAL

Stra tegic alliances are one of the leading busi- ness strategies of tl1e twenty-fi rst cen tury. They take many forms, fr om simple market exchanges or cross-licensing agreements to com- plex cooperative-manufac turing arrangements or joint-eq uity ventures. Strategic alliances can help firms lower costs, exploit each otl1er's specialized skills, fund costly research and development efforts, and expand into fureign markets. Using a strategic alliance to access a foreign n-.aiket usually involves "partnering" with a "local" to take advantage of his

familiarity with the social, cultural, legal, and other conditions in the market. There can also be a host of other advantages to this busine.ss arrangement, including sharing costs and r isks with the local partner, avoiding import restrictions a nd other trad e barriers, and meeting the host country's requirements fur local ownership.

Critical Analysis: What are the risks associated with using a strategic alliance to access a foreign market? Why would a country require that a for- e ign business have local pa rticipation? Can you think of any legal reasons?

Sales agency

An agreement in which a manufacturer or distributor allows another to sell products on its behalf.

Produ ct licensing An arrangement whereby the own er of a trademark or other propn etary ngh t grants to another the right to manufacture or d 1stnbu te products associated with the trademark or other proprietary right.

Sales Agency A sales agency relationship is usually an arrangement whereby a manufacturer or distributor contracts with an agent to sell goods or services supplied by the ma nufacturer or distributor on a principaVagent basis.4 0 The agent is not the actual vendor but acts on behalf of a principal, who is the owner of the goods or services. As this relationship is one of agency, fid uciary obligations are owed. Thi s arrangement is o ften encountered in the travel, real estate, and insurance ind ustries.

Product Licensing [n a p roduct licensing arrangement, the licensee is granted the r ight to manu- facture and distribute prod ucts associated with the licensor's trademarks or other proprietary rights, usually within a d efined geographic area. Licensing is common for many consumer goods such as clothing, sporting goods, and merchandise con- nected to the entertainment industry. Anne of Green Gables (images of Anne, Green Gables, and related trad ema rks) , for example, is licensed to almost 1 00 businesses.4 1 The relationship between the parties i s contractual, and the agree- ment usually covers such matters as the granting of rights, the obligations of the parties, the term of the agreement, and fees and royalties. This arrangement is explored in more d epth in Chapter 18.

40 See Chtlpt~r l~ fo1 a diSCtJSSiOn or the duties ~!lC! ti.l!:>lities 01 agents. 41 AnrK! of Green Ga~s Licensif\g Aolhcmly Inc-., l.JcensecJ P1od1.JCtS, on11ne lnnov~hon Pll <hllp//w..v"'

1nnova11onpel.oom/ann_tis tphp3>

372 NEL

BUSINESS LAW IN PRACTICE REVISITED

1. What forms of business organization are available for carrying on Luke and Raina's business?

Luke and Raina may carry on their business as a sole proprietorsrup, in partner- ship with others, or through a corporation.

2. What are the major considerations in choosing a particular form?

Roger is willing to invest in the business but is unwilling to accept risk beyond his investment. Thi s consideration eliminates an orclinary partnersrup, as it would expose rum to a dditional r isk; a limited partnersrup is a possibility. However, Roger would not be able to partake in the management of the organization. If he did, he could lose ms limited liability status. As Roger has a great d eal of busi- ness experience, Luke and Raina might want to be able to seek his assistance. A sole proprietorship exposes only one person to unlimited l iability; however, if the others participate in profits and management, there is a risk of an "unintende d" partnership. Thus, it would seem that the most viable alternative is a corporation, with Roger investing ms money in shares. Tills alternative limits ms exposure to r isk and allows for ms potential participation in profi ts.

Both Luke and Raina are interested in taking a role in the management of the venture. Tills consideration could be a ccommodated witrun a partnersrup agree- ment, although it may be clifficult to agree on the valuation of their time and expertise. As well, they may be averse to the risks associated with a partnership. The other option isa corporation, with both investing in shares. Thi s would allow participation in profits as a means o f compensation for services.

3. What form is best for Luke and Raina's business?

For the reasons given above, a corporation may be the most appropriate, but the success of Luke and Raina's busjness is not dependent on the form chosen. M uch more important is the viability of the idea and their ability to bring it to fruition.

CHAPTER SUMMARY Most busjnesses are carried on usjng one of the basic forms - sole proprietorship, partnersrup (or one of its variations) , or corporation. These forms have varying characteristics, most notably with respect to the exposure to liability. Sole pro- p rietorsrups and partnersrups expose their owners to personal liability for the business's obligations. A corporation, on the other hand, has the attraction of limited liability for the owners- their liability is limited to the amount of their investment. Thi s characteristic, however, can be neutralized. For example, a sole proprietor can escape the effects of unlimited liability by transferring assets to a relative prior to commencing business. As well, the advantage of lim ited liability in the corporate form can become meaningless if creclitors insist on a personal guarantee from the owners of the corporation.

Each form has other ad vantages and clisadvantages. The form chosen for a business enterprise depend s on an evaluation of numerous fac tors, such as inves· tors' aversion to r isk, thei r d esire to earn profits, and their wish to participate in d ecision making. In short, the best form for a particular situation depend s on all the circumstances.

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A partnership is the form most often found in the professions. This is d ue, in part, to prohibitions against some professionals incorporating. A partnership subjects the partners to unlimited liability. The other defining feature of a part- nership is agency- a partner is an agent for other partners and for the partner- ship. The effects of agency between the partners can be modified by a partnership agreement; however, the effects of agency in relation to outsiders cannot, and are governed by the Partnership Act.

A business may also at some point enter into an arrangement with another entity for carrying out business activities. The various arrangements are all based on a contract negotiated between the parties. Regardless of the arrangement entered into, the business still needs to be carried on using one of the basic busi- ness forms.

It is important to remember that it is the viability of the business itself that is critical, not necessarily the form o f the business or the particular arrangements made. Put another way, a business does not succeed because it chooses a franchise arrangement over a distributorship. The key to a successful business is having a solid business plan that is well executed.

CHAPTER STUDY

Key Terms and Concepts di.rector (p. 354)

distributorship (p. 363)

dividend (p. 35 5)

franchise (p. 358)

joint and several liability (p. 349)

joint liability (p. 343)

joint venture (p. 362)

limited liability (p. 355)

limited liability partnership (LLP) (p. 353)

limited partnership (p. 352)

partnership (p. 343)

product licensing (p. 364)

sales agency (p. 364)

shareholder (p. 354)

sole proprietors hip ( p. 339)

strategic alliance (p. 362)

unlimited liability (p. 340)

Q uestions for Review 1. Define sole proprietorship, partnership, and

corporation.

2. What are the advantages and disadvantages of a so le proprietors hip?

3. How is a sole proprietorship created?

4. What are the advantages and disadvantages of a partnership?

5. How can a partnership come into existence?

6. Does the sharing of profits result in the creation of a partnership? Explain.

7. How can a partnership come to an en d?

8. How can the r isks of the partnership form be managed?

9. What is the difference between a general and a lim ited partner?

1 0. Explain the difference between a limited partnership and a limited liability partnership.

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11. What are the advantages and disad vantages of the cor porate form?

12. How is a corporation created?

1 3. What is the difference between a business form and a business arrangement?

1 4. What is the basis of a franchlse? What is the relationship between parties to a franchise agreement?

1 5. How does franchise legislation change the relationship between a franchisor and a franchi see?

1 6. Is a joint venture a partnership? Explain.

1 7. What is the difference between a joint venture and a strategic alliance?

18. Is a distributor an agent? Explain.

Questions for Critical T hinking 1. Many high-profile franchise operations-

Dunkin' Donuts, T im Hortons, Pet Valu, General Motors, Quiznos, and Midas, for example- have been involved in class action lawsuits in Canada. What is it about franchising clisputes that makes them suitable for resolution by class action?

2. Joint ventures are appropriate in situations where a complex project requires the combining of the expertise and resources of two or more entities for a limited period of time. From a legal perspective, what are the risks associated with joint ventures? How can the parties manage the risk?

3. The limited liability partnership is a response to concerns about professionals' exposure to liability for their partners' malpractice. What is the nature of the liability created by the partnership form? How does the creation of an LLP address thi s liability concern? Is it appropriate that accountants and lawyers, for example, enjoy limited liability? Is there a downside for a law or accounting firm to converting to an LLP?

4 . What are the circumstances in which a partnership may be found to exist? What steps can be taken to avoid a finding of partnership? How can the consequences of being foun d a partner be mi nimized?

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5. In the limited partnership form of carrying on business, the limited partner 's liability is limited to her actual or agreed upon contribution to the partnership. To preserve this status, the limited partner must not participate in the management of the partnership busine.ss. What do you think is the reason for this prohibition? Can you think of situations where it would be useful for the limited partner to participate in management?

6. What is the difference between the duty of good fai th and fair dealing and a fiduciary d uty? How does the standard of good fa ith and fa ir dealing apply to the franchlse relationshi p?

Situations for Discussion 1. Kenned y, Logan, and Morgan were avid

hockey fans. They decided to put together an expression of interest for the purchase of a 50% interest in an NHL hockey team. They discussed some of the terms they wished to include in the.ir proposal but did not come to an agreement as to the terms by which they were prepared to be bound. They also did not discuss the terms that would govern their relationship but all three understood that no member of the group could bin d the others to any agreement d uring negotiations with the team owners. Over several months, the three put together a number of proposals but none were of interest to the owners. A short time later, Kenned y decided he no longer wished to pursue the joint acquisition and left the group. He clid tell Logan and Morgan that he remained interested in acquir ing a share in the team in the future should the opportunity arise. Logan and Morgan clid not commit to including him as part of the group again and no conclitions were imposed on any member of the group at the time of Kennedy's departure.

Logan and Morgan developed a proposal based on a clifferent ownership structure than that proposed before Kennedy's departure. It involved the purchase of a 75% interest in both the team and the arena. Negotiations based on this proposal did not progress significantly until Logan and Morgan offered to purchase 1 00% of the team and the arena. When Kenned y learned that Logan and Morgan were negotiating to

acquire full ownership of the Canucks, he asked them whether he could participate in the deal. They said "no."

Logan and Morgan continued to negotiate with the team owners but were unable to reach an agreement. Kennedy, without informing Logan and Morgan, entered into negotiations with the team owners and reached agreement to purchase 50% of the team and the arena with an option to purchase the remaining 50%. Ten days later, Logan and Morgan learned about the deal in the newspaper. They sued Kennedy, alleging they had formed a partnership or joint venture with Kennedy and as a result Kennedy owed them a fiduciary duty, which he breached by acquiring an interest in the team and arena while Logan and Morgan were attempting to do the same.4 2 Was there a partnership or joint venture between Kennedy, Logan, and Morgan? Did Kennedy owe any duties to Logan and Morgan?

2. Edie, Alma, and T im established a restaurant called EATs. Edie, a retired teacher, invested $20 000 in the venture, and Alma and Tim each invested $10000. Edie, Alma, and Tim do not have a formal agreement concerning the allocation of responsibilities, but they each take turns doing the cooking. The serving and dean up tasks are done by staff. One day, while Edie was doing the cooking, Juan got food poisoning from his meal. Juan intends to sue EATs, Edie, Alma, and Tim for damages of $100000. If Juan is successful, how will the damages be allocated among the parties? If the restaurant were incorporated under EATs Inc_ and Edie owned 50% of the shares, Alma owned 25%, and Tim owned 25%, how would the damages be allocated? What do these two situations illustrate about risk?

3. Regan, Riley, Madison, and Mackenzie were partners in a law firm. Regan gave the other partners written notice that he was leaving the partnership on March 31. The other partners purchased Regan's interest and agreed that he

42 BM<-'<.i on Biuc 1.Jnc I Jodlcy Acat1JsJr10n Co.. Inc. v Oca B.7y J Jockey Urr111cd p,,, ff1Cf$hip, 20illl BCSC 27, 4() BLR l4fh) 83. alf d 2009 BCCA 34.120091 8 WWR i13

would not be liable for any future partnership debts. At the end of May, it was discovered that Riley had, during the previous month, made various investments on behalf of a couple of elderly clients. The investments were either unsecured or undersecured and the elderly clients lost over $250000. None of the other partners were aware of Riley's activities although the law firm had occasionally invested funds on behalf of clients in the past.43 Who is responsible for the elderly clients' losses? What precautions could the partners have taken to prevent this situation?

4. Zowie was interested in starting a magazine catering to alternative lifestyles. Wanting to avoid the double taxation inherent in the cor porate form of carrying on a business but still having the benefits of limited liability, he settled on a limited partnership for carrying on his business. He first incorporated a company, Lifestyles Publishers Inc., an d became its controlling shareholder and president. Zowie then form ed a limited partnership with Lifestyles as the general partner and himself and two other investors as limited partners. The limited partnership was duly registered. Shortly thereafter, the limited partnership entered into a contract with a printing company, Print Press Inc., to print the magazine. Five issues of the magazine were published and printed and then the limited partnership went into bankruptcy, leaving Print Press unpaid for the printing of three of the issues. Print Press sued Zowie to recover its money.44 ls Zowie liable for Print Press's losses? What factors determine his liability? Are Zowie's actions in arranging his business affairs unethical? Explain.

5. Jody Ingalls is a recent university graduate with a BSc in kinesiology. As she was having difficulty fi nding a job, Jody decided that she could create her own job by opening a fitness club. As luck would have it, she saw an advertisement in a Halifax newspaper featuring franchise opportunities in the fitness industry.

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44 H1>:Jgh1on G1tl{lhi: Lid v Z1o'OI. U9B6l 33 BLR !<5 IOnt 1 ICJ. 119861 OJ No 288 afl d 11998). 38 BLR U988J OJ No 2'157 IOn C:AJ loi>llO 10 aopeal den'"° 11988) 38 BLR '°"'' ISCCJ

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Jody responded to the ad and the franchise owner showed her the financial statements for a "Fit for Life" fitness franchise in a Halifax suburb. The income statements indicated that the franchise had made $100000 per year for the past several years. Jody was extremely excited and agreed to lease it for $50 000 per year for a five-year period. She signed the contract and started carrying on the business. Jody worked 12-hour days for a year but was not able to make a profit, and now she wants out of her contract. Can Jody get out of the agreement? Explain. Would your answer be different if the franchise was located in New Brunswick? Explain. What are the legal risks associated with "purchasing" a franchise? How can the risks be managed?

6. Ragini and Rajiv were co-owners of a number of properties located in the suburbs of Surrey, BC. They had acquired the properties for resale and planned to subdivide and scll them for a profit over the next few years. One property, known as "The Corner", was too small to

HEl

meet the legal requirements for subdivision. Ragini and Rajiv hoped that they would be able to acquire adjacent property so that their subdivision plans could proceed. Rajiv did all of the work in the investigation of the surrounding properties while Ragini stayed in the background. She had recently been "downsized" out of her job and spent most of her time looking for alternative employment. Rajiv learned through his investigative skills that Ming. the owner of an adjacent property. would be willing to sell his property for the right price. Raj iv also knew that Ragini, because of her job loss, would not be able to raise her share of the purchase price, so he purchased Ming's property on his own behalf. Shortly thereafter, he offered to buy out Ragini's interest in "The Corner" for $15 000 more than the fair market value; Ragini accepted the offer. Raj iv consolidated "The Corner" and Ming's former property, subdivided them, and sold them for a $250 000 profit. When Ragini learned of Rajiv's purchase of Ming's property and the sale of the subdivided lots, she was very upset. Raj iv simply pointed out that she did not have the money or the means to share in the purchase of Ming's property, and he had paid a

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premium price for her interest in "The Corner." Besides, he argued, it was his investigative skills and hard work, not hers, that led to the profit on the subdivision sale. What is the nature of the relationship between Ragin.i and Rajiv? Does Rajiv have any legal liability in these circumstances? Explain.

7. Thomas, a young entrepreneur, started a construction business. Ari, who owned and operated a radio station, agreed to run some advertisements for him. Unfortunately, Thomas was unable to pay Ari for the services. In the hopes of making the business profitable so that he could get payment under the broadcasting contract. Ari. without remuneration, assisted Thomas in his business. !n fact, on behalf of Thomas. Ari signed a contract with Lopez for plumbing and heating supplies. When payment for the supplies was not forthcomi ng, Lopez sued Ari, claim ing that Ar i was Thomas's partner and therefore was responsible for the debt . Ari claimed that, when he signed the contract, he was acting as Thoma s's agent.•• What difference does it make whether Ari is considered to be Thomas's agent or his partner? What factors are important in determining the nature of a relationship between individuals?

8. Amir Sammi entered into a franchise agreement with Timothy's (a coffee business) to operate a store in the Lakebeach Shopping Centre in Montreal. Timothy's had a lease with four years remaining for a location on the third floor of the shopping centre. Sammi became a sublessee under Timothy's lease. The franchise agreement expired on the same date as the sublease even though a traditional franchise agreement runs for 10 years to allow enough time for the franchisee to recoup his investment. Concerned about the short term remaining on the lease and the franchise, T imothy's granted Sammi an option to extend the sublease and the franchise if Timothy's renewed its lease with the mall owner. [n the year prior to the expiry of the lease, Sammi left repeated messages for Timothy's r egarding the renewal of the lease. These

4 5 Sasad, 11') pan .. on LMripc"rl PJurnbu:q {C),lf1fotlh) t.fd v ..o.g,Jthos, 11!.)7~ 3 OR ll. 27 Dlll t3o) 284 tCoc.o

messages were unanswered and represen- tatives of Timothy's asked Lake beach not to pass on information about lease negotiations to Saromi. In the meantime, Timothy's was negotiating with Lakebeach and entered into a lease for a location on the second floor. Timothy's signed an agreement with a new franchisee for that location . Eventually,

Sammi was advised that his franchise agreement would end at the expiry of the third-floor lease as Timothy's was unable to renew the lease for that location. Sammi brought legal action against Timothy's. 46 What is the basis of the action against Timothy's? Evaluate Sammi's chances of success. If Sam mi is successful, what remedy or remedies can he expect?

46 Sa'ah v 1iroothy's Coffees. ol the Wor!d Inc., 2010 O NCA 673.. 74 BLR 14th) J6L

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BUSINESS LAW IN PRACTICE

Luke and Raina (introduced in Chapter 14) have been working with Sandra Higgins of Envision Business Labs to develop a business plan for their team management system. They are delighted that industry analysts have given a thumbs-up to their plan. Buoyed by favourable feedback, the team decided to engage the services of a marketing firm to assist with a detailed marketing strategy. Initial results from the mar- keting firm's consumer surveys indicate that there is, indeed, significant demand fur the team management system in a wide range of industries.

Anxious to proceed with the plan, Luke and Raina have made an appointment with a lawyer to assist with incorporating a company w ith a head office in Calgary. They have a name, Time-in Team Management Incorporated (Tim e-in Inc., for short), and they plan to be equal shareholders given that they will both continue to be involved in the management and expansion of the business. However, Luke and Raina are unsure how to structure an investor's involvement in the business. Roger (introduced in Chapter 14) will not be participating in the day-to-day operations, but will be giving advice and contributing $ 200000 in capital.

The only major problem revealed by the business plan- and it is a significant one-is that the business is underfunded. Sandra informs them that they will need an additional $350000 to fund the expansion into other countries and markets. Luke is not too concerned about this news, in part because he has read an article in The Globe and Mail on 10 of Canada's most successful crowdfunding campaigns.1 "I can crowdfund. No problem." says Luke. "I'll make a short video on our team management system, upload it on the Internet, and have people purchase shares in the business.And if that does not work, I will simply sell some shares to friends and family."

1. How is a corporation formed, and what factors should Luke and Raina consider in forming a corporation?

2. What options are available for involving Roger in the business?

3. What factors should Luke and Raina consider in seeking to raise money by selling shares?

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OBJECTIVES After studying this chapter. you should have an understanding of

• a corporation as a leg al person

• the distinction between federal and provincial incorporation

• the share structure of a corporation

• the selection of a corporation's name

• how a corporation is created

• how a corporation is financed

• how securities are regulated

The Corporation Defined The corpora tion1 is the pred ominant business vehicle in modern commerce because it is a separate legal entity. For this reason, it is able to remed y many of the shortcomings associated with the other prevalen t business forms - the sole proprietorship and the partnership.

The notion that the corporation possesses a legal identity separate and distinct from its owners has fund amental repercussions. It means that the corporation alone is responsible for its own d ebts and other liabilities. Should the corporation fail to make good on its obligations, the sharehold ers a re not responsible for the default. The most that they stand to lose is the purchase price o f their shares.

If Luke and Raina d ecide to run their team management business with Luke as a sole proprietor (and Raina as an employee), Luke is gambling his personal assets if the venture proves to be a financial disaster. Yet if they decide to run the identical business through a corporation, none o f Luke's assets are at r isk.

The law recognizes this different outcome as being perfectly legitimate and eminently just. As indicated in Chapter 14, the key question is this: who has incurred the obligation in q uestion? Liability falls on that entity- be it an ind ividual or a corporation- and that entity alone. Put another way, the creditor must d ecide with whom she is doing business and live with the consequences of that de cision.

The concept o f a corporation being a separate legal entity is complex. 3 It was established in 1897 in a case tl1at remains atthe centre of modern corporation law.

Since Salomon v Salomon Ltd (see the Land mark Case below), the separate legal existence of the corporation has not been seriously dlallenged. Corporations, with few exceptions, continue to be treated as entities separate from their sharehold ers. The cornerstone of corporation law- limited liability- is secure.

Salomon v Salomon Ltd, [1897) AC 22 (HU

THE HISTORICAL CONTEXT: When Salomon was d ecided , the corporate form was just comi ng into wid er usage. At the time, it was unclear whether companies with few share- hold ers would be recognized as separate legal entities.

FACTUAL BACKGROUND: Aron Salomon car- ried on a profi t able shoe-manufac turing busi- ness for many years as a sole proprietor. He decided to fo rm an incorporated company- Aron Salom on and Company, Limi ted- as the vehicle through whidl to run his business. The

Companies Act, which set out the rules fo r cre- ating a company, required that a company have a minimum of seven sharehold ers. Therefore, Aron took one share and members of his family took the remaining six shares.

Aron became the managing director. Prac- tically speaking, Aron Salomon and Company, Limited, was a" one-person company", since Aron en tirely controlled the company. Put another way, the other participants in the company had no involvement in operations: any d ecision the company took was only because Aron wanted it to follow that particular course of action.

Next, Aron Salomon and Company, Lim · ited, agreed to purdlase the assets o f Aron's

2 In. B111is!\ COOm!>a a co1001a1on iS osu~y ~•oo a ·com;'X)ny · Atti\Ou91\, slr ctty· soaaking, tf'\e t'211ns are oot synonymous, lh<:.y ara used interchan-;ieabfy 10 tl'\!S text.

3 Most ol theOislinguishing cha1acteris1csof a corpo1ati0n-t1m1ti'!dliabiUy for sha1et"K>liderS, oe1pe1uatexis1~nce. se;)<')1ati0not ow00rs":lio ar'ld ~nagernen1, ease of 11ansleni!lQ owne1s":lip, aoo se~rate t.'))(3ti0n-a1e a conseouence ol a co1po1a1.on OOing a k?9a\ entity d!Sl!ncl hom its sha1eh01ders TOO cha1aclt'!riStcs or a coq::.-orattO!la1ediscussed inChaote114

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sole proprietorshlp. As the co r poration had little cash, Aron was i ssued 20 OOOshares anda mortgage secured by the shoe-business assets. In tills way, Aron became a highly protected creditor of his own company.

The business suffered fi nancial problems d ue to a series of strikes and the loss of gov- ernment contracts. The company became insolvent, and a trustee was appointed to d eal with its creditors and dose d own the business. Many creditors of Aron Salomon and Compa ny, Limited, lined up for payment, but there were insufficient assets to satisfy them. In response, the trustee in bankruptcy took the position that Aron was personally responsible fo r all his com- pany's debts.

THE LEGAL QUESTION: Was Aron liable for the d ebts of Aron Salomon and Company, Limited? Was Aron a legitimate creditor of the company?

RESOLUTION: A corporation- large or small- is a separate legal entity and, as such, is totally responsible for its own obligations. Indeed, one o f the main reasons for creating a compa ny is to limit liability in the event of bankruptcy. The court rejected the argument that there was som ethlng essentially improper about an

individual cond ucting ms business through a one-person corporation to secure the protec- tion of limited liability. If a number of persons can lim it their liability in this way, then why should n' t a single per son be able to do the same thi ng? After all, it should not make any difference to a creditor whether one or several sharehold ers limit their liability.

The House of Lords also confi rmed that there is nothlngwrongwith a sharehold er being a creditor of tl1e corporation, even when tl1at shareholder essentially controls the company in question. Furthermore, the creditors had chosen to d eal with Aron's company- not with Aron, the in divid ual- and had chosen to do so on an unsecured basis. They, in tum, would have to live with the adverse outcome o f that business decision.

CRITICALANALYSIS: Do you think that the court went too far in giving independent existence to tl1e corporation, especially when the intere.sts of Aron and his company were virtually identical? Should the shareholder of a one-person company be entitled to limited liability? How could the creditors, other than Aron, have better protected themselves in this situation?

Stakeholders in the Corporation The corporation has a legal existence and, as sudl, is treated in law as a person. That said, the corporation is an artificial entity whose activities are controlled entirely by human beings. A corporation not only comes into being through the actions of humans, but also can make decisions, formulate policy, and enter contracts only through the actions of humans. Eadl of these individuals, o r groups of individ uals, is referred to as an internal stakeholder of the corporation. In short, internal stakehold ers are those who have a direct or indirect role in governing the corporation and d etermining its m ission and how it will be adlleved. Sharehold ers are those persons who have invested in the cor poration by buying shares in return for a potential share of the corporate profits and other benefits. Shareholders d o not have any direct authority to manage the corporation. However, they do have the power to elect the board of directors and therefore can have a strong influence on the direction of the corporation. The board of directors is charged with management functions - including policy development- and is answerable to the shareholders since, should it perform poorly, the board runs the risk of being voted out of office. Corporate officers- such as the president, secretary, and treasurer- are another important internal group. They are hired by the board of directors and are dlarged with managing the d ay-to-d ay operations of the corporation.

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Stakeholder

One who has an interest in a corporation.

Officers

High· level management employees appointed by the directors of a corporation to manage the day· to-day operation of the corporation

Not surprisingly, the internal stakeholders may come into conflict with one another, as well as w ith the corporation itself. The bulk of corporation law seeks to regulate tl1e relationships among the corporation's internal stakeholders. Chapter 1 6 will provide a more detailed account of internal stakehold ers. They are introd uced here to esta blish some of the basic vocabulary associated with the corporate form, as well as to identify its central players.

The internal stakeholders are not the only stakehold ers. The corporation has a tremend ous impact on much of society. External stakehold ers are people who have dealings witl1 or are affected by the corporation but do not have an explicit role in governing the corporation. Examples a re government, the general public, employees, customers, and creditors. These groups, altl1ough external in the sense that t11ey are generally not involved in corporate governance, nonetheless have an interest in the corporation, and tl1eir interests receive recognition in some circum- stances. The relationship between tl1e cor poration and its external stakeholders is explored briefly in Chapter 1 6.

Pre-Incorporation Issues Assuming Luke and Raina decide to do business through a cor poration, they must make a number o f d ecisions prior to preparing and fi ling incorporation d ocu- ments. They must decide

whether to incorporate fed erally or provincially.

what type of shares will be available and to whom.

wha t to name the corporation.

These decisions will be influenced by a host of factors, such as the kind of business they intend to operate, where they intend to operate, how they inten d to manage the corporation, how they wish to accommod ate fu ture growth, and, in the case of a corporate name, its availability.

Provincial and Federal Incorporation Luke and Raina have the choice between incorporating federally and incorporating provincially. They have this choice because jurisdiction over the incorporation of companies is divided between tl1e fed eral government and the provincial govern- ments. Both levels of government have passed legislation that provid es for the incorporation o f companies. These acts embod y different mod els or prototypes as to how the corporation comes into existence.• Although the way in which the corporation is created varies, the different methods of incorporation have much in common. All methods allow for the creation of an entity that is recognized as a legal person, is owned by shareholders who enjoy limited liability for the d ebts of the entity,5 and is managed by directors who owe fid uciary duties to the entity.

4 The diffe1enL rrodehcu11~ntty 1ousea1ear11des or inCC1Po1alo11, m21n:>randumof assoc0L1CI\ a!'Y.I ten~rs patent. The federal government.. Atber-t.\ l~n11ot:-a N~v1 Brunswck.. N~·1foundla:ld aoo t.abiaoor_ Oniaro. and Sask.atche\win fOIO\Y the a11iek!s or iocorpo1a1cn modet. See C11t1udt1 BuSiness Co1po1a!10ns Ac:, RSC 1985. c C·44; BuS/rtess C0tpor~1ons Acr. RSA 2000, c B·9; Corpor11t1orts Aa, RSM 1987. CCSM c C·22S, Sustfk~ Cot(>Of<1tians Act.. SNS l98l c B-01, &ismess C0tpotat10r.s Aa. ~NL 1990, c C·36: &isiness Cotpotauons Aa, RSO 1990, c B~l6 ar'ld Bu.t..•ness Corpor;n:or1s Act. ~SS 1978, c B· lO f\bva Scola lolov.·s lhe me~ra!ldum or assOCk)tlOn moo~. See Compi'Nl1es Acr, RSNS 1989, c 81. P11!lc':e Cdward l~r.d a!'Y.I O!Jebec lotb.-1 lhe teue~ ~tent modd. See Comp;1r11esAa, R$~CJ 19BB, cC-14 .and Comp.!Hl.ies Act, RSO 1977,c C·3B. Br11iSl'\Cdumbia hcls tea"J res ol bOlh the a11,c~s ot assocaton .and 1he me'T'IOr.lndum of assocatiOn mOdets Soo Business Corpor;)flort:s Act. $BC 2002, c 51.

5 N0\0 S::ol!a, Attx:!rta. and BntiShCdumbia .llso provae ror unt1m1ted tlclbl11y co1po1atons IULC)

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When, then, should a business incorporate federally, and when would it be best advised to incorporate provincially? There is no hard-and-fast answer to this ques- tion. Federally incorporated corporations have a right to carry on business in each province, whereas provincially incorporated corporations have the right to carry on business only in the province in whlch they are incorporated. Thls difference has little practical significan ce, because each province has straightforward licensing procedures through whi ch corporations incorporated in other provinces can do business in that province.•

For corporations that intend to operate in more than two provinces, fed eral incorporation may result in lower administrative costs. For corporations that intend to operate in only one or two provinces, provincial incorporation usually results in lower ad ministrative costs.7 Since Luke and Raina intend to operate nationally and even internationally, they should seriously consider incorporating und er federal legislation.

Shares and Shareholders As part of the preparation for incorporation, Luke and Raina must d ecide on a share structure for the corporation. Thls entails deciding on the class or classes of shares thatthe corporation will be authorized to issue, what rights and privileges attach to each class, and the number of each authorized for issuance. Luke and Raina must also consider how the shares will be available and to whom they will be available.

Classes of Shares A share represents an ownershlp interest in the issuing corporation. It is, however, a unique kind of ownership interest. It d oes not give the owner or hold er any right to use the assets of the corporation or any right to directly control or manage the corporation. It d oes, however, give t11e owner those r ights that specifically attach to the share.

A corporation may simply have one type or class o f shares with all the basic shareholder rights attached to it. In this case, the share must include the right to

vote for the election of directors.

receive divid ends declared by the directors.

share in t11e proceed s on dissolution o f the corporation, after tlle creditors have been paid.

A one-person corporation witll no plans or aspirations for growth may choose this option. However, to ensure that the corporation has tlle flexibility to meet fu ture needs, it is prud ent to establish different classes at the outset. Though different classes could be created when the need arises, tllis would require an amendment to the corporation's constitution- a potentially costly and complicated procedure.

There are many possibilities for creating shares witll diverse rights (see Figure 15.1) so long as the basic rights mentioned above are distributed to one or more classes. For example, if Roger simplywants to be a passive investor in the business, shares without voting rights could be created to meet hls needs. If he wants some qualified assurance of the return of his share capital when and if Time-in Inc. wind s down, tllen shares witll preference rights on dissolution could be created. The possibilities are almost lim- itless; however, careful consideration must be given to how management and financial rights are distributed among classes of shares.

6 Pet~· Hogg, CoostitutiOn~ Law of Ct1nbda, Siil ed I.Toronto. O N <'.'.arsw~l 2007} lbose--4eaf sup~mern 1) a1 23--2?

'l Kevin PalriCk McGu;n~ss. Ct)ni'JdtiNl Busness Cot(>Olations u .. 1 ~ ed I Marie ham, ON l~x.tSNe.xis, 2017J al 178.

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Share structure

The shares that a corporation is permitted to issue by its constitution.

Widely held corporation

A corporation whose shares are normally traded on a stock exchange.

Securities legislation

laws designed to regulate tr ansa ct1ons involving shares and bonds of a corporation.

Closely held corporation

A corporation that does not sell its shares to the public.

FIGURE 15.1 Creating Classes of Shares

A class of shares may include a combination of various rights and privileges. Examples of typkal rights that may attach to a class of shares include the following:

voting righ rs: the right to vote for election of directors. financial rights: the right to receive dividends when declared by directors or the right to re<eive fixed dividends on a regular basis. preference rights: the right to re<:eive dividends before dividends may be paid to any other class of shareholders and/or the right, on dissolution, co receive invesnnent before any payments are made to any other class of shareholders. cumulative rights: tbe right to have a dividend .not paid in a partkular year added to the amount payable the following year. redemption rights: the right to have the corporation buy back the shares at a set price.

Luke and Raina may limit the number of shares of each class that can be issued by stating a maximum number, or they can simply leave matters open-ended by indicating that the number is "unlimited."

Availability of Shares A corporation may issue shares to the general public. This type of corporation is usually referred to as a widely held corporation (or public corporation)." A corporation that issues shares to the public is subject to regulation pursuant to the relevant securities legislation in those provinces in which the securities are issued or trad ed. Securities legislation, discussed in more d etail below, imposes registration and disclosure requirements on the issuers of the shares.

A corporation that does not issue its shares to the general public is usually known as a closely held corporation or private corporation.• The vast majority of Canadian corporations- including some very large enterprises, such as McCain Foods and the Irving companies in New Brunswick, James Richardson & Sons, Ltd in Manitoba, and Holt Renfrew & Co. in Ontario-fall into this category. These corporations are generally exempt from most of the obligations of securities regulation so long as they meet the d efinition of a private corporation. For example, in Ontario, the SecuritiesAct'0 says that a corporation qualifies as a private corporation if it has the following provisions in its incorporating documents:

a restriction on the transfer of shares.

a limit (with certain exceptions) on the number of sharehold ers in the corporation to no more than SO. a prohibition on any invitation to the public to subscribe for the corporation's shares.

An added advantage of private corporation status is the potential for a lower rate of income tax. The Income Tax Act1' provid es that a Canadian-controlled pri- vate corporation is entitled to a lower tax rate on its first $500 000 of business income earned in Canada in its fiscal year. In effect , a qualifying corporation pays about half the normal corporate income tax rate of approximately 503 on this income.

B rne le1m "wiOety hE!ki" is tl!>e(J 1!'HercM~ettbty\•1th •ouotc• toaonoteac01p.:')1a1tof\ li"\t)l offers its shtl•es tor sak'! 10 the OObfic. In some)niSdic::tiO!\S.. the t!l1rns ·ottering· 01 '1epo1ling· areatso o~d

9 The term ·cbsety r.ckr is usoo 1nte•changc.'!abty w.tn ·p11~1e· to denote a coroo1a1iOn !Ml doos not o!fe• 11S s!\ares lor s#.e to the pubtie. In soma ju1i$diCtiOl)S. the terms ·nol\-Ofla1if\g· 01 ·non•reoort iog· are tttso u~d

JO RSO 1990,.c S·S, s JUJ ·p1111at~ compa~· 11 RSC 1985, c I (Sth Supp), s 125

384 NEL

Nll

BOMB.ARDIER INC. AND DUAL-CLASS SHARES

Quebec-based Bombardier Inc. is a mul tinatio nal aerospace and transportation company. Founded in 1942 by snowmobile inventor Joseph-Annand Bombardier, the company (under the guidance of Laurent Beaudoin, son-in law of the founder) moved into the manufacture of business. com- mercial, and military aircraft and rail vehicles. The company sells its products worldwide; has its main manufacturing facilities in Canada, the United States, and the United Kingdom; and employs over 70000 people, about 18000 of whom are in the province of Quebec.

The company's latest aircraft venture- the C Series commercial jet, which started more than a decade ago- has been plagued with dlfficulties. The narrow body aircra ft with capacity to transport 100 to 130 passengers was. by 2015, over two years late; was U.S. $2.2 billion over budget; and had few confirmed orders. By the end of that year, the company was in serious financi al difficulty. Its stock price had declined more than 753 over the previous fi ve years, its $3.1 billion liquidity (as atthe end of2014) was vanishing, and its debt level had increased to $ 9 billion. The company appealed to government. A CdnSl.3 billion investment from the Province of Quebec and a Cdn$372.5 million loan from the federal government was forthcoming. the Board of

Pierrt Be11L1doin, Chairman of tht Board of Bombardier Inc.

Despite its financi al difficulties, the infu - sion of taxpayers' money, and intense pres- sure fr om minority shareholders including several large pension funds, the company has continued to maintain a dual-class share struc- ture. A dual-class share structure confers a dls- proportionate amount of control on one group of shareholders in relation to their equity par- ticipation in the company. The structure may take a variety of forms, but usually it is a struc- ture in which shares with single voting rights are coupled with either shares having multiple voting rights or shares without voting rights. The classes of shares have differences in terms of voting power but typically have the right to receive similar dlvidends. In the case of Bom - bardier, the Bombardler/Beaudoin family owns 79% of the Class A shares, whicl1 have 10 votes per share. The Class B shares have one vote per share. This structure allows the family to con- trol 53% of shareholder votes with only a 133 equity stake in the company.

As reported by Reuters, Pierre Beaudoin (the current cllairman and son of Laurent Beaudoin), in response to a question at Bombardler's annual meeting, stated that shares with multiple voting rights allow the company to be able to "invest in the longterm and allow us to protect the com- pany against its dismantling and we do not want anything to mange." 12

CrilJ ...,._ n. Whataretheadvantagesand disadvantages of dual-class shares?

Sources: &c:: Reqi..l'f ·N:t....,lit"ll:' T<nelOI So-nOMtoC'I toOIS'T\l~M Us ~.C\.:rss Sl•l.Cti..'1i: 7heGl::lbe.}1'CfM ... l90t10lA"' 201.SI ~'\"le <ti.nos 11w ...... .,,_tf'l~tobe~"IO-na lco..,..1·~::>011-o.,.DL1s f'W!'i.s/no<,v 11 tiie «1'lE'~Or·oo<nba10 e<f.aitc c267l~3.>f,. M-"'"" P•l'Q"lf\ "T~

~· lnsoe Story Be., <io l"le Su""'Q~ Somo.ice:• C Set• M«Jc;,ns x lS t£tY"->ary 2016) Ont.fie <'\Ill),,.,,..,. ... , inac:lr:A"SCAICCO!'C!Tlff ,! b\is .~ss/t lie-s1ory· be: n "CJ·ll'le l>\<"19Le<2· oomo.tid C'' < i.Cf e~f > "' Bomt--a•o e1 Inc ReJe1encc 101 Bu.s11~ss ol'll ncr <ntlo f/WNN ~ -efcf(!"lCelortius T'\3S.c:om/n :i.tory21S6l&olt'IDitT0~' Inc nt1T11>, Tin 1 Slll.lletl "Oll<l'IY:t I etps Sho1e Ui> Bom1:>ao1dic1 W 11'1 S372 5 M IOI\ c Casnlnfusori· 7'hf:Cbbeandlvt)'1r7rcoiuo\1y20171 or-i1 nc <l'\llP\ff

"~ ww.v.the-g1obe!andma•.co•-nfrepo11 on-bY~'~'sf,nduiliy·ncw.,.f ~ f~era!·gavern.~nl 10-grve·bomba1d·et 372 mlon n k»ns. ~1a-:/ J!. aitc~33945504f>

385

Who May Own Shares A share is a piece of property and is freely transferable unless there is a restriction in place. In widely held corporations, shares are almost always freely transferable; otherwise the shares will not be accepted for listing on a stock exchange. In closely held corporations where shares are generally issued to family or friend s, the sharehold ers have a strong interest in having control over who the other shareholders are. It is therefore common to have a provision in the incorporating d ocuments that shares cannot be transferred without the agreement of the directors or a majority o f the sharehold ers of the corporation. At the same time, shareholders require some flexibil ity in bejng able to transfer thlli shares; thus it is common to includ e "a right of first refusal" for directors or sharehold ers. When a right of first refusal is in place, it means that the share- hold er wishing to sell must first offer her shares to the directors (or shareholders, as the case may be) at the same price she has negotiated with the outsider. This gives the insiders one last chance to acquire the shares for themselves instead o f having to welcome a new inve.stor to the company.

As an alternative to having a restriction in the corporation's constitution, the shareholders could have an agreement that covers transferring. Sharehold er agreements are discussed in Chapter 1 6.

A Corporate Name All jurisdictions req uire a company to be identifie d by a name or d esignated number. The selection and use o f corporate names is subject to regulation by trad emark law, 13 tort law, 14 and corporation law.

The basic requirements for a name are as follows:

it must be distinctive (different from the nan1es of other businesses in the same field) .

it must not cause confusion with any existing name or trad emark.

it must includ e a legal element (e.g., Limited or Ltd, Incorporated or Inc., or Corporation or Corp., or the French eq uivalents) . The purpose of the word is to distinguish a corporation from a partnership and a sole proprietorship and to signal to the public the fact of limited liability.

it must not includ e any unacceptable terms (e.g., it must not suggest a connection that d oes not exist such as affiliation with government or royalty, falsely d escribe the business, or be obscene or scand alous).

On choosing a corporate name, entrepreneurs such as Luke and Rafoa are ad vised to be particularly careful. If the corporate registry inad vertently approves a name that is confusingly similar to the name o f another business, the entrepreneurs can be sued for trademark infringement and the tort of passing off. ts They will be liable for any damages that the other business has suffered and, perhaps even more problematically, be ordered to change the name of their corporation. This will require Luke and Raina to re-establish a corporate identity and reputation in the marketplace, as well as replace letterhead , invoices, business signs, and anything else bearing the former corporate name. This is obviously costly. The Business Application o f the Law: The Tangerine Name Dispute box illustrates how such a dispute can arise.

1 3 Set:! Chaptar 18. 14 The to1tof nassing 0 11 15 Tnis is beCclus.:? Lu~e v..outd be represt'!f\ l 'fl9 10 t he pubfic-e-11!ler 1n1en1,ona!tyo1 not - l M t l he1G is a

r.a~tollShip betvRt'.!n hiS ousi~ss and t~ o t her o...siness when no suet\ 1'£!'-'t onship e.xist s

386 NEL

BIJSINESS APPLICATION OF' THE LAW

THE TANGERINE NAME DISPUTE

In 2012, Scotiabank acquired ING Bank of Canada from its Dutch parent, ING Groep NV for $3.1 billion. As part of the terms of the sale, Scotiabank was required to change tl1e name of ING Bank of Canada.After considering over 3000 possible names, Scotiabanksettled on Tangerine. As reported in the Toronto Star, Peter Acceto, chlef executive officer of ING Canada, stated, " ... we wanted a name that speaks to the future." 16 In 2014, Scotiabank introduced its new name supported by a massive advertising campaign that

included signage, promotional materials, and a television ad featuring a spokesperson hanging from the side of a moving train.

Shortly thereafter, a small financial institute fi led an application in receivershlp proceedings to block Scotiabank's use of the name because it believed it owned the name and was using it first. The company, RSP Generation LP of Vancouver, alleged that in 2012, it bought the assets of a business called Tangerine Financial Projects LP, which had gone into receivershlp. This "Tan- gerine" company planned to market a financial strategy related to unused registered retirement savings plan contribution limits and had been using the name since 2008. A bid by Scotiabank to strike RSP's application was dismissed by the Supreme Court of British Columbia. However, the appeal court found RSP's application to pre- vent the bank from changing the name of its sub- sidiary from ING Bank to Tangerine was an abuse

j of ~~ocess as dithe application was filed i~ receiv- ~ ersrnp procee ngs agamst a non-party.

- Critical Analy.U: What is the problem w ith } similar names for businesses? • jj 5 Sources: Jett Gra;. ·ra"9erine Bank F"oces ~llle Ove1 Narr!(!°, The 2! Cbbe Md Mail U2 .lo->e 2014J B3. J•m"' Lar>gton. 'App(cot"' by 1 - Vanco1Jve1 Btlsed RSP Gene1alion LP Oisrn!ssed·. Jnves1ment !xec-

What are the basic reqitiremenrs for a corporate name? ~Vhy is u:Ne U7 Au9us1 2015J, ontioo . <tltto//\•1ww.inves1ment'2-x<?ctJlive tlte name of a business important? ~om/-/b<.~apfX28. cou1l•Mck.S .. St':otiAMnk·in-1ange1 :ne·appe.;j>

Assuming that Lukeand Raina want to incorporate federally, they will have to send their proposed name--Time-in Team Management Inc.- to the federal cor- porate registry for approval. They will also have to have a Newly Upgraded Auto- mated Name Search Report, or NUANS Report. Thls document lists those business names and trademarks- if any- that are similar to the name being pro- posed. A NUANS Report is prepared using a database containing existing and reserved business names, as well as trademarks. If some other business is using the name "Time-in Team Management Inc." or a name similar to it- such as "Time-out Team Management Inc."- the NU ANS Report would presumably con- tain such information. In that case, Luke and Raina should avoid the name and come up with an alternative name for their fledgl ing business.

NUANS report

A document that shows the result of a search for business names.

16 O~na Ftavele,. 'ING Dm:~Cl Ri:?na11es Itself Tange1 ine·. The Star 15 November 2013), on11!le <http l/v.ww.1hesta1 com/bus 1rress/ om so na1_1inance/2013/l 1,K) S/tng_d 11ec t_ 1e ~ :'l1e L il setL taa;ie mlE!. html>

11 TM1getine F:nanc.,i/JJ Products !Nn11ed Partnersiupv The Raeves f<NnA~' Trust . 2015 SCCA 359, !20151 BCJ Nol730.

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Shelf company

A company that does not engage in active business.

Articles of incorporation

The document that defines the basic charactenst1cs of corpora t1ons incorporated in Newfoundland and Labrador. New Brunswick. Ontario. Manitoba. Saskatchewan. Alberta. and the federa l jurisdiction

lncorporator

The person who sets the incorporation process in motion.

It is common for a company's legislation to permit a corporation to be assigned a numbered name. Und er the federal legislation, for example, the corporation can be issued a d esignating nUlllber, followed by the word "Canada" and then a legal element- such as "Limited" or "Incorporated." A numbered company is useful when a corporation must be created quickly, when the incorporators are having difficulty coming up with a suitable name, or when there is a wish to create a shelf company. Shelf comparues are often incorporated by law firm s for the future use of their clients. The company does not engage in any active busi- ness. It simply sits "on the shelf " until a firm's client needs it.

The Process of Incorporation All Canaclian jurisclictions follow a similar procedure for the creation of a corpo- ration, though precise requirements do vary. Assum ing that Luke and Raina want to incorporate fed erally, they must submit the following to the federal corporate registry in Ottawa:••

articles of incorporation. 19

notice of registered office.

notice of directors.

Newly Upgraded Automated Name Search (NUANS) Report.

the filing fee, payable to the Receiver General for Canada.

The articles of incorporation set out the basic features of the corporation- name, place of the corporation's registered office, class and number of shares authorized to be issued, any restrictions on the transferring of shares, the number of clirectors, any restrictions on the business that can be carried on, and any other provisions that an incorporator requires to customize the corporation to meet his needs. For example, incorporators may include provisions that require direc- tors to own at least one share in the corporation, provisions prescribing how sharehold ers will fill a vacancy in the board of clirectors, or provisions that limit the nUlllber of shareholders to a certain number. The name or names of the incor- porators must also be included in the articles of incorporation.

The Notice of Registered Office form is very brief because it has only one pur- pose: to provide a public record of the corporation's official address. Thi s is the address that those having d ealings with the company can use to commurucate with the corporation, particularly with respect to formal matters, including lawsuits.

The Notice of Directors form contains the names and residential addresses of the clirectors and must correspond with the number of directors given in the articles of incorporation.

The completed forms, along with the requisite fee, are then submitted to the appropriate government office- the Corporations Directorate of Industry Canada. If the forms are in order, the clirectorate will issue a "birth certificate" for the corporation, known as the certificate of incorporation.

Provincial incorporation legislation has its own requirements, which are par- allel but not necessarily identical to the requirements and procedures under the Canada Business Corporations Act.

18 Feoera11nc:o1poratOn IS ava\lbteonline try occess:ng toe CorporahOllS cana::a Onl:tne n,ng C~n11e\Y€bs!le at <https //www c 9c.ctl/app/scr/cc./Corp.o1.lhOllSCaMda/hm h1mf?bc~-e =en_ CA>

19 Ti'le term ·artides of incoroor<Hio:'f s ~so used io A!berta. ManHoM, New Srons>NiCk,. ~-. ... roul'ld!and a1'0 LamOOor, Oru~1 r.'> and Saskatchev1an. Tn.a courv-.~<lnl term in Nov() Scot'.(} IS ·l'l"X'mo1andum of associaitiOn·; 1n PriOC(! £award l~nd a'ld Quebec, it is ieuers P<'.) t~nr. aoo ,n Brtish Cdumbia IL IS ·notice of art.d~s:

388 NEL

Organizing the Corporation Followjng incorporation, the first directors Mll ordinarily undertake a number of tasks. Under fed eral legislation, for example, the directors are required to call an organizational meeting to

make bylaws. 20

ad opt forms of share certificates and corporate records.

authorize the isSlle o f shares and other serurities.

appoint offi cers.

appoint an auditor to hold office until the fi rst annual meeting of shareholders.

make banking arrangements.

transact any other business.21

Fed eral legislation also specifies that the directors named in the articles of incorporation hold o ffic e until the first meeting of the shareholders. That meeting must be called wjthjn 1 8 months of incorporation. 22 At that first meeting, shareholders elect tl1e permanent directors, who hold offi ce for the specified term.23 The directors carry on the management of the corporation until the next annual meeting, at whlch time they report to the shareholders on the corporation's performance.

Financing the Corporation Luke and Raina need to finance their company to have the funds to operate. They have two basic means o f doing so: T ime-in Team Management Inc. can borrow money (debt financing) or issue shares (eq uity financing).

Debt Financing A corporation may raise money by borrowing. The company may obtain a loan from shareholders, fa mily or fr iends of sharehold ers, lending institutions, or, in some cases, the government. If it is borrowjng a substantial sum of money on a long-term basis, the corporation may issue bonds or debentures. The terms bond and debenture are often used interchangeably and refer to a cor- porate IOU, whi ch is either sernred or unsernred . Note that the word "bond" is sometimes used to descr ibe a secured debt, and "d ebenture" to refer to an unsernred debt, but the only way to know what is actually involved is to read the debt instrument itself.

A bond or debenture d oes not represent any ownership interest in the corporation, and the holder does not have any r ight to participate in the management of the corporation.24 However, these d ebts are often secured by a charge on the assets o f the corporation. Thls means that if the debt is not repaid, the assets can be sold to repay the debt and the bondholder has a better chance

20 "By\~ws· is the 1c1m used 1n the arldas ol ioco1p0ra1on and klte!5 patent ;uriSCiCIJOn. In Nova S:oti,\. ·artc\e-s of assoc:ia100·- 1he ve~ general equivatien1 of bytar ..... s-iS t'le teirn used, arxi in BntlSh Cdumbia 1~ 1~rm Is ·a1tiCtes:

21 Can.>d;, Sustness COlporatl()ns Acr, RSC 1985 c C·44, s 104 U) 22 lb.d al' 133 ru la). 23 ll>d ats 10613) 24 II L" poss1bt¢.. llov.~vcr, 101 b0ndl'dde1s to oblain rranagemt'.lnl nghts rl UK!com;>anydefooll:.on the ban T hiS

depends Ofl the l<:rms of is suance

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389

Bylaws

Rules specifying the day- to - day operacing procedures of a corpora ti on

Bond

A document evidencing a debt owed by the corporation. often used to refer to a secured debt.

Debenture

A document evidencing a debt owed by the corporation. often used to refer to an unsecured debt.

Securities

Shares and bonds issued by a corporation

Conversion right

The right to convert one type of security into another type.

of recovering his investment. Bonds and debentures- like shares- may have any number of features and are freely transfera ble, creating a secondary market for their purchase and sale.

The advantage of raising cash by issuing bon ds is that Luke and Raina do not have to relinquish formal control. That is, they can raise money to run their operation without having to give management rights to their lend ers. On the other hand, there is a requirement that the interest on the bonds be paid regard- less of whether a profit is earned . In fact, if the interest is not paid on the debt, the corporation faces bankruptcy unless it can reach a new agreement with the bondholders.

Equity Financing Shares are frequently used to raise money for the use of the corporation. This is done by issuing shares to investors in exchange for a purchase price.

Shares provid e a flexible means of raising capital for a corporation because they can be created w ith different bund les of rights attad1ed to them to appeal to different investors. Shares can be attractive to investors because, unlike d ebt, where the return is usually limited to a fi xed amount, shares provid e an opportunity to benefi t from the corporation's growth. [f the corporation prospers, the value of the shares will increase. Shares are advantageous to the issuer in that the money raised by selling shares does not have to be repaid in the way a loan must. On ilie other hand, ilie sale of shares may mean the relin- quishing of management rights. Aliliough it is possible to raise capital ilirough the sale of shares that do not have any voting rights attached, investors may be interested only in shares that give iliem a say in ilie control and operation of the corporation.

Shares and bonds represent two very different ways of raising money for corporate activities. There are, however, many combinations of iliese two types of securities. Much d epends on ilie features that investor s are interested in purchasing. Most businesses, particularly large ones, use some combination of these various methods of raising funds, maintaining a reasonable balance between iliem. Furthermore, shares and bonds can come w iili a conversion right. A convertible bondholder, for example, is entitled to convert h is d ebt interest into shares and thereby assume an equity posit ion in the company instead of being a creditor.

Figure 15.2 shows a comparison of ilie preceding points regarding securities.

FIGURE 15.2 Securities Compared

Status of holder

Participation in management

Rights to income

Security for the holder on insolvency of the corporation

Shareholder

Elects directors (if voting rights); approves major

Dividends, if declared

Entitled co share in proceeds after all credirors paid

390

.. Investor/ creditor

Does not participate- (except in special circumsr.ances)

Interest payments

En ti tied to payment from proceeds before general creditors, if secured, and before shareholders

NEL

BUSINESS AND LEGISLATION

CROWDFUNDING

Crowdfu nding is the pract ice o f funding a project or a business venture through soliciting small amounts of money from a large number of people, usually through the Internet. Entrepre- neurs and others seeking financing can present the project- typically through a video-to the "crowd" using a website or portal and request small contributions. If successfu l, a large number of people will contribute and a sizeable sum of money will be raised. Canadian projects that have been fu nded in this manner includ e video games, waterproof toques, 30 printers, and craft beer.

Crowdfunding Models: There are several mod els of crowdfunding. With the donation model, individuals make a contribution without expect at ion of anything in return, although they may receive a reward such as a sample prod uct. In the lending mod el, in divid uals lend money with the expectation that it will be repaid at some point. The most controver sial is the investment or equity model, in which an individual receives equity in return for fi nancing. It is this mod el that attracts security regulation as securities laws d o not per mit the distribution of securities without a prospectus unless there is an exemption.

After much study and debate, and in response to pressure from entrepreneurs and owners of small and medium enterprises who wish to access capital, the securities commissions of most prov- inces have implemented eq uity crowdfunding exemptions.

Seven25 provinces have implemented a start-up crowdfunding exemption that allows issuers of securities to raise capital without having to undergo the expense o f prod ucing a prospectus or to

Spacefy, a variation on Airbnb for spaa>sthat con be used forflbnl photo shoots and other creative prodiu:tions, successfully raised over $300000 by eqraty crowdfrmding through Vanmm..,r·based InvestX Capital Ltd.

comply with the dealer registration requirement?• This exemption is for companies in the very early stages of development and is not available to large companies that distribute securities as repor ting issuers.27 A non-reporting issuer can raise up to $ 250 000 per offering with a limit of two offerings per year. Individ ual investors are limited to investing $1500per year.18 The issuer's head office must be in one o f the participating provinces. The funding portal d oes not have to register with a securities regulator but must have a head office in a participating province."'

Five provinces"" have introd uced a broader crowdfunding exemption that is available to both start-ups and reporting issuers. 3l The broader mod el provid es for a prospectus exemption for the issuer and a registration fra mework fo r fu nding por tals. The annual limit on capital raised is $1.S million and individuals can invest $2500per offering to a maximum of $10 OOOper year. Accredited investors (those with net assets of $1 million) can invest $25000 to a maximum o f $50 000 per year. Funding portals must

25 6 r1t1Sh Cdumbia, Stlskalch0.•1c)I\ f.;1an11ote Quebec, N~1 BnH\!>W 'Ck.. Albeit.a. aoo Nova S:'.:oli.1 26 Mutlla1erat CSA Notiee 4S.316 Stfln·up CrCN1dfund.'ng Regisiti'ltion and Prospectus Cxempuon TM

reg.strahon e>emptiOnexemoi.s a fund1n9 p.:->rlat hom h~r.- 1ng 10 teQt$le1 as() dea!e1 27 Reporuog iSSuers ~1e <:01t1panies whOSf:! secunt~s aie puot:C~ traded 28 lnv~tors ,n SC a!lc! Alcer~C.ln invest tJO to $5000 29 Arnanda Pl.lstina. "How Can Iha Crowd l'uoo You?·. Norton Ro!.<! Fulbnghr CtNladtJ (10 Nov~m~r

2017J, on(111e MoOOa<:; .:l\t tp //wuw mond~.corn/canada/.x/6450S4Nenture +Caoital/ Hovi +can+ the ~·ovxJ + fund +you>

30 On~rio, 0Jebcc, Manitoba. NQw Brunsv1x::~ and Nov;,, Scot a. 31 Mull la teral lnslru l'l"Cnl 4S·l 0B Crawdfunditlg.

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regjster wjth the relevant secur ities regulator and are subject to a number of requirements, such a~ conducting background checks on issuers and reviewjng the issuers' offering materials. Issuers that raise capit al using this exemption must provide a crowdfunding offering document and meet continuous disclosure requirements.

Critical Analysis: What a re the pros and cons o f crowd funcling? What are the pros and cons of Canada's crowd funcling regulations?

Sources: Robe1l Thompson, "Move 0Vt?r K·ck.S1a1te1, ((luity Crowofuod1ng lets You Gel a P1e::e cf the AcliOo, Not .lust~ lOIJSy T·Sl'l1r1·, fitl/Jnci<JJ Posr (4 rebrua1y 2016J, on(ine· <hllp//txls;oess fioonc:iatpostcom!linanc1(')(·pos1•mtJ9a21ne/mo-v<:·ove1·1<.ick.starte1 eqt11ty•crov1d h.1~d ing ·t.e ts ·you·g~t ·a· piece· ot • the~ac 1;on·no1

•)Js t•a ·kill!.y·l--s hi1 l>, Bil 1< 1tay. 'Land of Co!'Jlusion-C1awofundi!YJ Regu\atlOrlS H'l Cal'k)d,l, P<11iefl V<No UP {19 AP• • 2016), Online Mo Mao <http !/vNNI .mondtx:; 1Com/caooda/x/484298/Secunlies/ land +of +Conlusion+Crowdlu Ming+ Regut.ations + 1n +CaMO.t:1>, Norman Sl\ydei. 'Crov{dfund1ng C~mpto~ Adopted by Ca1\1!1Chl!'I Securities Regut<>tors· Ttry10t Mc.Ci>f/tey U.PtS JIAy 2015),onfrte: <http II w.•r.-1 trr1awyersJ:.Orn/t.10\ .. <dlu001ng•9.X.Cf'hOIOnS-OOOp1ed·Oy<:an<Xllcll'\ ·S(!Cur11ies~reglJ'21to1s/>; TaV!a Giant. lo tlnd SeE!d Money. Ca!Wan S"'th.ips ro!.ow tne CrovA'f, The C.bbetlrd /"1a.V 124 Mtl•cll2014J SL

Securities Legislation All provinces have enacted securities acts.31 In very general terms, the aim of all securities legislation is to

provide the mechanism for the transfer of securities.

ensure that all investors have the ability to access adequate information in ord er to make informed d ecisions.

ensure that the system is such that the public has confidence in the marketplace.

regulate those engaged in the tracling of securities.

remove or punish those participants not complying wjth established rules.

With these objectives at the forefront, all securities regjmes have three basic requirements: regjstration, clisclosure, and insid er-tracling restrictions.

BUSINESS AND LEGISLATION

A COOPERATIVE NATIONAL SECURITIES REGULATOR Canad a is the only major, industrialized economy without a centralized, national body regulating securities. Instead, there are 1 3 clifferent pro- vincial and territorial securities regulators, wjth a corresponding multiplicity of statutes, regula- tions, policies, and inter pretations.

Since the 1960s, there have been numerous calls for a national securities commission. In 2 011, the fed eral fi nance m inister, d espite the vehement opposition o f several provinces, unveiled draft legislation establishing a national

body. However, the Supreme Court o f Canad a"' unanimously held the legjslation to be unconsti- tutional as provinces have juris cliction over the d ay-to-d ay regulation of the sernrities market. The court did state that the fed eral government has a role in guarding against system ic risk and could seek a cooperative approach.

Heecling the Court's words, the federal govern- ment in 2013 launched the Cooperative Capital Markets Regulatory System to admin ister a single set of rules and regulations to regulate the market. The governments of Ontario, British Columbia, Saskatchewan, New Brunswjck, Pr ince Edward

32 The Cant1d<1 Eusmess Corport1:to."IS Ac~ &o contains 01ovisi0ns tMI 1e9uttlte s.eau 1es 1Mt are issu~<J 01 t100E!d byCBCAco1po1al.ons.

33 Refe1e11Ce Re SaaJnues Ae.1, 2011 SCC 66. 12011] 3 SCR 837

392 NEL

< - What are the polit:y arguments against a sing le sec11 rities n?g1Jator?

Island, and Yukon signed on. Quebec (and others) opposed tl1e establishment of a cooperative system and challenged the constitutionality of the system.

[n May 2017, the Quebec Court of Appeal"' ruled that the plan was unconstitutional in that the mechanism for setting up a common set of rules for participating provinces interferes with their sover- eignty. The case has been appealed but no d ecision

~ has been rendered as at the d ate of writing. ~ ~ Critical Analysis: What are the policy argu- ~ ments in favour of a single securities regulator .!i'. for all of Canada?

~ 2! ,_

Sourc es: f(evJn J Sorochan. ·cooperative Cap:tat M<'l1kets RegtAa1oiy Syslem- An Updat~·. M!Jler Thomson LLP t30 SeptE!mMr 20 15), ont tne <t\ltp ·//\Y\•1w.m 1He11 homson.corn /en/pub1ic<H ·or.sf cornmtJ l't(lues·~od·uPda1es/secu ri L1e..s •p1aclice·not~s/ saptember 201S-~curr1ies·pr.Y-tiee·notes/coope1a1111e-<:ao,ld•-m1kets·1egu~1ory

-system!>; John Tufyk & Liam Churchill., 'NatJOnal SGcur;ties Ra9uta101 on the Ro~s? Quebec CC1U11 of Ap~ ~tes Pro;::osed Cooperllt'\e System u ocons1.1u tiO:laf, BJakes. Cassss b Gsydon UP 116 May 2017), onl1~ <tt 1p//vN1·w.~~sbus1r~ssdass.com/nat1Cl\al.-secm 11es •1eguta1or•Oflolhe·ropes•<:;uebec·COu1l·Of •appea1•1u~s·p1opos~c

<:OOOOral1V(!-syS1~m·uocons1 tu t:Ollt'J/>

Registration Any company intending to sell securit ies to the public in a given province must be registered to do so with the relevant provincial securities commission. Furthermore, all persons engaged in ad vising on and selling securities to the public must be registered with the relevant securities commission. The d efinitions o f those covered by the various statutes vary between provinces but generally extend to ad visors, und erwriters, dealers, salespeople, brokers, and securities issuers.

BUSINESS APPLICATION OF THE LAW

SECURITIES CLASS ACTIONS The number of securities class action lawsuits file d against corporate Canad a is changing at a slower rate than in previous years. According to a recently published study by National Economic Research Associates lnc., six new securities class actions were filed during 201 7, three less than in 2016 and two more than in 201 5. The average rate of fil ings for this three· year period is about half that experienced in tl1eperiod 2008- 201 4. Four of the new fi lings in 201 7 involved claims und er the second ary market civil liability provisions of

the provincial securities acts. [n total, 81 cases have been filed und er these provisions since they came into force in 2005. All of the new cases were fi led in Ontario. There were settlements in four cases in 2 01 7 , with defend ants paying a total of $1 04.8 million. At the end of 201 7, there were 51 active Canadian securities class actions repre- senting approximately $27 billion in claims (see Figure 15.3).

In o rder to proceed with a second ary market liability action, a judge must certify the class action and grant leave to proceed to trial. Leave

34 l?f!nV01 reJatNe a la reg,iement~t/On panctNladt<u'lnedes valeurs rnob.~teres. Ouebec fprocu1eutegettert11eJ c Canada /ProcurwregeneraleJ. 201? QCCA 756.1201 71 OJ No 5583

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FIGURE 15.3 Number of Ac tive Securities Class Action Cases in Canada

"' ~ so a g> 40 :;:; c & 30 Ci ll 20 E i 10

0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2017

As of December 31 Note: ca~s t hat are 1rnt"9tty dJsrncSsed but subsequentlyove rt urned o n appeal au~ shown as pending a t each

year end senc:e t he date o r 1n1Ual tiling. Cases tha t hav(! beM d1smrsse:t are not l n<:tuded among t he pending cases !Tom t~ year of the initial dJsmissal deces»On f!ve n tf Uwy may Still be subjec t to appeal.

What fact.ors may aaount for dte rerent slowdawn in the rate of Canaclian securities dassaction filings?

Sourc.e: Aoaplec v 11th ~rm1ss1on rro m N£RA £cooomc Consuuing. 'Trenos 1n (:af\M<ln Sec:u111ies (lass k.tions 2017 Uodat~·. by B1~!ey A. Heys and Robert P~tton.. F'et>roa1y 20, 2018, o. 17

is granted if (1 ) the claimants are acting in good faith (e.g., they have an honest belief that they have an arguable claim) and (2 ) the claimants have a reasonable possibility of success at trial. In Theratechnologies v 121851 Canada, Inc." the Supreme Court o f Canad a unanimously con- firmed that the "reasonable possibility" require- ment o f the leave test is not a proced ural formality or "speed bump." Rather, judges must engage in a reasoned consideration o f the

Disclosure

evid ence to ensure that the action has some merit before certifying.

CrfticalA-1,,.U: What do you thi nk is the pur- pose of the leave req uirement? What impact is the Theratechnologies de cision likely to have on securities class actions?

Sour ce: BrMtey A Heys b Ro~1t P.'.)llOI\. ·rrends 1n C.a!\adia"I Secu1111as Oass .!o.C110ns 2017 Upd:Jle· NC!?A tconom.v: Comu!:it:g 120 ~ebrua1y 20181. on« me <'1llp/f\Yww.~1a.com.lcontenl/darn/l'\eia/ p.J b4 ieat o ns/2018/PU B _2017 _ Rl'C':e n1_ T1e Ms_ Caooda__ 0 218.P<J r">

Prospectus The document a corpora ti on m ust pub lish when offering secu rities to the p ublic

The company must comply with disclosure or pr ospectus provisions set forth in the securities legislation. With limited exceptions, this means that any sale or distribution of a security- in this case, meaning ejther d ebt (bond s) or equity (shares)- must be preceded by a prospectus that is accepted and approved by the appropriate securities commi ssion. A prospectus is the statement by the issuing company of prescribed information. The list o f information required to be in the prospectus is lengthy and ranges from financial information to biographical infor- mation about the directors. The overriding req uirement is for "full, true, and plain" disclosure of all material facts, that is, facts that are likely to affect the price of the securities. The legislation assumes that prospective investors will rely on the prospectus in making investment d ecisions.

35 2015 sec I B. 2 SCR 106

NEL 394

The issuer of securities has an obligation to continue to keep the public informed of its activities. ln general terms, this means that it must notify the public of any mate.rial change in its affairs, first by issuing a press release and second by filing a report with the securities commission within 10 days of the change. A material change is defined as one thatis likely to have a significant effect on the market value of the securities and is not known to the public in general.

BUSINESS AND LEGISLATION

SECURITIES LEGISLATION AND SECONDARY MARKET LIABILITY

All provinces and territories have amended their securities statutes" to provide a statutory right of action for m isrepresentations contained in second ary market disclosures. The objective o f these reg imes is to create a meaningful civil remed y for secondary market investors and to facilitate class action lawsuits. As a result, there has been a marked increase in the number o f securities class actions (see Business Application of the Law: Securities Class Actions, page 385).

Prior to the amendmen ts, securities legisla- tion provided only a statutory cause of action t o investors who purchased securities in the pri· mary market (i.e., purchased pursuant to a pro· spectus, offering memorandum, or securities exchange takeover bid circular). Investors in the secondary market37 (i.e., purchasing from or selling to third parties) had to rely on a common law action for fraudulent or negligent misrepre- sentation. This meant that the secondary market purchasers had to establish that they relied on the defendants' misrepresentations in making their investment decisions. This requirement made it next to impossible to have a class action certified because of the individual issues of reli· ance. The amendments create the statutory cause of action "without regard to whether" the pur· chaser or seller relied on the alleged rnisrepresen· tation. In other words, the investor is d eemed to have relied on the disclosures and does not have to prove that she relied detrimentally on the mis· representation. This amendment facilitates the

30 S('(I for c1clmpl<" SCc.umJcs Acr RSO 1990. c S ·5. Pa11 1)()(111 1 s 138.3 U)

certification of class actions by removing the issue of proof of individual class member relia nee.

The key provisions of the amendments31 are as follows:

cause of action. Secondary market investors have a right to sue where they bought or sold securities d uring a per iod where there was an uncorrected misrepresentation made by or on behalfo f an issuer in a d ocume n t released by the company or in a p ublic oral statemen t . The r ight to sue is also available where there was a fo ilure to make timely disclosure of a material chang e in the issuer's business.

defendants. The class of people that may be liable for a company's misrepresenta lion or failure to disclose is broad and includes the reporting issuer, its directors, officers, influential persons (including controlling shareholders, promoters, and insiders), and experts (including auditors and lawyers).

defences. There are a number of defences available to defendants, including reasonable investigation (defendant had conducted a reasonable investigation and had no reason to believe the document or oral statement contained a misrepresentation), plaintiff's knowledge (defendant proves that the plaintiff knew there was a misrepresentation or failure to disclose at the relevant time), no involvement, and reasonable reliance on experts.

damages. There is a complex formula for calculating d amages, but generally

31 11 11. cs11m,ll<'d tM t ~conda1y 1na1kcl 11001ng accounts 101 rnor~ tl\o')n 90% o t ~t ~~u'ty trading ,n Cana::ta 3ti The d1S01\\10n bck>w 1\ 00\tdOn lhc On101:0\c!9isl;)ttve !iChcrnv. M. the p10V 1n~sand 1eri lOrlOs haw s1m1")'

PIOVr\Or\\

NEL

395

a person who is found liable will be responsible for the losses the investor suffers (the difference between the price paid or received for a security and the average price in the 1 0-d ay period following the disclosure or public correction). If more tl1an one person is liable, each d efendant will be responsible only for the proportionate share of d anrnges that corresponds to his responsibility unless he knowingly participated in tl1e m isrepresentation or failure to disclose. Also, liability for damage awards is capped except when a defendant knowingly participates in the misrepresentation or failure to disclose. Liability for individ ual d efendants is the greater of $ 25 000 and 5 0% of their compensation from the issuer in the prior 12 months. The liability limits for corporate d efendants are the greater of 5 % of capitalization and $1 million.

leave. A unique feature of the legislation is the requirement that the claimant obtain leave of the court before commencing

Why did all provinces and territories amend their securities acts ro create a stat11tory cause of action in the semndary market?

a second ary market liability claim (see Business Application of the Law: Securities Class Actions, for tl1e tes t). To date, only a handful of second ary market cases have advanced beyond the leave stage.

Critical Analysis: How d o the amendments enhance investor protect ion? Do the amend- ments do enough for investors?

Insider trading

Transactions in securities of a corporation by or on behal f of an insider on the basis of rel evant material information concerning the corporation that is not known to the general public

Insider-Trading Restrictions

Insider

A person whose relat1onsh1p with the issuer of securities 1s such that he 1s likely to have access to relevant material information concerning the issuer that is not known to the public.

Tip pee

A person who acqu ires material information about an issuer of securities from an in sider

The objective of provisions against insider trading is to ensure that trading in securities takes place only on the basis of information available to the public at large. Securities legislation ad1ieves this aim in two primary ways: first, it requires an insider to report any trading that he has engaged in, and second, it prohibits trading by certain insiders- sud1 as directors, senior offic ers, employees, and the corporation itself- on the basis of information not publicly available.

The reason insiders must report any trade is simple: if someone in this capacity is either buying or selling large blocks o f securities, tllis is critical information for the investing public. Even small trad es can be relevant. Insiders are prohibited not only from trading on material information not publicly disclosed but also from passing on tllis information to a thi rd party or tippee. This person i s similarly prohibited from trading on sud1 information.

Those who engage in insider trading are subject to both crim inal and civil lia- bility under securities legislation and under corporation legislation.39 In addition, the Criminal Code has improper insider trading and tipping offences. The insider trading offence carries a penalty ofup to 1 0 years in prison and the tipping offence is punishable by up to five years in prison.4 0

39 Supra no1e 21 al s 131{4J. 40 Ctim.'>al Code. RSC 1995, cC-46. Pan X, ss 382 1 IU 12J.

NEL 396

In considering whether to offer securities to the public through a stock exchange, Luke and Rruna have a number of fac tors to consider. Although selling securities is a means of obtaining fu nds from a wid e group of investors, it entails public disclosure of information that would otherwise not be known to competi- tors, and certainly requires costly compliance with regulations.41

Finkelstein v Ontario (Securities Commission), 2018 ONCA 61, (2018) OJ No 489

THB BUSINESS CONTEXT: Insider trading and tipping are serious offences because they erod e public confidence in the fai rness of the securities markets. Securities regulators pursue insider trad ers and tippers with the goal of punishing them and persuading others to refrain from these activities. When regulators fi le crim inal charges, it is difficult to get a conviction without d irect evidence or an admission ofliability as the burden of proof is beyond a reasonable d oubt. Consequently, regulators are inc reasingly proceeding before adm inistrative tribunals where the burden of proof is on the balance o f probabilities.

FAC1UAL BACKGROUND: Mitchell Finkelstein, a prominent mergers and acquisitions lawyer prac- tising in Toronto, and four investment advisors were convicted by the Ontario Securities Com- m ission (OSC) of tipping and insider trading contrary to section 76 of Securities Act of Ontario. Section 76 prohibits persons in a special relation- ship with a company from informing others of material non-public information (MNPI) and from trading with knowledge of MNPI. A person in a special relationship includes a person who is an insider of the company such as an officer or d irector, a person who engages in professional activity on behalf of the company, and a person who learns of MNPI and knows or should know that it came from a person in a special relation- ship witl1 the company.

Finkelstefa, who was tlle lead lawyer in a proposed takeover of Masonite International Corp. by an American private eq uity firm, disclosed tvl.N PI about the takeover to a close friend, Paul Azeff, an investment ad visor with

CIBC in Montreal. Azeff, in turn, disclosed the information to a colleague, Korin Bobrow, and an accountant (L. K., who was not charged) who passed the information on to Howard Miller, an investment adviser at TD Securities Inc. in Toronto, who shared the information with his colleague, Francis Cheng. All of the investment ad visers in the chain purchased shares for them- selves, family members, and clients in amounts totaling several millions of d ollars.

The OSC was able to prove t ipping and insider trading against Finkelstein, Azeff, and Bobrow on the basis of circumstantial evidence that consisted of:

tlle freq uency, duration, and d ate of telephone calls, text messages, and emails between Finkelstein, Azeff, and Bobrow;

the knowledge of the transactions possessed by Finkelstein as the lawyer involved in the transaction; and

the pattern of trades, the d ate of the trades, the fact that the trades were first-time purchases of the securities in question, and the concentration of trading.

Miller and Cheng received the information from the accountant but did not know the source and reliability of the information. They were convicted on the basis that they should have known that the information came from someone who was in a special relationship with Mason ite. The OSC listed factors that are relevant in that determination, including the relationship between the tipper and tippee, the professional qualific ations of the tipper and tippee, how detailed and specific the informa- tion is, how q uickly trades are mad e after the information is received, whether any steps were taken to verify the information, and the trading patterns of the tippee .

41 Cdmuod M.o. Kwav1 The L1Y1 Of Cot(>Oftlte t!inatte.tnn Cattadh !Toronto: Bu1terv10rths, 1997) at 121- 122

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The OSC imposed a total o f $ 2.9 mHlion in penalties, costs, and disgorgement ord ers agai nst the parties. Finkelstein rece ived a 1 0 -year trading ban, a lifetime ban on becoming an offic er or director o f a public cor- poration, a $450 000 ad ministrative penalty, and $125 000 in costs. Azeff also received a 10 -year trading ban, a permanent ban on being a director or offi cer, a $750 000 ad m in istra- tive penalty, and $1 75 000 in costs, and had to disgorge $49 996 o f profits earned on the transactions. Similar penalties were imposed on the other investment ad visers. The parties appealed the convictions.

The Div is ional Court upheld all o f the convictions except against Cheng, the last person in the chain, as it was not clear that he should have known that the information

Mitchell Fi nkelstein

398

came from a person in a special relat ionship (he may have been trading on a rumour as opposed to MNP!). With respect to the other parties, the court conclud ed that it was rea- sonable for the OSC to draw its conclusions based on the entirety o f the circumstantial evid ence before it. The court noted that the stand ard o f proof is on the balance of proba- bilities, not the criminal stand ard o f beyond a reasonable d oubt, and that it was not the role of the court to retry the case or reweigh the evidence. The court also clarified the level of knowledge that a person in the chain must have about the source o f the information. It is not necessary that a tippee knows the identity of tl1e tipper. It is enough that the tippee is aware or ought to know that the information he rece ived originated from an insider. MH!er

j NEL

appealed hls conviction and the OSC appealed the acquittal of Cheng.

THE LEGAL QUESTION: Had the OSC correctly identified tlle circumstances in which a person ought to have known that material non-public information originated from a person in a spe- cial relationshlp with the corporation?

RESOLUTION: The court confirmed the con- viction of Miller and restored the conviction of Cheng. It expressly endorsed tile factors used by the OSC for d etermining whether a person ought

to know that the MNPI originated from a person in a special relationship with the corporation. The inference that a tippee reasonably ought to have known is stronger where the tippees are market registrants (people registered under the securities legislation) such as Miller and Cheng.

CRITICAL ANALYSIS: Why is it clifficult to pros- ecute insider trader and tipping cases? What are examples of circumstantial evidence tllat would be helpful in proving illegal insider trading or t ipping?

BUSINESS LAW IN PRACTICE REVISITED

1. How is a corporation formed, and what factors should Luke and Raina consider in forming a corporation?

A corporation is formed by an incorporator or incorporators making an appli- cation to the appropriate government body. The choice of the corporate form requires the consideration of a number of issues, including the cost of incorpora- tion and where the corporation will conduct its business. Luke and Raina foresee rapid expansion nationally and internationally; tllus a federal incorporation would probably be the logical choice.

Luke and Raina also need to consider such factors as whether the name tlley have chosen is already in use, what sort of capital structure they will employ, and how tlle corporation will be capitalized. In particular, Luke and Raina need to recognize tllat tlleir proposed share structure-half tile shares to Luke and half to Raina- may result in sharehold er d eadlock.

2. What options are available for involving Roger in the business?

Roger could invest as a shareholder, but a loan would give him priority over share- holders in the event of clissolution; however, a loan provides little opportunity to participate in profi ts unless the interest rate is tied to the profita bility of the corporation. Shares offer profi t opportunities but have greater risks of loss of investment should the company fail. Roger's investment- whether in shares or debt- can be tailored to address Roger's d esire to participate in profi ts while avoicling risk.

3. What factors should Luke and Raina consider in seeking to raise money by selling shares?

In attempting to raise money by issuing shares, Luke and Raina need to consider a number of factors. Most importantly, both public and private sales involve a consideration from a financial perspective as to whether there is a market for the corporation's shares. As well, any issuance or sale of shares involves an assess- ment of the impact on the control of tile corporation. Sales on the public market also involve requirements as specified by the relevant securities legislation. These requirements can be significant and costly. Selling shares through crowdfuncling

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is a viable option in Alberta (the proposed head office for the business), as Alberta has implemented eqtrity crowdfunding exemptions.

CHAPTER SUMMARY

The corporate form is prevalent and widespread. The characteristic that distin- gtrishes it from the other basic forms for carrying on business is its separate legal status. This means that the owners are not liable for the d ebts and obligations of the corporation. It also means that those who are d ealing with a corporation need to understand that the owner's risk is limited. Thus, if security is important, they should d emand a personal guarantee.

A corporation may be incorporated federally or provincially. There are few distinct advantages of incorporating in one jurisdiction versus another. Prior to co1U1Uencing tl1e incorporation process, incorporators must decide on a share structure, that is, the classes and numbers of shares authorized for issuance. The share structure may be simple or complex depending on the needs of the investors.

The actual process of establishing a corporation is relatively simple, and essen- tially the same format is followed in all jurisdktions. It is a matter of completing and filing the correct forms with the appropriate government body. That said, the incorporation process is not w ithout risks, such as the risk of choosing a name that is similar to that of another business. This risk can be substantially reduced by obtaining legal advice.

A corporation can be financed by equity or d ebt. Equity represents what the sharehold ers have invested in the corporation in return for shares. Debt consists ofloans that have been made to the corporation. The issuance of shares and d ebt instruments such as bond s to the public is strictly regulated by securities laws.

CHAPTER STUDY

Key Terms and Concepts articles of incorporation (380)

bond (381)

bylaws (381)

closely held corporation (376)

conversion right (382)

debenture (381)

incorporator (380)

insider (388)

insider trading (388)

NUANS Report (379)

officers (373)

prospectus (386)

securities (382)

securities legislation (3 76)

share structure (3 75)

shelf company (380)

stakeholder (373)

tippee (388)

widely held corporation (3 76)

Questions for Review 1. What does limited liability mean?

2. Who are the corporation's internal stakehold ers? Who are the corporation's external stakeholders?

400 NEL

5. One of the strongest arguments for the establishment of a single national securiti es regulator y body is the need for effective enforcement of securities market conduct. How does a single national body, as opposed to 1 3 provincial and territorial boilies, improve enforcement?43

6. In an effort to counter illegal insider trailing, market manipulation, and accounting fraud, the Ontario Securities Commission (OSC) has introd uced a whistleblower program."' Inilividuals who voluntarily submit to the OSC information that assists in an investigation that leads to the imposition of a monetary sanction will receive a reward between 5% and 15% of the monetary sanction to a mru6 mum of $5 million (i.e., eligibility for a reward is dependent on an enforcement o rder that results in a monetary penalty of at lea~ $1 million). The program also includes measures to protect confid entiality and prohibitions against reprisals. Should whistleblowers be rewarded for ilisclosing wrongdoing? What are the potential problems with a whistleblower program?

Situations for Discu ssion 1. In Silver v fMAX Corp, 45 shareholders sued IMAX

Corporation and certain ilirectors and officers for $500 million in damages and an adilitional $100 million in punitives. The shareholders alleged that [MAX misrepresented its 2005 earnings revenue in press releases and other disclosures for the period March 9, 2006, to August 9, 2006. It was alleged that 2005 revenues were overstated because IMAX recognized revenues from theatres that had yet to open and that this overstatement artifici ally inflated the trailing price of IMAX securities. On March 9, IMAX shares traded on the Toronto Stock Exchange (TSX) at $11.94. On August 9, IMAX issued a press release stating that the U.S. Securities and Exchange Commission had made an informal inquiry about the company's timing of revenue recognition. On August 10, the price

43 Pool'lam Pur t. ·The Casa KeepsGrOWillQ ro1 a Nal OMt Securrtit?s Regut&to(. The U~-..yers Weekty 13 OGcember 2010J 5.

4"1 OSC Poley 15· 601 WhJsilebk'Y.v& Ptogrt1m 45 20U ONSC 1035, !20ll] 105 OR (3d) 212 (c 15)

of IMAX shares dropped to $6.44 on the TSX. 46

The action was certified as a class proceeding but subsequently settled for $3.75 million plus legal fees.47 If the case had proceeded to trial, what would the plaintiffs have had to prove to be successful? How would the secondarymatket liability amend ments in securities legislation have assisted the plaintiffs?

2 . Steering Clear Ltd is a manufacturer of an expensive automatic helmsman that ocean cruisers use to navigate. Perry Jones ordered such a helmsman on behalf of a company called Cruisin' Lt d The helmsman was supplied, but Cruisin' Lt d ilid not pay its account. Because of this delinquency, Steering Clear Lt d decided to investigate the background of Cruisin' Ltd and iliscovered that it has a grand total of two issued shares- one held by Perry and the other by his wife. Perry has advised Steering Clear that the debtor company has only $5 in the bank and may have to go out of business soon. Steering Clear wants to sue Perr y per sonally for the debt.48 Will Steering Clear be successful? On what ba~is? What is the largest obstacle facing Steering Clear's potential action against Perry? What should Steering Clear have done ilifferently from a business perspective?

3. To take advantage of the growing market for organic foods, Charles Knight, a retired agro- food specialist, has decided to open a retail store in Vancouver, BC. With a large health conscious population and access to organic farmers in the Okanagan Valley, Charles believes that his business has great potential. He is going to start small but will incorporate to take advantage of favourable tax laws and limited liability. Charles is meeting next week with a lawyer to start the incorporation process, and the lawyer has asked him to furnish a list of potential names for his corporation. The names that he has come up with are Organic Foods Inc. (Charles likes to keep things simple), Prince Charles Organic Foods Inc. (Charles is an admirer of Prince Charles's gardening practices), Charles

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3. When should a business incorporate federally, and when should it incorporate provincially?

4. What basic rights must attach to at least one class of shares?

5. A class of shares may include a combination of various rights and privileges. Name three examples of typical rights that may attach to a class of shares.

6 . What is the difference between a widely held and a closely held corporation?

7. How can a corporation qualify as a private corporation in Ontario? What are the advantages of a corpora ti on qualifying as a private corporation?

8. What is a dual-class structure?

9. Are shares freely transferable? Explain.

10. What are the basic requirements for a corporate name?

11. What is a NUANS Report, and what is its purpose?

12. What is a shelf company, and what is its purpose?

13. Describe the process for incorporatinga company.

1 4. What is crowdfunding? [s equity crowdfunding permissible in Canada?

15. Compare shares to bonds. Whkh is the more advantageous method of raising money?

16. What are the objectives of securities legislation? How are the objectives achieved?

17. All securities acts have been amended to provide a new statutory right of action for misrepresentations contained in secondary market disclosures. What is the difference between the primary market and the secondary market for securities? What is the statutory right of action for purchasers in the secondary market? Expla.i n.

18. What is meant by insider trading, insider, and tippee?

19. ls all insider trading prohibited? Explain.

20. What is a prospectus? What is its purpose?

Questions for Critical Thinking 1. Salomon v Salomon Ltd stands for the

proposition that the corporation has a separate existence from its shareholders. Th is means

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that creditors o f a corporation do not have recourse against the shareholders' assets. Is this fair? Is it fair that creditors of a sole proprietorship seek the sole proprietor's personal assets? What is the justification for the difference in treatment?

2. Family-controlled businesses are a dominant feature of the Canadian economy. It is estimated that 90% of all Canadian companies, large and small, are family-owned. Some of the very large family-controlled companies such as the Loblaw Companies, Power Corp., and Husky Oil have gone public. Others- such as the Jim Pattison Group and McCain Foods Ltd- remain private. What are the advantages and disadvantages of going public? What are the advantages and disadvantages of remaining private?

3. Dual-class share structures (more than one vote per share) are prevalent in Canada. Roughly 1 0% (83) of the compartles listed on the Toronto Stock Exchange use some form of dual- class, multiple-voting share structure. lncluded in this group are Bombardier lnc., Canadian T ire Corp., Power Corp., Rogers Communications Cnc., Onex., Tech Resources Ltd, and Air Canad a.42 Why do you think dual- class structures have emerged in Canada?

4. The Cnternet has had a tremendous impact on the securities industry- it has spawned online brokerages, has emerged as the primary source of information for investors, and is the means by which businesses can distribute prospectuses, financial statements, news releases, and the like. It also poses considerable challenges as its global, invisible nature increases the likelihood of fraud. Because scam artists can anonymously and cheaply communicate with a vast number of people, they can readily spread rumours that result in the manipulation of market prices, trade in securities without being registered to do so, and distribute securities in nonexistent entities. What is the rationale for regulating trade in securities? Do you think the rationale changes when the commercial activity is conducted over the Internet?

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Krught Inc. (what could be better than one's own name?), BC Organic Foods Inc. (a nod to his home province), Imperial Organic Foods Inc. (worked really well for a tobacco, margarine, and oil company), and Kashi Foods Inc. (has a nice ring to it). Are there any problems with the names that Charles is considering for his corporation? Explain. What rights d oes the registration of a corporate name give Charles?

4. Paws Pet Food & Accessories Lt d (Paws Pet Food) was incorporated under the Alberta Business Corporations Act. Three years later, Paws & Shop Inc. (Paws & Shop) was created under the same piece of legislation. Both corporations operated in Calgary, and both were in the business of retailing pet food and accessories. Paws Pet Food was successful in getting a court order directing Paws & Shop to change its name even though the registrar had approved and registered its name.•• Why d o you think Paws Pet Food was successful in getting the court order? What are the costs to Paws & Shop of a name change? The registrar made a mistake in registering Paws & Shop's name. Who should bear the cost of the mistake- the business itself or the taxpayers?

5. In 1995, Bre-X Minerals burst from the ran.ks of Canada's junior mining companies to become the toast of markets across North America. It was considered a "can't m iss" by gold analysts at many of the top brokerage fi rms on the strength of reports tl'lat it had discovered, at Busang, Indonesia, the biggest gold fi nd the world had ever seen. By 1997, it was revealed that the Bu sang properties contained insignifi cant amounts of gold. An ind ependent consultant hired to investigate various discrepancies reported that the core san1ples had been tan1pered with, resulting in tl1e fals ification of assay values (assaying is tl1e process of subjecting the samples to specified testing proced ures to determine what quantity of a given mineral is present) . Billions of d ollars in stock market value evaporated; shares tl'lat trad ed at about $286 fell to pennies and were delisted, leaving many people with huge losses.

49 Pt1wsPet food bAccessor.oesLidvPaws hShopJnc. U9'92) 6Atta LR 13oJ 22.45CPR13d) 367.

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The debacle spawned an array of police investigations, regulatory probes, and class action lawsuits in Canad a and Texas. Twenty years later, the lawsuits are over with investors recouping next to nothing. The only person ever charged in relation to Bre-Xwas John Felderhof, the chief geologist of Bre-X. He was charged with eight violations of the Ontario Securities Act, including four based on insider trading. The Ontario Securities Commission ( OSC) alleged that Felderhof sold $84 mill.ion of Bre-X stock in 1996 while having information about the company that had not been publicly disclosed. After a lengthy and controversial trial, he was acquitted. The OSC was unable to prove beyond a reasonable d oubt that Felderhof had knowled ge of the fraud at the time he sold the shares.

After the dismissal of the remaining class actions, lawyer Clint Docken, who represented some of the investors, stated, "It's a sad d ay .... We have arguably Canad a's largest (ever) fraud and no accountability. There's no criminal accountability, there's no regulatory accountability and (now) there d oesn't appear to be any civil liability."50 What factors do you think contributed to tl1e lack of accountability?

6. In 201 0, Frank Stronach relinquished control of auto parts giant Magna International. Since 1 978, Magna has had a dual-class, multiple-vote share structure. Through this structure, Stronach was able to control the company d espite owning just 0.6% of its 113 million shares, because his 720 000 Class B shares each carried 300 votes, while the remaining 112 million Class A shares had one vote each. In return for cancelling the Class B shares, tl1e Stronach family trust received US $300 million in ca~h and 9 million new Class A shares. In addition, Stronach received a four- year consulting contract and a 27% stake in Magna's electric car business. It is estimated that tl1e deal was worth $1 billion- an 1800% premium on the value of Stronach's shares. Seventy-five percent of the Class A sharellold ers voted for the deal and subsequently the Ontario Superior Court" approved the deal. Market

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reaction to the d eal was also favourable- on the d ay following the announcement of the deal, Magna shares closed up 143 on the Toronto Stock Exchange.51 What are the problems with d ual-class share structures? What are the advantages? Do you think the deal to eliminate the dual-class structure at Magna was fair?

7. Former RBC Dominion Securities investment banker Andrew Rankin was foun d guilty in Ontario provincial court o f 10 counts of tipping a fri end, Daniel Duic, about pending corporate deals. Duic used the t ips to make a net profit of over $4.5 million in stock trades in a 12-month period. Insider-trading charges against Duic were dropped in return for his testimony against Rankin and the payment of a $1.9 million fi ne. Rankin was acquitted o f 1 0 counts of the more serious offence of insider trading because he wa~ apparently not aware of his friend's deals and he did not directly profit from them. Rankin was sentenced to six months in jail. Rankin's conviction was overturned, however, because o f contradictory evidence (inconsistencies in Duic's evidence) and errors by the trial judge. Before a new criminal trial was to begin, the Ontario Securities Commission (OSC) agreed to withdraw criminal charges in return for an admfasion by Rankin that he engaged in illegal tipping. Rankin also agreed to a payment of $250 000 toward OSC's investigation costs, a lifetime ban on working in

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the securities ind ustry or serving as a director or officer of a public company. and a 1 0-year ban on trading in securities in Ontario. What are the problems with insider trading? Why is it difficult to secure a conviction for improper insider trading? Do Rankin's penalties fit the "crime"? Why or why not?

8. Alimentation Couche-Tard Inc. is the Canadian leader in the convenience store industry. At 8:30 A.M. on October 6, 2003, Couche-Tard publicly announced a deal to purchase the 2 013 - store Circle K chain. Completion of the deal would make Couche-Tard the fourth largest convenience store operator in North America. When trading opened on the Toronto Stock Exchange at 9:30 A.M., the company's Class B stock was up 40 cents at $1 7.50. The price steadily gained all day and dosed at $ 21, for a gain of $3.90. Within five minutes of the opening, Roger Longre, a Couche-Tard director, bought 1500 shares and by 1 0:30 A.M. he had bought a further 2500. At the end of the day, he had a one-day gain, on paper, of $11372:53 Did Longre breach any legal requirements? Did he breach any ethlcal requirements? Should insiders be prohibited from trading prior to earnings announcements and after major announcements? Should insid ers be required to dear all proposed trades in the company's securities with a designated in-house trading monitor?

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NEL 4 04

BUSINESS LAW IN PRACTICE Time-in Team Management Inc. (Time-in), incorporated under the Canada Business Corporations Act, has been in operation for over two years. Luke Bailey owns 55% of the common shares as he had the idea for the business, while Raina El Khoury owns the remaining 45%. Roger Wiley contributed $200000 and was issued 100 pre- ferred shares. An angel investor' loaned the company $350 000. Luke and Raina are directors and officers of the corporation, and Roger is an officer although not a rurector. He is the president of the corporation.

Because Time-in hired a number of employees, Luke and Raina have been able to devote all their energy to sales and business devel- opment. Under their leadership, the company has done remarkably well, with $2 million in annual sales and excellent financi al pro- jections going for ward. Not only do they have customers in all the major sports, but a broad range of organizations have also bought into their system. The company continues to field inquiries from abroad and is exploring an international launch. There is, however, a major problem confronting the company.

Several weeks ago, Raina approached Luke with the idea of Time-in purchasing a junior, semi-professional sports team. She told him that she had run the numbers and had concluded that such an investment was feasible, would be an excellent marketing ploy, and would be good for the image of the company in the community. Luke responded by telling Raina that buying a sports team was easily one of the worst ideas he had heard in a very long time. "Eventually, I would agree that buying a team might well make some sense. But I'm not convinced that Time-in is currently big enough and profit- able enough to own a sports team. I suggest giving your head a really good shake because you are losing your g rip", he told her. Deter- mined to have her way, Raina told Luke that if Time-in rud not pur- chase the team, she would form her own company whose business purpose would be to buy a team and win a championship. "Then we'll see who is the smart one around here", she told him. Raina and Luke had been finrun g it increasingly rufficult to get along given the pres- sures, tensions, and fatigu e of running a rapidly expanrung business. This particular disagreement had simply brought matters to a head.

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OBJECTIVES After studying this chapter. you should have an understanding of

• the liabilities of a corporation

• the duties and li abi lities of corporate directors and officers

• the rights and liabi lities of shareholders and credi tors

• how the corporation is terminated

Identification theory

A theory specifying that a corporation is liable when the person committing the wrong is the corporation's directing mind

In response, Luke d ecided to show Raina who was the boss. He called a share- holders' meeting an d, exercising his rights as a majority shareholder, voted Raina off the board of directors. For good measure, Luke also excluded her from participating in the management of Time-in. Raina is devastated because T ime-in was herwhole life.

Roger does not want to get involved in the dispute at aH because he has much more immediate concerns. Roger believes that T ime-in is plagued by lax stand ards in its day-to-day operations. From Roger's perspective, this is what Luke and Raina should focus their attention on. For example, Roger has discovered thatTime-in has not been dedu cting and remitting income tax on salary p aid to certain employees. Roger not only finds this unacceptable from an a ccounting perspective, but also worries about Time-in's liability and fears that he may have personal liability for this "oversight."

1. What obligations d o Luke, Raina, and Roger have as corporate officers and directors?

2. Are there any problems with Raina forming her own company to purchase a sports team?

3. Can Raina d o anything about Luke voting her off the board and ousting her from management?

4. Is Time-in liable for the failure to de duct and remit in come tax? Does Roger, as an officer of T ime-in, have any personal liability for the fai lure to d edu ct and remit the taxes?

5. What are Roger's r ights as a shareholder if he d oes not like how Time-in is being managed ?

Corporate Liability A cor poration is a legal person in the eyes of the law. The corporation is respon- sible for its own a ctions, however, the responsibility of the corporation is com- plicated by the necessity of corporations to act through hlllUan agents. The law has developed rules regarding how a corporation can be said to have committed a tort, committed a crime or regulatory offence, or entered a contract. These rules are particularly important to stakeholders such as Roger, because they d etermi ne the legal consequences of corporate behaviour. A summary of the rules regarding liability for corporate cond uct can be fo und in Figure 1 6.3.

Liability in Tort A corporation can experience two distinct kind s of liability in tort: primary lia- bility and vicarious liability.

A corporation has primary liability for a tor t when, in law, it is regarde d as the entity that actually committed the tort in question. The idea of a corporation h aving primary liability is inherently problematic sin ce a corporation, as noted above, can work only through hwuanagents. How can a corporation commi t a tort when it does not have a mind of its own and d oes not have a physical existence?

The courts have overcome thi s hurd le by d eveloping what is known as the identification theory o f corporate liability.' A corporation has liability- an d

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NEL 4 06

could therefore be described as directly "at fault" - when the person committing the wrong was the corporation's "directing mind and will."

The theory seeks to determine which person or persons are the directing mind o f the corporation. When that person or persons commit a tort related to the business enterprise, this cond uct is identifi ed with or attributed to the corporation itself. The liability of the corporation is thereby mad e direct- not vicarious- because in law, the cond uct of the directing mind is the conduct of the corporation

Generally, it is the highly placed corporate offic ers who are classified as "directing" minds, while low-level employees are not. Whether a mid-range employee would be a directing mind is a more complicated and fact -specific inq uiry. A corporation may have more than one directing mind . Each may be responsjble for a different aspect of the corporation's business. For example, the vice president for marketing may be the corporation's directing mi nd in relation to the marketing function, whereas the vice president for finance may be the directing mind in relation to fi nance.

A corporation has vicarious liability" when the tort has been comm itted by an agent or employee who is not a directing mind of the corporation. The law of vicar- ious liability does not distinguish between the natural employer/principal- that is, a living, breathing human being- and the artificial employer/principal- that is, a corporation. Instead, the same principle applies to both.

Liability in Contract While there is no reason why the identific ation theory could not be used as a way of assessing a corporation's liability in contract, the courts generally have not fol- lowed this approach. Instead, agency law largely d etermines when a corporation is liable on a contract and when it is not.

A corporation is bound by the actions of the agent only if the agent is acting w ithin his actual or apparent authority. For example, if Raina were to enter a contract on behalf of T ime-in to purchase a sports team, T ime-in would be bound to the contract so long as Raina had the actual or apparent authority to enter the contract. Historically, an agent's apparent authority could be limited by fi lingwjth the incorporation documents a specific limita tion of the agent's authority. As these documents were publicly filed, outsiders were d eemed to have notice of them and to have read their contents. This was known as the doctrine of construc- tive notice and prod uced commercial inconvenience, since the only way that an outsider could fully protect herself would be to go d own to the registry offic e and review what the company had filed there. The d octrine has been abolished ,4 meaning that outsiders can now generally rely on the apparent authority of agents. In such a case, the corporation would be liable on the contract.

To avoid personal liability, the person signing a do cument on behalf o f a corporation should ensure that the d ocument contains a clause clearly indicating that the person is signing on behalf of the corporation and is not sig ning in her personal capacity. Th is precaution is eq ually important in the case of pre-incorporation contracts, which are contracts that have been entered into by the company's promoters' on behalf of tl1e corporation before it has even been created . Such contracts are governed by fed eral and provincial corporate law statutes, which permit the company to ad opt the contract- something that was

3 ViC~ric>.Js t:abl 1y iS diSCtJSsed ,n CMpters 10 and 2 0. 4 See, !or cxamp1a Canilda Business Co1po1a:K.Y1s A.ct ~SC 1985, c: C--4 41. s 17 5 A ::norroter is som~ooo woo particip.ll<?S in seuiog uo a co1po1al.on

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Directing mind

An individual who exercises decision making authority in matters of corporate policy.

impossible to do at common law. When adoption occurs, the corporation assumes liability on the contract. The promoter can avoid liability so long as the pre- incorporation contract expressly indicates that the promoter was acting on behalf of the corporation.• Pre-incorporation contracts can be problematic if they d o not indicate clearly who is intend ed to be liable7 and if the corporation fai ls to come into existence.

From a risk management perspective, people would probably do well to avoid pre-incorporation contracts altogether. Although such contracts are sometimes necessary to take advantage of a valuable business opportunity that just cannot wait, it is usually possible to find a corporate ve!Ucle quickly- such as through the purchase of a shelf company. In this way, the corporation is immediately in place and can enter the contemplated contract directly.

Criminal and Regulatory Liability Criminal Liability The criminal liability of a corporation poses the same conceptual problems as tort liability. As Baron Thurlow, L.C ., observed in the eighteenth century, "Did you ever expect a corporation to have a conscience, when it has no soul to be damned and no body to be kicked ?"

The judiciary solved this problem by adapting the identifi cation theory to the criminal law scenario. The theory maintains that a corporation has committed a crime if the person who committed the crime was a directing mind of the corpo- ration and he commi tted it in the course o f his duties and did so mostly for the benefit of the corporation.• This approach proved to be problematic because of the difficulty in proving beyond a reasonable d oubt that the directing m ind behaved in a criminal manner. The problem was highlighted by the lack of crim inal convictions in the 1992 Westray mine explosion in Nova Scotia.9 In response to the Westray public inquiry's findings, the fed eral government amended the Crim- inal Code. 10 The amendments increased the scope of potential criminal liability of corporations" by expanding the range of in divid uals whose actions can trigger liability, by broadening corporate responsibility for all criminal o ffences, and by increasing the penalties.

Prior to the amend ments, a corporation could be liable for a criminal offence only if the directing mind o f the corporation committed the o ffence. The amend- ments expand the range of individuals whose actions can trigger liability of the

6 Suprh r.o te 4, .s 14{4) ·E'.x<?mplion frOm oorSOMf (iat>~ity-11 expres~y ~provided in the \•1ritt~o contra-.:t. a pe1son V(l'w:J purpon11d to ~t '"the narna of or on bahatl of 1neco!porat10n befo1e t eame into eirn•tef"ICe is 001 . bOund oy the con11act ·

i The f(!91~at/l/4? pro\lislO~s prot~Cli!''Q 100 promo ter t•om perSonat fiabliry ha\/~ oeen strictty cons tnJQd by tM courts. For e~mok?. in Landmark ln.'ls Of Can;,dtJ Ltd v H0tmk U982J, 18 Sask. R 30, !19821 2 WWR 377 (OBJ, 1ne cou11 ~to 1 M t mere(y Mrning the yet•IO•tx:! :nco:oorat(!d co1po1a1.on as a party 10 tne con11.x:1 was 11\SuffiCient 10 1etleve the p1omot~r of persofl<i tiab11ily. The conl r.-.c t must also contain an express O<OV!Sien that spac1tc~y ieleves hirn of liabl ly.

8 A co11::01.) l 10n is not f~b4e tor an o lfence comm1u~c by a ·c11ech!\g m100· 11\at is 101.<alyunre\al ed to h.21 corporat~ po!.i tiOn. ro1 e)(()mp(e, a corpora ton :s r.o t f.l~ lor a b1ea\ a!ld enter comm1Ued by the pr<.'!sden1 o!l l'K!rv.ay hOme lrom ~olfce

9 O~ 9 May 1992. 26 miners died in an uode1g100 nd mel haoe <.'!>CpbsiOn a t lM \lVest ray coot mi~ Hl PtymouU\. No va Scotia Theempby(!eso f too m;oo vRre v .. orking ii\ tJns<'Jte cond1t i0ns that were itoov1n 10 I lle corpora t bn ~t c11m1nal proceedif\QS uga1ns l the corpo1at 10n and the mme·s man.agers we1e unsoccessfut

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pa11ne~h:ps, tiadE! un:OflS, ano any associaiton of perso!lS lhat was creatGd 101 a common our pose, has a s1ruc1u1t>. and l'IOfds ILS<.'!tt 001 as a!lassoc:iclt iOn ot per so"-'>

408 NEL

corporation to senior officers. These are individ uals who play an important role in the establishment of the organization's policies or are responsible for managing an important aspect of the organization's activities. The d efinition focuses on the function of the individual, rather than any particular title.

The amendments also address both crimes req uiring proof of knowledge or intent and crimes requiring proof of negligence. For offences tl1at require intent,12

an organization will be criminally liable if a senior officer, while acting in the scope o f his or her authority and intending at least in part to benefi t the organization, e ither actively engages in unsafe conduct, directs representatives13 to d o it, or knows about the unsafe conduct but does nothing or not enough to put a stop to it , and death or injury results. The effect o f the d1anges is that it is no longer nece.ssary that the intent and the guilty act of a criminal offence resid e in the same person. For offences based on negligence,14 an organization can be convicted if any representative providing services for the organization causes injury or death by unsafe cond uct and the senior officer or offic ers in charge of the activities of the representative d epart marked ly from the reasonable standard of care necessary to prevent the incident. These manges broaden negligence offences by allowing the combined cond uct of two individuals, who individ ually may not be acting in a manner that is careless or reckless, to constitute the necessary elements o f the crime.

The amendments provide for s tiffer penalties and corporate probation orders. A less serious summary conviction offence carries a fine of up to $1 00 000 (an increase from $25 000) and fines for more serious indictable offences remain with no prescribed limits. The legislation also enumerates factors that the courts must consider when setting fines, in duding moral blameworthiness (i.e., the economic advantage gained by the organization by comm itting the crime), public interest (i.e., the cost of investigation and prosecution, the need to keep the organization in business), and the prospects of rehabilitation (remedial steps directed to p re- venting the likelihood of a subsequent offence). A corporate probation order may involve conditions sum as providing restitution to victims, publishing the offence in the media, and implementing policies and proced ures. Its purpose is to allow the court to oversee and regulate an organization's efforts to reform.

BUSINESS APPLICATION OF THE

DEATH IN THE WORKPLACE

On Christmas Eve 2009, four construction workers who were repairing concrete balconies at an apartment building died when their swing stage scaffolding broke and they plummeted 1 3 storeys to the ground . A fi fth worker suffered severe leg and spinal injuries and a sixth worker,

who had attamed hi mself to a lifeline, was unin- jured. Since the accident, five parties have been found guilty of safety-related offences:

In June 2012, Metron Construction Corporation plead ed guilty to one count of criminal negligence causing death and was fined $200000. On appeal, the fine was

12 Most crimes io l!')e C1llrina1 Cod~ tctt w:t!\to lhiS cat~gory; exam~s i!\dude ft;.Jd, theft.. aM !)1it>ery. 13 "A reoresentaliv~( 1nctudes eveiyo~ v101ic.1ng for 01 afflrated wit nan 019an12al10n. such as a d11ector, pa11001.

em~oyee,agent.. orCOf'\t1ac1or. 14 l:xam~s of negtigenn-?--bMOO crimes indudes101 ;Ilg a hrea1m 11\ a cardess manner, operatillQ a motor

vehicle in a man~1 dal')Q<:l10us to Lile pi.JO(JC, and shOwrlg v1an1on and reckless dis1e9a1d IO! the lwes 01 saraty ofolhers.

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What is an appropriate punishment for a corporation amvicted of criminal negligence cattsing death?

quadrupled to $750 000. 15 Metron's Criminal Code liability resulted from the actions of its site supervisor, a "senior officer" of Metron. The site supervisor, who died in the accident, permitted six workers to work on the swing stage when there were only two harnesses and the usual practice is to have only two workers on a stage, and he permitted some wor kers to be under the influence of marijuana.

A director of Metron was convicted of breaching the province's Occupational Health and Safety Act (OHSA) and fined $90 000. He failed to ensure that non-English speaking workers received written material in their native languages; failed to ensure that training records were maintained; failed to ensure that the swing stage was not defective or hazardous; and failed to ensure that the swing stage was not loaded in excess of the load that the platform was designed and constructed to bear.

~ .r. Q

~ g ,2 g ~ c

Regulatory Offences

Swing N Scaff Inc., the company that supplied the swing stage platform, pleaded guilty to an occupational health and safety offence of failing to ensure that the platform was in good condition and was fined $350 000.

The director of Swing N Scaff pleaded guilty to failing to take all reasonable care to ensure the platform was in good condition and that a platform weighing more than 5 25 kilograms was d esigned by a professional engineer in accordance with good engineering practice. He was fined $50000 under the OHSA.

Vadim Kazenelson, the project manager for Metron, was convicted of four counts of criminal negligence causing death and one count of criminal negligence causing bodily harm. He oversaw the construction crew and allowed his workers to board the swing stage even though he was aware that fall protections were not in place. In sentencing Kazenelson to three and a half years in prison, the judge stated that a significant prison term was necessary to reflect the tragic consequences of the offences.16 Both the conviction and sentence were upheld on appeal.17

Critiall An11lyris: What are the lessons for employers from this case?

Sou re.es: CBC Na ... s ·Ma~er 1n r<')la1$c<')ftdo:'l1ogCd~pse S~ntencE?o lO 3·1/2 Yea1s· Ill January 2016), ont100 <hllp://v1vN1cbc.ca/ noos/caoodaf101on1o/t.e:aflotdi1¥J-<:Ot~pse-c1imlMty·1espc!\Sibte~ vadim•k.a2netson-J.3397597>. CBC N~v1s. ·oeadty Scalfotd L~ads 10 $340K 1n P~Mlll~s· {13 JtJly 2012). ont1ne -ch1tp'//vmv1cbc CA! nev1s/canaca!toron10/ story/20 12/ 071131 toronto ·met ron ·fioo."tml>

In addition to criminal liability under the Criminal Code , a corporation faces liability pursuant to a wid e range of statutory enactments related to taxation, human rights, pay equity, employment standards, const11Uer protection, unfair or

15 II v Me!roo Consrruc::on CO!p<'>t<l!i'On, 2013 ONCA 541, 300 CCC l3dJ 212 16 R v V"'1'm Ka>ene!<on. 2016 ONSC 25, 128 WCB t2dJ 76 17 R v KazenelSO'I. 2018 ONCA 77, i20lJlJ OJ No 452.

41 0 NEL

anticompetitive business pract ices, o ccupational health and safety, and environmental protection, to name a few. The relevant legislation often imposes penalties on the corpora tion, and sometimes on its directors and officers, including civil liability for d amages. An offence like those alluded to above is known as a regulatory offence.A regulatory offence has a criminal aspect because it involves some kind of punishable cond uct that is contrary to the public interest, such as polluting streams.

Owing to the large number of regulatory offences affecting business, as well as the expense and public relations problems associated with their commission, corporations are concerned with assessing and managing their exposure as they may be subjec t to large penalties. Consider, for example, the follow ing:

In 201 7, Prairie Mines & Royalty, a coal m ining company, was fined $4.S million after pleading guilty to two counts of violating the federal FisheriesAct lA and one charge under the provincial Environmental Protection and Enhancemen t Act. 19 A spill of an estimated 670 million litres o f waste water and 90 000 tonnes of sediment escaped from a failed ruke at the Obed Mountain m ine near Hinton, Alberta, and polluted tributaries feeding the Athabasca River.1°

In 201 7, Amazon Canada agreed to pay $1.1 million in penalties and costs to the Competition Bureau over m isleading price claims contrary to the fe d eral Competition Act.21 Amazon's pract ice o f comparing its pr ices to regular list prices suggested a savings to consumers that was not verified. 21

In 201 6, Teck Metals was fined $3.4 m illion after pleading guilty to offences under the federal Fisheries Act23 and the provincial En vironmental Management Act. "' The company accidentally dis charged water with elevated levels o f copper, zinc, ammonia, chlorine, and cad m ium into the Columbia River from its smelter at Trail, BC. 25

In 201 5, Quebec company Compu -Fin der was fi ned $1.1 million for violating Canad a's Anti-Spam Legislation (CAS L).26 The company sent commercial electronic messages promoting its train ing courses to potential business customers without the consent o f the recipients. 27

18 RSC 1985. c r-14. 19 RS~ 2000. c E 12 20 Dan Heatinq, ·co~ Mine r1ned $4.S Miliof\ for 2013 Sp• Thal Contarnif\ated Alt-ella R1\(!1 System·

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21 RSC 1985 c C-34. 22 Hotfie $Mv1, "A!'l'l<'ZOll CaMda rtoos $1 MltiO!') ~JS $100000 CoslS IOr MiSIQ001ng Prici'! C\i)ims

on\.'/eos ltf F.vr<Jno/11 Past Ul January 2017J,on(oo <http://bosinessJu'lanc:lalpcst.corrV~wsl re1ai--marketingfa1Ti1)2:0!l-Ca!\21C!a-fi~ .. 1-m1ion.•p(uS•COSIS•fOr·m1Slead1n.g·priCe-c~ims<>1vwebS11ef

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Mall {29 reb1ua1y 2016), Onli~ <hllps//www.theg!Obeandmateom/rtews/brthsll·co1um't:l.a/ t~c l(.·ffl'= tals• I i!led· 34· m I X'>rl· for· pdtu l1ng• l.'X':S•edtJ m oitt•1 ive 1/ a1 hck:-28962151 l>.

26 SC 2010. c 23. 27 CBC News. ·compu 0 r1nder 1"1ned $1.1 M Unde1 AnL1-$pam Lav1· 1s Maich20L5J.online <http//v1\•1,>1.cbec.a/

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Regulatory offence

An offence contrary to the public interest.

T im e-in's operations may be affected by many legislative provisions. For example, the Income Tax Ad"' requires that every per son paying salary, wages, o r other remuneration wHhhold a prescr ibed amount o f income tax. Time-in is a person paying salary, so it comes within the provisions of the legislation . Its failure to d ed uct and remit income t a xes can trigger penalties including, fo r a first o ffence, a fi ne of 1 0% of the amount owing. Liability und er this taxation legislation is strict, 29 and d efences are therefore rare.30

What facwrs short Id the cottrtscon siderwhen fining a corporation that cattses the death offish?

Directors and Officers The clirectors, who are elected by sharehold ers, manage or supervise the manage- ment of the business and the affairs of the corporation.3L In addition to this gen- eral authority, directors have specific powers and obligations set out in legislation. For exan1ple, directors can declare clivid end s, call sharehold er meetings, adopt bylaws, and issue shares. Directors are not usually in a position to carr y out the actual management themselves; generally they are authorized to appoint officers to carry out many of their du ties and exercise most o f their powers.32 This power of delegation does not relieve the clirectors of ultimate responsibility fo r the man- agement of the corporation, however.

28 RSC1985.c l lSthSupoJ.s J53tU. 29 The vasL ma.or11y ot 1egutato1y offenc:e.,; are st11ct tao1f!lyoltef"K:es . Th~ means LMt the accuse:1 may avoid

fia blily ,f he ca:') shaw that he .;):'.:led v11l h duealr;ie~ 01 took. a1Jt 1eas0Mbfe car~ Few offences impcise aosdute t~bl:ly. that is, liabl1ty i$ imposed for do'-.g the act. ana it is llOI open to the occtlsed to snov1 ht.'! v.·as W!lhOU I la.ull.

30 Ver!\ Kiishr\a, ·o;iectors· liabl ty for Corporate Tax~· The Lav..yer.s Weat<ly 114 .l.Jly 2000) S. 31 Th~ 9eoo1at pmver mery be circumscribed by too oytaws 01 by a ul\C':l!\i:'n:.')us sha1eh0tder agreem::?nl 32 Note 1001 some l'l"kllters, such as dec"ru\g dr\lldaods and apo1ov1ng the annual f1Mnca. s~ternents, IT'l<)y n<)l

bede\egated

NEL 412

ION OF THE LAW

CORPORATE GOVERNANCE AND GENDER DIVERSITY The Canadian Securities Administrators (CSA)33

have policies on corporate governance best prac- tices" and the disclosure of corporate gover- nance practices." The best practices include recommendations on the role of the board, the composition of the board, independence of direc- tors, and the like. The rules are not mandatory for companies listed on Canadian stock exchanges, but companies are encouraged to follow them and they are required to describe their practices. Where practices differ from the recommendations, they must explain why.

[n 2014, security regulators in most Canadian jurisdictions"' amended the disclosure rule to include disclosure of gender diversity policies with the goal of increasing the representation of

Wliy is it importan1 to haw mo" 1Wmm an the boanls of dir«· "'" of compo.n~s?

women on boards and in senior decision making positions.37

The amendment, which follows the "comply or explain" model, requires affected companies to publish annually a description of their diversity policies, including whether they have internal targets for promoting women to their boards of directors or to senior executive roles. Companies are not required to add women to their boards or adopt a diversity policy, but they are required to explain why they have not complied with the recommendation.

The securities regulators have released data on progress.38 The key findings for 2017 are:

The percentage of board seats occupied by women increased from 123to143 compared to the prior year.

Sixty-one percent of issuers"' had a least one woman on their boards, a 63 increase compared to the previous year.

Large issuers continued to lead in female representation on their boards, with 243 of board seats held by women.

Thirty-five percent of the issuers had adopted a policy on the identification and nomination of female directors, compared to 213 in the previous year.

Eleven percent of issuers had a formal target for the representation of women on their boards.

The number of women on boards and in executive positions varied significantly by industry.

33 A DOay torn;x>W<J of Inc tJ P'Ov nc~ .a"CI k.'.lrt tor.at SC::\Jr.t<:s regul.llOrS wl'lOS!a !Ole is IO COOrd !\at e a.,o na1mo'\J£ riecur,1c:i; r·rq1JI 1ton oe1rcy.-,c,os..\Car\Xl<i

34 Nat Ollil . l'\\lrurn:!nl 58 201 Corpor<1r•GOll(',rtc>tte.eGu1ddmes. 35 N at :Or\311'l ... 11yrncn1 58 to t 0Jsdosu~ o!C0tpor<1lt!Govan¥tct!Praeuces. 36 Onty scc:t.1· I C'\ r~ult>lOr~ '"Br 1.11'\Col.!mbo..1.)nd Pr nc(! (dwaird l ~a")d Mve notapp•owd t !')e 1tJle 37 Thl" l~dc1at~ovc1nmcn1 1s<)(50cr.courtX_1 !')CJ dNCIS tyonco1pC11d tC boards and sen;or rna'laqemeril ll Ms

pas~<.1 tc!q !.L:'\ t on tBt C. l~ 4rn<md'll\'J thQ CdfliKJ,) Business Cor(X)IMJOfls Act to 1a:io.1e PtJtliliety' t raded companlC's tOd"!dO!.C Ille nu1nbe1 o t v1011lenand t~ numbe1 o f visil::lk! rn1~t t :es on tne1r co1po1a1e b0a1d and 1n wno1 1mtldf)cmt•nt p0s1t10nt; and t!x:111 p0licies on dNc1s1ty

38 CSA MutU .. , 1c1,:,t Sldll Not ice !!18·309 !>l.lfl Rcviev1ot Worr~noo Boordsa()d :n £~cutl\f(> O ffiecr Pos111ons Co1nptW:l~ w11 ll NI 58· 101 O·!iC\osurc o r Co1po1atc Go\(!r~nce Prac: tices T~iS nohce 9.Jmmari2es a comprcht'lnsNC' ~1vcy o f 660 1uu~1s' !>led on the! Toronto Stock Citcl\ilng~

39 Jssucrs is.l t<:>rmuscd 1ooc1i<:;t 1 00aco1nPclny 11\.>t ~ &MJ(!d 01 proposes lo ~uea s.ecu1 ty

NEL

413

The results in clicate that, after nea rly three years of reporting rules, there has been mod est progress in in creasing the representation of women in the boa rd room. It is, however, well short of the 30% representation advocacy groups have called for. To accelerate the pace o f change, some commentators have suggested approaches such as setting specific targets40 or mand atory q uotas.4 1

Critical .£na1yrit: What is the advantage of the "comply or explain" approach? Do you think specific targets or mandatory quotas would be a better option?

Sou re.es: "CttMd·a~ Socurrlies Ri'!gulalors nnatae Rute Ameoomenis Ragard!"9 Q:sctosu1e oPNomenon Boards.lrd in Sef\or MaM;Jemenl', OruarJo Sea111ties Corrm1ss,br1 US Octobe1 2014). onf1f')e <hnp // ww>H.osc.gov.o".ca/eo/N~v..sEverus_nr_ 2014101S_c:sa·rega1di"9 •discbsure-ol·v..Om(!r'thLm>. All1SO!!G1<?ene., ·cornptyor (x~1 n '\/'/try·. The LM~'"' W-ly 16 Seotembe• 20 13) 17.

Self-dealing contract A contract in which a fiduciary has a conflict of interesl

Duties of Directors and Officers In exercising their management fu n ction, directors and o ffic ers have obli- gations contained in two broad categories: a fid uciary d uty and a d uty o f competence.

The Fiduciary Duty The fid uciary d uty requires directors and offic ers to act honestly and in good f aitl1 with a view to the best interests of the corporation. They cannot allow themselves to favour one particular group of sharehold ers, for example, because their d uty is not to that group but rather to the corporation as a whole. One o f the central prin ciples info rming fid uciary duties in corporate law can be summarized as follows: clirectors and o ffic ers must not allow their personal interest to conflict with their d uty to tl1e co r poration. Not sur prisingly, then, the fid uciary principle arises in multiple circumstances, two o f which are explored below.

T he Self- Dealing Contract To understand how a self-dealing contract wor ks, assume the following scenario. Time-in req uires some offic e furn iture, which Luke just so happens to be in a position to supply. He has several reasonably nice executive desks stored in his garage and is willing to sell them to the corpo- ration. Luke is now in a conflict -o f-interest situation.

As clirector o f T ime-in, Luke is obligated to try to buy the fu rniture at as low a price as possible. As vendor o f the furniture, however, Luke may be motivated by self-interest to sell the furniture at as high a price as possible. In this way, his d uty to the corporation and his self-interest may collid e because Luke is on both sides of the contract (see Figure 16 .1).

FIGURE 16.1 Self-Dealing Contract

Luke (the corporate director) buys from Luke (the individual)

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41 AnitaAnandb Krupa l<otech.cl,. ·cana.d<fs App10.lCh to Board OiverS1ty N eeds a ~ethinl(, The CJobeand M<NJ (22 M,l!Ch 2017),ontine : chttps //w .. vw theg!Obet)nd:'n~~.comfrepo1t·On-i:>'.JS1ness/rob•Commenta1y/ raM:ias·~poro.x:h-to•bOard·dwersi ty•na?ds-a•rethink/ar1.c~34~864501>.

414 NEL

In law, Luke is said to be in a self-d ealing contract: he is d ealing with himself in the purchase and sale o f the office furruture.

Many juris clictions have enacted proced ures through which self-dealing con- tracts are perm issible. The idea is to ensure that the corporation is not "ripped off " and , at the same time, to avoid a blanket prohibition on self-d ealing contracts since some of them could be beneficial to the company. Und er the Canada Business Corporations Act, for example, Luke's contract to sell furniture to his own company will be enforceable provid ed that

Luke cliscloses the contract to the corporation in writing.

Luke does not participate in any vote of the directors approving the contract.

the contract is fair and reasonable to the corporation.42

Failure to follow these statutory provisions gives the corporation the right to ask a court for a remedy, inducting that the contract be set asid e or "cancelled" on any terms the court sees fi t.

Corporate Opportunities Another area in whid1 conflicts o f interest frequently arise concerns corporate oppor turuty. Directors and officers are often req uired to assess any number of projects in which their corporation could become involved . These projects are known in law as "corporate opportunities"- they are opporturuties to d o business that the company can pursue o r d ecline. If the directors and offic ers were perm itted to take up any o f these opportunities for themselves, problems very much like the ones present in the self-dealing contract scenario would arise.

Assume that T ime-in has been approached by an Ontario company that is in need o f a program for sched uling, on a moment's notice, a large workforce with a variety o f different skills located in many different parts of the world. That company would like to wor k with T ime-in to create a sched uling system, the revenue potential of which appears to be very high. Luke is in a conflict -of-interest situation. As a director, he is required to assess the corporate opporturuty on its own merits. As an in clivid ual, however, because he is interested in the contract for hi mself, he is motivated by self-interest. Put another way, if Luke were permitted to pursue the opporturuty himself, he would be tempted- in his capacity as director- to turn d own the project, not because it was in the best inte.rests of the corporation to d o so but because he wanted to d evelop the sched uling system himself.

Given her fid uciary d uty as a clirector, Raina must proceed cautiously to purchase the sports team. Provid ed that Raina secures Luke's and Roger's fully info rmed consent, perhaps in the form of a clirectors' resolution and a share- holders' resolution, there is no obvious legal impecliment to her proceecling to purchase the team. She is being aboveboard and acting fairly regarding Time-in. Since Time-in does not want to pursue the opporturuty, i t would be highly unlikely that a court would decide that Raina was in breach of her fid uciary duty to Time-in by pursuing the opporturu ty for herself.

42 SuprtJ no1e 4 , s 120.

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Corporate opportunity

A business opportunity in which the corporation has an interest.

Canadian Aero Service Ltd v O 'Malley, [1974) SCR 592, 40 DLR {3d) 371

THE HISTORICAL CONTEXT: The Supreme Court's decision in this case is the leading analysis of the principles underlying the corporate opportunity doctrine. The case is also important because of the court's recognition that officers may owe fiduciary duties to the corporation and a director or officer may be precluded from appropriating a business opportunity even after she resigns.

FACTUAL BACKGROUND: On behalf of their company, Canadian Aero Service Lt d (Canaero), the president and executive vice president had been negotiating to win an aerial mapping con- tract in Guyana. Subseq uently, both officers left Canaero and set up their own company, Terra Surveys Limited. Terra began to pursue the very same line of work as Canaero and successfully bid on the aerial mapping contract in Guyana. Canaero brought an action against Terra and Canaero's former executives for improperly taking Canaero's corporate opportunity.

THE LEGAL QUESTIONS: Were the former exec- utives in breach of their fid uciary duty to Can- aero? Did the fact that the two had resigned and then, sometime later, acquired the opportunity for themselves mean that there was no liability?

RESOLUTION: The former executives were held liable to account to Canaero for the profits they made unde r the contract. They had breached their fid uciary d uties by taking something that belonged to the corporation. In determin ing whether the appropriation of an opportunity is a breach of fid uciary duty, the court suggested an examination of fac tors such as these:

ETHICAL CONSIDERATIONS

CORPORATE SOCIAL RESPONSIBILITY Corporate social responsibility (CSR) is a term without a precise d efiniti on. It is usually defi ned as "volunta ry activities undertaken by a corpo- ration to operate in an economic, social, and

the position or office held by the directors and offic ers (the higher they are in the organization, the rugher their duty).

tl1e nature of the corporate opportunity. (How clearly was the opportuni ty identified by the corporation and how dose was the corporation to acquiring the opportun ity?)

the director's or managerial officer's relation to the opportunity. (Was the opportunity one that the fid uciary worked on or had responsibility for?)

the amount of knowled ge the directors and o fficers possessed and the circumstances in which it was obtained.

tl1e time between when the opportunity arose and when the officers took the opportunity for themselves.

tl1e circumstances w1der which tl1e employment relationship between the offic ers and the company terminated. (Was termination due to retirement, resignation, or discharge?)

Because the former offic ers violated their fid uciary duty, any profi t gained- even if it was not at the expense of their former company- had to be g iven to tl1e company. That they had resigned before pursuing the opportun ity did not change the analysis.

CRITICAL ANALYSIS: When d o you thi nk a director of a corporation should be able to take ad vantage of a business opportunity? In other words, when i s a business opportunity her own and when does it belong to the company she serves as director?

environmentally sustainable manner." Typical examples of CSR are Vancouver City Savings Credit Union (Vancity) developing Canada's fi rst mutual fund that exclud es companies associated with fossil fu el prod uction; Ind ustria d e Diseno

41 6 NEL

Textil Sa (Zara) undertaking a project to support cooperatives in l ndia by trajning female farmers to build and conserve organic cotton seed banks; L'Oreal SA sourdng 100% of palm oil used in cosmetics from sustainable sources; and Intel focusing on women in its djgital literacy pro - gram throughout Africa, lndfa, and Latin America.43

Not surprisingly, CSR has become a common item on the agendas of corporate boards. Evi- dence of CSR's prominence is Maclean's annual ranking of the top SO socially responsible corpo- rations. ln partnership with Sustainalytics, they select the top "do-gooders" in an array of indus- tries including banking, retailing, energy and utilities, and materials including mining.

Despite the emphasis on CSR and the laud- able efforts of many businesses, there remain examples of Canadian corporate involvement in activities with un des irable and sometimes t ragic outcomes.

Tills is particularly the case in the mining and extraction sector, as the following cases filed in Canadian courts illustrate. HudBay Minerals [nc., a Canadian company that operated a nickel mine in Guatemala, is facing three negligence lawsuits in Canada." It is alleged that the company was complicit in gang rapes suffered by women at the hands of security personnel hired by the company and in the beating deaths and injury of protesters

The Duty of Competence

Nevsun Re9!lurres Ltd's g>ld mine, Eritrea

at its Fenix mine site. Nevsw1 Resources Limited, a Canadian company that owns a controlling interest in the Bishagold mine in Eritrea, is facing a lawsuit by three refugees. 45 They are alleging t hat the comp any co mmi tted human rights abuses , including being complicit in the use of forced labour in the construction of a mine. These cases have not yet been litigated and no allega- tions have been proven, but they do raise the question of whether social responsibilities should remain voluntary or be made legally enforceable, particularly with respect to activities in underde- veloped and developing countries.

Critical Analysis: Should governments pass leg- islatio n requiring CSR? Why or why not?

This duty requires directors and officers to exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances. Put more informally, directors and officers must meet a general standard of competence.

At one time, directors had very minimal obligations to act with care in exer- cising their responsibilities. In Re City Equitable Fire Insurance Co,46 for example, the court held that "a director need not exrubit in the performance of his duties a

43 .AJlt? Smy1n. 'CaMdai Top 50 SocwllyRc\pol\~DleC01poratons 2015", Macle;)n·s (S~ne 201.Sl onl Ile <htte> /Jwww moc~•n\c.t!~conomy/ou!. rlC'v~/cana.1a<. tor>· SO m:>sl·Sc>::d~i~resPo~·C4e-comoanics/>

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40 119251 H.h401iUKCAI DI 4l8

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greater d egree of skill than may reasonably be expected from a person of his knowledge and experience." This meant that if the director were ill-informed and foolish, then little could be expected of her; she was required only to display the competence of an ill-informed and foolish person. The unfortunate outcome at common law was that the less qualified a director was for office, the less time and attention she d evoted to her d uties, and the greater the reliance she placed on others, the lower was the standard that she was required to meet in managingthe business affairs of the company.

Recognizing that the common law standard of care was unduly low, legislatures have codified and upgraded what is expected of directors. The present standard con- tained in corporation legislation requires directors and officers to display the care, diligence, and skill thata reasonably prudent person would exercise in comparable circumstances. This is an objective standard, and, whHe directors are not expected to be perfect, they are to act prud ently and on a reasonably informed basis.

Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68, (2004) 3 SCR 461

THE BUSINESS CONTEXT: The Canada Business Corporations Act imposes a duty on directors and officers to act honestly and in good faith with a view to the best interests of the corporation (the fiduciar y duty) and to exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances (a d uty of care).47 There have been questions about whether the duties of directors extend to creditors, particularly when the corporation is financially troubled.

FACTUAL BACKGROUND . Lionel, Ralph, and Harold Wise wer e majority shareholders and directors of W ise Stores Inc., a publicly trad ed company operating about 50 junior department stores in Quebec with annual sales of $100 million. In 1 992, Wise Inc. acquired all of the shares of Peoples Department Stores Inc. from Marks & Spencer for $ 27 million. Peoples owned 81 stores and generated sales of $160 million annually. The Wise brothers became the sole directors of Peoples. The joint operation of Wise and Peoples did not function smoothly. In an effor t to help the sagging fortunes of the companies, the Wise brother s implemented a joint inventory purchasing

polic y on the recommendati on of the companies' vice president of administration and financ e. The result of the policy was that Peoples purchased and paid for most of Wise Inc.'s inventory, subject to reimbursement by Wise Inc. Peoples end ed up extending large amounts of trade credit to Wise and, by June 1994, Wise owed more than $1 8 million to Peoples. The fi nancial s ituations of both companies continued to deteriorate and both end ed up bankrupt in January 1 995. After the sale of the assets and the payment of secured creditors, approximately $ 21.5 million in trad e debt went unpaid . The Peoples' trustee in bankruptcy, representing the interests of the unpaid creditors, sued the Wise brothers, alleging that in implementing the joint inventory procurement program, they breached their duties as director s o f Peoples.

THE LEGAL QUESTIONS: Did the Wise brothers as directors of Peoples owe duties to the creditors of Peoples? If so, did they breach these duties?

RESOLUTION: ln a unanimous d ecis ion, the Supreme Court of Canad a held that the Wise brothers did not owe a fiduciar y d uty to the creditors. While directors are entitled to have regard to the interests of various stakehold ers- shareholders, employees, sup- pliers, creditors, consumers, government, and

4 7 Most prov1ncl<at co1porate sl<!itu1~s prov.de fo1 siml.:lf du1:es.

41 8 NEL

the environment- they owe their fid uciary d uty only to the corporat ion. The directors' fid ucia r y d uty d oes not change when the cor- poration is in the "vicin ity o f insolvency." The court furthe r noted that stakehold e rs, like creditors, have other avenues of potential relief. The creditors can use the oppression remedy to protect their interests from the prejudicial cond uct of directors.

The Court also held that c reditor s can pursue an ac tion based on breach o f the d uty of care as the identity o f the beneficia- r ies o f this d uty was "more open end ed " and "obviously" includ ed creditor s (th is marks the fi rst time that the Supreme Court has extend ed the d uty o f care beyond the cor- poration). The Court stated that the d uty of care is to be judged objectively. In analyzing

Liabilities of Directors and Officers

whether particular cond uct met tl1e stand ard o f care, the Court will consider tl1e fac tual circumstances as well as the socioeconomic conditions. The Supreme Court (also fo r the first time) end orsed the "business jud gment rule" in assessing whetl1er directors have ful- filled the d uty o f care. The rule hold s that the Court wHI not second -guess business judg - ments that are mad e honestly and on the basis o f reasonable information. The W ise brotl1ers did not breach their d uty of care to creditors, as the inventor y policy was a rea- sonable effort to address inventory manage- ment problems.

ClUTICALANALYSIS: Is the decision in Peoplesv Wise good news for directors of corporations? Is it good news for creditors?

Directors and offic ers are exposed to a broad range of liabilities relating to the business o f the corporation, including liability in torts and contracts, and liability by statutory o ffences.

This section will discuss such liabilities in relation to directors, while recog- n izing that the same analysis usually also applies to offic ers.••

Liability in Tort and Contract When a director is acting on behalf of a corporation and commits a tort, hls actions may be attributed to the corporation itself by virtue of the identifi cation theory. Similarly, when the director enters into a contract, as agent for hls corpo- ration, his actions make the corporation the other party to that contract and the director slips out o f the eq uation altogether. There are times, however, when a director has personal liability for a tort he may have committed or a contract he may have entered into.

Liability in Tort Traditionally, courts have been reluctant to say that a director is automatically liable just because he commits a tort on company time. The idea is to permi t the director to conduct company business without risking personal, unlimited liability at every tum. Think of it this way: if Luke were personally liable for any tort he committed during the course of hls business day, there would really be little benefit in incorporating Time-in from his perspective as a director. His liability would be the same whether he was running his business through a corporation or as a sole proprietorship, and the principle in Salomon v Salomon Inc would fall by the waysid e.

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That said, courts have acknowledged that in some circumstances the actions of the director d one in the course of carrying ou t duties may result in personal liability. Courts disagree in their approach as to when that will o ccur, however. Some courts have ruled that directors are not personally liable provided that they were acting in furtherance of their duties to the corporation and their cond uct was justifiable.•• Other courts have opined that personal liability is co nfined to actions that are tortious in themselves or that "exhibit a separate identity or interest from that of the corporation so as to make the act or conduct complained of thei r own ... ."50 Still other courts appear to suggest that directors and offic ers will almost always be responsible for their own tortious conduct even if they were acting in the best interests o f the corporation.51 With this i n mind, prud ent direc- tors will take care not to commit torts and will thereby avoid having to establish what the law concerning the matter is in their jurisdiction.

Most certainly, where the director's cond uct is extreme, she will be found liable for committing a tort regardless of the approach taken by the court in question. For example, assume that Luke is meeting in hi s offic e with a customer who has not paid his bill to T ime-in. Things get a little out of hand and Luke bars the door for several hours, saying to the customer, "You're not getting out of here until you write a cheq ue for what you owe us." On these facts, Luke would fac e personal liability no matter what the legal test applied might be.

Liability in Contract The director d oes not generally attract lia bility for the corporation's contracts- the prin ciples of agency operate in such a way that the corporation is liable to the outsider and the director who has acted as agent for the cor poration drops out of the transaction.

Nonetheless, a director faces personal liability on a contract if the fac ts indicate that the director intend ed to assume personal liability, as when

tl1e director contracts on his own behalf, as well as on behalf of the company.

the director guarantees the contractual performance of the company.

Liability by Statute In addition to tl1e exposure that directors fac e fo r breaching their general management d uties, d ozens o f pieces of legislation place obligations on them (see Figure 1 6. 2 for exa mples o f the range o f legislation affecting directors). These statutes impose potentially serious penalties for failure to comply, in duding fines of up to $5 million and imprisonment fo r up to two years.52

For example, the fai lure of T ime-in to withhold and remit income t axes can result in the directors being personally liable for the corporation's fai lure, unless the directors can demonstrate that they acted in a reasonable a nd diligent manner.53

Thus Luke and Raina, as directors of T ime-in, face personal liability for T ime-in's failure. Interestingly, the Income Tax Act d oes not impose personal liability on offic ers- such as Roger- for tins particular failure. While Roger owes d uties as a

49 Mcf•ddar> v 4817112 Oniar.-o Ud. 11984), 47 OR t2dJ 134, 27 BLR 173 tHCJ. SO ScoO,,,.,,cLeod Inc. v A!op.Oes Jewellers Ud 11995). 26 OR {:lo) 481, 129 DLR f411l) 711 a1 p.>ra 25 {CAI. leave 10

appeal le SCC 1efo~d. 25109 U2 Septern~r 1996). Seeatso 1-fOt}.:Hth v l?oeky Mount.tJ"n SUlte !ttc., 2013 ABCA 57.1201315WWR 457

51 See. lo< example. ADGA Sysiems 1n1emaiion•I Lid v Va/Cam Lid 1mg1 43 OR t3d) 1oi 168 DLR l4 •Ill 351 tCAl 4Qave to aope.at to SCC rel\Jsed, 119991 SCCll. N:> 124 .

52 SGe.101 gx.arn~a the lede1~ J lllZ<Ndous Products Act ~SC 1985, c H-'.t s 28U) 53 SuPfa<101e 2B.s 2271 IU[3)

4 20 NEL

corporate offic er under the Canada Business Corporations Act, at common law, and under his employment contract, he does not have any direct personal liability for his company's failure to remit under the Income Tax Act. It is important to check the provisions of legislation to determine who may be potentially liable .

Another example of director's liability is with respect to the environment. Both the Canadian Environmental Protection Act, 199954 (CEPA) and provincial environ- mental statutes have specific provisions imposing personal liability on directors and offic ers for the corporation's commission of an environmental offence.55

The CEPA specifies that whe.re a corporation commits an offence, an officer or director who participates in the offence may also be guilty of the offence. In addi- tion, directors and officers have a d uty to take all reasonable care to ensure that the corporation complies with the Act, its regulations, and environmental orders. 56

Provincial legislation also imposes personal liability. In Ontario, for example, the legislation imposes on directors and offic ers a duty to prevent the corporation from committing environmental harm.57 Failure to carry out that duty is an offence.

Environmental offences are generally of a strict liability'" nature, meaning direc- tors and officers have the d efence of due diligence. They are entitled to acquittal if

FIGURE 16.2 Directors' Statutory Liabilities: A Sampling

. - . - . .. Failure to pay employee wages Federal and provincial

incorporation statutes Liability for wages

Directing, authorizing, or permitting the release of a toxic substance into the environment

Failure to remit required raxes

Failure to maintain health and safety standards

Insider trading- using confidential information in buying and selling shares

Engaging in anticompetitive behaviour

Paying a dividend wben company is insolvent

tvt isrepresentation in a prospecrus

Improperly transporting dangerous goods

54 SC 199il. c 33. s 2BO fU

Federal and provincial environmental protection statute

Fines and/or imprisonment

Provincial and federal revenue acts Liability for amount outstanding and interest or penalties

Provincial workplace health and safety Fines and/or imprisonment legislation

Provincial securities acts, federal and Fines and/or in1prisonment provincial incorporation statutes

Federal Oimpetition Act Criminal and civil liabilities

Federal and provincial Personal repayment incorporation statutes

Provincial securities legislation Damages

Federal and provincial transportation of Fines and/or imprisonment dangerous goods legislation

SS Onty Ni'!v1 Brul\SWick. s erwironmE;'!nt.:i h.~9i.C>'fat•:>o do.?s oot specillCMfy a::Jd!ess lM tiablit1 of oll:CE!rs ar'ld d11~101s.

So Supr.> "'"" 54. s 280.l fU 57 ftrvifonmenti>! P10loct10.'l Act, RSO 1900, c £·19, !.194 58 Oflences a1e gane1a~y (;.')li'!9or!?t'!d as absotulG or strlCL tebi.ly. An absotu1e4iab1tity ollence 1.1\ one w~re l!le

p1osectJ1ion neec onty pro...e the physcti e~!'l"le-nlS or me ollence and t~ b4llmeworlhines.s or negtgence ot 1naaefer'lda"L L'> 1mmat'2i'.at There are few deteoces avalal*'! fo1 tMsa otfeoces. A st11c1 t1abl1ty oflE;'!nce a.~ui1es the sa~ crool but., unt1kG \Yith absotute tablity offer.c~ the d<?lence of due dligence :s avalAbhl Most regul<>tory otfaoces. lnctuding erwironm.t?ntal offences. aie s11ic1 V.aib1:1y

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they can show they "exercised all reasonable care by establishing a proper system to prevent commission of the offence and by taking reasonable steps to ensure the effective operation of the prevention system."" The defence of reasonable care and due diligence d oes not mean superhuman efforts, but it d oes mean a high stand ard of awareness and decisive, prompt, and continuing action.60

Convictions for environmental offences can result in a range of penalties, including fines and/or imprisonment. Under the CEPA, directors and officers are subject to fines ranging from a minimum of $5000 to a maximum of $1 million and prison terms up to three years, o r both for the most serious offences.61 In addition to these penalties, directors a nd offk ers face personal liability for the cost of preventative or remedial measures.

Midwest Properties Ltd v Thordarson, 2015 ONCA 819, 128 (3d) 81, leave to appeal dismissed 2016 Canlll 30455 (SCC)

THE BUSINESS CONTEXT: The following case considers the statutory r ight to compensation for spills under Ontario's Environmental Protec- tion Act and the personal liability of a principal/ director o f a corporation for environmental damage.

FACTUAL BACKGROUND : In 2007, Midwest Properties Ltd purchased an industrially zoned property and building. Prior to acquiring the property, Midwest obtained a Phase I Environ- mental Audit (primarily consisting of a visual inspection) from an environmental consultant who reported that more extensive Phase II sam- pling and testing of the soil and groundwa ter was not req uired .

After purchasing the site, tvlidwest became interested in acquir ing the adjoining property owned by Thorco Contracting Lim ited ., whi ch was controlled by John Thord arson. Thorco's business activities involved the ser vicing of petroleum equipment and tanks and the storage of various materials including petroleum hydro- carbons (PH Cs). Thorco gave Midwest penuis- sion to access the site and Midwest had both Phase I and Phase II environmental studies

conducted. These repor ts disclosed PHC con- tamination. Midwe.st then conducted sampling and testing on its own property an d discovered similar PHC contamination.

The activities of Thorco were well known to Ontario's Ministry of the Environment (MOE), as Thorco was in almost constant breach of envi- ronmental approvals and ord ers related to the storage of the PH Cs. Thorco and Thord a rson had been convicted o f environmental offences and had been ord ered to clean up the property purchased by Midwe.st. They had not complied .

Midwest sued Thorco and Thordarson in his personal capacity on the basis o f negligence, nuisance, and s 99(2) of the Environmental Pro- tection Act (EPA), which provid es a right of com- pensation for damage that o ccurs as a result of the spill of a pollutant. At trial, the court held that no remedy was available to Midwest under s 99(2) of the EPA because the MOE had already ordered Thorco to remediate the property an d to o rder a remedy under this section could result in double recovery. The d efendants were also found not to be liable fo r nuisance or negli- gence as Midwest failed to show it suffered any damage (Midwest did not prove that the PHC contan1ination had lowered the purchase price of the property) . Midwest appealed.

THB lBGAl QUESTIONS: Was Midwest enti- tled to a remed y under s 99(2 ) o f the EPA?

59 R v Sault Ste M>fle/OryJ. U978J 2 SCR 1299, 85 DLR Clo) 161. 60 RvCour!tw.'ds FibfesCt1nada (1992), 9Cl!LR tN$) 304, 76CCC {3dJ 68 tOnl Ow Cu. rorganerM 01:oc:otes 01 a

d'1cc1or"s du~ d~igance see R v &ta Jndusrnes !.Id, 11992) 9 OR {3c) 329, 7 CCLR {.2d) 245 {Ont SCJ. 61 Supra no1e 54, s 272.

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Was Thordarson personally liable under the EPA? Were there claims in nuisance and negligence? Was there a claim for punitive damages?

k£SOU IOfJ Section 99(2) of the EPA provides in part that a "person has the right to compensa- tion for loss or damage incurred as a direct result of the spill of a pollutant that causes or is likely to cause an adverse effect ... from the owner of the pollutant and the person having control of the pollutant." The Court of Appeal opined that the objective of this section is to establish a distinct ground of liability for polluters that does not require a plaintiff to establish intent, fault, a duty of care, or foreseeability. The section imposes strict liability on polluters by focusing on who owns and controls the pollutants. The court held that it would undermine the objective of the legislation if a polluter could avoid its obligation to pay damages solely on the basis that a remedi- ation order is in existence. The court also pointed out thatThorco and Thordarson had not cleaned up their property so the chances of double recovery were remote. ln assessing the measure of damages, the court awarded damages based on the restora lion costs as opposed to damages based on the decrease in the value of the prop- erty. The court reasoned that damages based on diminution of the property may not adequately fund a dean-up. The court awarded $1328000.

Thordarson sought to avoid liability on the basis that it was Thorco, a separate entity, that

committed the breach. The court noted that the action ins 99(2) is against the owner of the pollutant and the person who controls the pollutant. Thordarson was found to be in con- trol of the pollutant as he effectively controlled the day-to-day operations of the business and he was responsible for the pollutants being brought onto the property. He was held jointly and severally liable with Thorco.

As the court awarded damages under s 99 of the EPA, it normally would not be necessary to consider the claims of nuisance and negligence. However, in this case, the plaintiff was seeking punitive damages, which could not be awarded pursuant to s 99(2) as it only provides for com- pensatory damages . The court held that the trial judge erre d in dism issing the negligence and nuisance claims on the bas is that damage had not been established. The court pointed out that Midwest has suffered a loss in the value of its property even though the amount was not quantified. Pursuant to a finding of nuisance and negligence, the court awarded punitive damages of $100000, $50000 from each ofThorco and Thordarson. In making the award, the court considered Thorco's history of non-compliance with MOE orders and its indifference to the environmental condition of its property.

CRITICAL ANALYSIS: How might a director or officer of corporation avoid personal liability for environmentalharmunders99(2)of0ntario'sEPA?

Art restoration c.osts the appropriate remedy in all contaminated land cases?

423

Avoiding Liability

Indemnification

The corporate practice of paying the litigation expenses of officers and directors for lawsu its related to corporate affairs.

Directors have onerous d uties to the corporation, and no one should agree to become a director without a sound understanding of the obligations involved . Most important is the recognition that service on a board of directors carries significant risk. Directors are exposed to the r isk of criminal, civil, and regulatory liability, as well as reputational risk. The exposure to risk suggests that a r isk management plan, as discussed in Chapter 3, is warranted. The basis for such a plan is provided in the Business Application of the Law box below.

BUSINESS APPLICATION OF THE LAW

AVOIDING THE RISK OF PERSONAL LIABILITY

Directors can red uce their exposure to per- sonal liability by exercising care, diligence, and skill in their d uties. Directors can meet the statutory stand ard o f care by being atten- t ive, active, and informed . In this regard, directors should

regularly attend directors' meetings.

read all relevant materials.

a~k questions and speak up at meetings.

keep personal notes o f meetings and review minutes of meetings.

make all their d ecisions informed decisions.

do what is necessary to learn about matters affecting the company.

identify possible problems within the company.

stay apprised of and alert to the corporation's financial and other affairs.

ensure that they receive reliable professional ad vice.

Directors may also protect themselves by ensuring that an indemnification agreementwith their company is in place. The purpose of such an agreement is to ensure that the corporation pays any costs or expenses that a director fa ces as a result of being sued because he is a director.

Directors should also ensure tl1at tl1e corpo- ration carries adequate insurance. Directors' and officers' liability (D&O) insurance provides cov- erage to the director who has a judgment or other claim against him. Director s should carefully review the policy's exclusion clauses to ensure that maximum protection is provided.

Source: A~x L Mac:rartane bA~xaoora N01LI\. ·caiiaaa 0 11ec10Ni al'td Offie~rs Lablily 1!l Lhe ShOC!ow o f lnSO\vc~# Mondt1q Corporate/ Cornpany raw U1 Apr~ 20 UJ, ontine <r'lltp//rrooo~.comtcanadaf art+de.asp?art:deiO=J2B316>

Shareholders and Creditors Shareholders A sharehold er is someone who invests in a company by buying shares. As soon as Time-in was created, for example, the company- through the directors- issued shares in the company to Luke, Raina, an d Roger. Another way of becoming a sharehold er is by buying the shares from an existing sharel1older or rece iving the shares as a g ift.

Regardless of how the shares are obtained, the shareholder has few responsi- bilities with respect to tl1e corporation. Unlike d irectors and officers, the share- hold er has no d uty to act in the best interests o f the corporation.62 She can freely

62 T~ra is an eitcephOI\ in son~ JUnSa1cllo!l$ \Vh<!r(! anot1ig.lliOn<:an be !fnoo.s(!d on shar(!h:.'>tdm I Lll<fy hold er>::)u9l'tsM1es lo bec&.1Ss:~oo as ,nscers, inv1niehcase they rnJS I 001 use 1nside1 1nfo1'1"11lll iOn to 11'x:!i1 OW!l bener t

NEL 4 24

compete with the corporation in which she holds a share. She is not obligated to attend shareholder meetings, cast her vote, read the corporation's financial reports, or take any interest whatsoever in the progress of the corporation. And, o f course, she is not generally liable for the d ebts and obligations o f the corpora- tion because of the principle in Salomon.

There are exceptions to this immuruty, however, as the following section explores.

Shareholder Liability Owners of the corporation are occasfonally held responsible for debts and liabilities incurred by the corporation. In other words, the corporation is not considered a sep- arate entity from its shareholders. This is known as piercing or lifting the corporate veil Due to the Salomon principle, courts are generally reluctant to lift the corporate veil except when they are satisfied that a company is a "mere facade" concealing the true facts."' It must be shown that there is complete domination and control by the person or entity sought to be made liable, and that the corporate form must have been used as a srueld for conduct akin to fraud that d eprives claimants of their rights.61

Forexan1ple, in Big Bend Hotel Ltd vSecurity Mutual CasualtyCo,65 the court ignored the separate existence of the corporation when the corporation was being used to hide the identity of the person be!Und the corporation. Vincent Kumar purchased insur- ance for his company, Big Bend Ltd, which owned a hotel The hotel burned down, but the insurance company refused to pay because Kumar had failed to disclose on the application for insurance that he had been president and sole shareholder of another corporation whose hotel had burned down less than three years earlier. The court held that the insurance company should be able to disregard the separate existence of the corporation and treat the policy as if it had been applied for by Kumar himself.

Also, in Wildman v Wildman, f6 the Ontario Court of Appeal ignored the principle of a corporation asa separate entity and held a husband's corporation liable for spousal and child support. The court opined that the corporation as a separate legal entity was not an absolute principle and the principle should not be used to defeat the enforce- ment of family law orders. The court allowed the wife to look to the corporation to satisfy the obligations of the principal and sole shareholder- the husband.

Lifting the corporate veil

Determining that the corporation 1s not a separate legal entity from its shareholders.

Chan v City Commercial Realty Group Ltd, 2011 ONSC 2854, 90 CCEL (3d) 235.

may be lifted when incorporation occurs for a purpose tl1at is illegal, fraud ulent, or improper.

THB BUSINESS CONTEXT: A corporation is an entity separate from its owners, and the courts will not readily ignore the corporate form and hold the sharehold ers liable for the conduct of the corporation. However, the corporate veil

FACTUAL BACKGROUND: City Comme r - cial Realty Services (Canada) Lt d (City 1) , a Toronto real estate brokerage company, sued Stephen Chan and others in respect of a real estate transaction. City 1 lost both at trial and on appeal. Costs were awarded against City 1,

63 Kevin P.llriek McCu1...ess.. Can/ldian BuSines.s CO!f;>OrtJUons Law, 3d ed IM~1khclm ON l~x.iSNE!xtS , 2017) at 4<} .. 6Q po~nts O<.Jl a ~mbar of 011'\E!r s ~1t1a1i0ns \'IOO!i? the vei w il be HtOd , 1nc!ud1n9 \'11'\ie!\ ii iS 1()Qui1ed by st.aluta contra:l 01 ot~r docurt'(!nts, and w~n it cart be~sia!:l( ished LMl Iha company :s the agt'!nt or its conl1dk?rs or SMrehOlders

64 Gregorio v Intrans-Corp 11994), 18 OR 13dJ 527. 115 DLR 14th) 200 !CAI 65 11980). 19 SCLR 102, ILR 1-1217 ISCl 66 12006), 82 OR t3d) 401. 215 OAC 239

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which were not paid. Shortly before the appeal was heard, City Commercial Realty Group Lt d (City 2) was formed to continue the busi- ness of City 1. The principals of City 1 were two brothers, Samuel and Martin Wygodny. Martin resigned from City 1, transferred his shares in City 1 to Samuel, and became the sole officer, director, and shareholder of City 2. City 1 became inactive and its brokerage reg- istration lapsed. City 2 engaged in the same business as City 1, using the same premises, furniture, phone number, business name, and signage, and some of the same personnel. The plaintiffs requested that the court lift the cor- porate veil on the basis that City 2 was incor- porated for an illegal, fraudulent, or improper purpose. The defendants argued that it was not unlawful or improper to let City 1 expire or to incorporate City 2, which was not burd ened by City l 's liabilities.

THE LEGAL QUESTION: Are the brothers person- ally liable for the debts of City l?

RESOLUTION: The court held that the rule that a corporation is a separate legal person

Shareholder Rights

is not inviolate and would not be applied if its result would be "too flagrantly opposed to jus- tice." The court stated: "The alter ego theory is d esigned to prevent the use of a corporate vehicle to achieve an objective which offends a right m inded person's sense of fairness ... . Two elements must be proven by the plain- tiffs in this case: first, that the activities of the companies were completely dominated by Martin and Samuel, and second, that they engaged in improper conduct tl1at unjustly deprived the plaintiffs o f their rights." The brothers were responsible for City l's cost award as the plaintiffs' inability to recover any amount was attributable to their improper conduct in "organizing their corporate affairs in a way which provided them w ith all the ben- efits of their real estate activities and none of its burd ens."

CRITICAL ANALYSIS: Despite the success of the plaintiffs in having the court "lift the corporate veil", courts are generally reluctant to do so. Can you think of situations where it would be appro- priate to lift the corporate veil?

Preferred share

A share or stock that has a preference in the distn but1on of div id ends and the proceeds on dissolution.

Shareholder rights fall into three broad categories: the right to vote, the right to information, and financial rights. How directors d ecide to allocate these rights when issuing diffe rent classes of shares is largely up to them, as there are few requirements in this area. One kind of share can have all three rights, while anotl1er kind of share may have only one of tl1ese rights. All that is normally required, in this regard, is that the voting and financial rights referred to above be allocated to at least one class of shares; however, all those rights are not required to be attached to only one particular class.

Common share

A share that generally has a right to vote. share in dividends, and share in proceeds on dissolution.

The idea behind having different classes of shares is to permit different levels of participation in tl1e corporation. As noted earlier, if Roger does not want mum of a role in the company, he may be content with nonvoting shares. A nonvoting share is often called a preferred share.67 A voting share is usually called a common share. Although nonvoting shares are normally called preferred and voting shares are normally called common, this is not always the case. The only way to know for certain what rights are attached to shares is to review the share certifica te itself, as well as tlle articles of incorporation.

67 Tney are Cclk!d orel~rred sM1es beCcluSC! 01a1r~1ly t~ hdd<lrs or orefoned shares get prc1111y--J1 ha\€ a ·prefere')C;f-01\ kll<.ing a sf1ce Ol lhe cOrPorat:on·s asse1s ti H is tiquidalOO

426 NEL

Right to Vote Corporation legislation requires that there be a t least one class of voting shareholders in a corporation. The most s ignifica nt voting r ight t ra cti- tionally attached to common shares is the right to vote for the board of directors. Note that the number o f votes that a particular shareholder may cast usually d epends on the number of shares he holds. If Luke holds 1000 collllUon shares, he has 1000 votes. As he holds a majority of the shares, he is in a position to elect at least a majority of the boa rd of ctirectors a nd therefo re control the compa ny.

As well, voting shareholders have the r ight to approve or disapprove of direc- tors' actions since the last general meeting. This is because the right to vote brings with it other rights, inducting the right to

hold a shareholder general meeting each year.

be given notice of the meeting.

attend the meeting.

ask q uestions.

introduce motions.

A shareholder who cannot attend a meeting can exercise her voting power through a proxy, which means granting formal permission to someone else to vote her shares on her behalf. The use of a proxy is import ant, particularly in large corporations when there is a ctispute between competing groups of shareholders. Whichever group does the best job of soliciting proxies is most likely to carry the d ay. Nonvoting sharehold ers- usually preferred shareholders- have the r ight to vote in certain specialized matters. Under the Canada Business Corporations Act, for example, Roger- as the hold er of preferred shares in Time-in- would have the right to vote on any proposal to sell all the cor poration's assets.68The rationale is that even nonvoting shareholders should have a say when such a fundamental change in cor porate direction is being put forward.

Right to Information Shareholders have the right to cer t ain fun damental information concerning the corporation. This includ es the right to

inspect the annual fin ancial statements for the corporation.

apply to tl1e court to have an inspector appointed to look into the affairs of the corporation if it can be shown that there is a serious concern about mismanagement.

inspect certain records, inducting minute books, the register of sha re transfers, incorporating documents, bylaws and special resolutions, and the registry of shareholders and directors.

know whether directors have been purchasing shares of the corporation. This is to perm it sharehold ers to determine whether ctirectors have been using confidential information to make personal profi ts.••

Financial Rights Sharehold ers generally buy shares with the hope or expec- t ation that the corporation will prosper and generate fi nancial rewards, in terms o f either capital gains or income for them. In this respect, one of the funda- mental rights of the shareholder is the right to receive any ctividend declared by the corporation. The shareholder has no r ight to have dividends just because

68 Supra no1e 4. s 189(3) 69 See. for ex.lmp4e, Se::ur11:e-s Act ~SO 19':}() c S·S. $$ 106·9.

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Proxy

A person who is authorized to exercise a shareholders voting rights

Pre-emptive right

A shareholder's right to maintain a proportionate share of ownership by purchasing a proportionate share of any new stock issue.

the corporation has earned large profits, since the d eclaration o f divid ends is d one at the discretion of the board of directors. However, if the sharehold ers can show that the directors are abusing their discretion, they can consider bringing an oppression action, which is discussed later in trus chapter.

Once divid ends are declared, directors are bound to pay them in order of p refer- ence assigned to the classes of shares. As well, there cannot be any discr imination among shareholde rs belonging to the same class. If Luke and Raina both own the same class of shares, it is illegal for the directors to d eclare that Raina gets a certain dividend but Luke d oes not.

Shareholders have a right to share in the assets of a corporation on dissolution after creditors are paid. Again , the right is d epend ent on the priorities o f each class of shares. Preferred shareholders are often given the r ight to be first in line for corporate assets once all the creditors have been paid.

Additionally, a shareholder may have what is known as a pre-emptive right. When thls right exists, it requires the corporation to offer existing shareholde rs the chance to purchase a new issue of shares before these shares are o ffered to outsiders. This gives existing sharehold ers a chance to maintain their level of con- trol or power in the corporation. For example, asswue that Luke has 1 000 common shares in Time-in, and because of other entrepreneurial interests, he has unwisely resigned as a director in the company for the time being. Asswue Raina is the only corporate director left and she resolves to issue 2000 common shares to Roger. This issue would transform Luke's position from being a majority shareholder to being in the minority, but rus pre-emptive r ight would allow rum to maintain his propor- tional interest in the company if he could afford to purchase further shares.

Shareholder Remedies A sharehold er, such as Roger, who is dissatisfied with a cor poration's performance or management has a number of remedies available to rum.

Selling the Shares Often the simplest and least costly remed y for a share- hold er who is dissatisfi ed with the operation or performance o f a corporation is simply to sell his shares.

Trus, of course, is an easily viable remedy only in the wid ely held or public corporation, where shares are traded on a stock exchange and there a re no restric- tions on their transferability.

The situation is q uite different in tl1e closely held or private corporation. In this case, there are usually restrictions on the transference of shares and- even where the restrictions a re minimal- it may be difficult to find someone willing to buy such shares. Historically, this reality put the m inority sharehold er in the unenviable position of having little input into the operation o f the corporation and no easy way to extricate rus inve.stment. In response, both the collllUon law and the legislatures d eveloped a number o f remedies to protect a minority share- hold er from abuse by the majority. The most important are the appraisal remedy, the derivative action, and the oppression remedy.70

Exercising Dissent and Appraisal Rights In situations where share- hold ers, by a two-third s majority vote, approve a fund an1ental change to the cor- poration, a dissenting shareholder may elect to have her shares bought by the

70 Othe1 11'.?m~dK:>s indud~ w 1nd11\9 up, \ ... hiei\ invctves d1SSOh.JtJOn or the 001p0rallon and the return of sur~s asseis to 1ne st\a1etdde1s. T~useof this 1emedy is uncommon

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corporation. 71 This dissent and a ppraisal right is limited to specific actions such as changes to the restrictions on share transfers or restrictions on the business a corporation may carry on; the amalgamation or mergerwith another corporation; or the sale, lease, or exchange o f substantially all of the corporation's assets. The procedure for obtaining the remedy is complex, and the dissenter must strictly follow the prescribed steps.

Bringing a Derivative Action Because o f their managerial control, directors are well placed to rob the very corporation that they are charged with serving. For example, tl1ey could take a corporate opportunity and develop it for tl1eir own personal gain, they could vote that the corporation sell corporate assets to one of them at a price ridiculously below market, or they could vote themselves outra- geously h igh compensation packages. What can a minority sharehold er do when the directors are breachlng their d uty to the corporation and causing it injury?

At common law, courts permi tted minority shareholders to take action on behalf o f the corporation against the directors, but the system was far from ade- q uate. In response, corporate law statutes have created what is called the statutory derivative action. Thi s perm its a sharehold er to obtain leave from the court to bring an action on behalf of the corporation, where he can establish that

directors will not bring a n action.

• he is acting in good fa ith.

• it appears to be in the interests o f the corporation that the action proceed.

Thls action means that directors cannot treat the corporation as their own personal fiefdom with impunity. They owe strict d uties to tl1e corporation. Even if they breach those d uties with the support of the majority o f the shareholders, the m inority has recourse to the courts and can secure any number of remedies on behalf of the corporation. By virtue of the d erivative action, if the directors have stolen a corporate opportunity, they can be fo rced by the court to account for that profi t. If they have disposed of corporate assets at below market value, the court can order them to account for the difference between what the asset is actually worth and what was paid for it. If they have voted to overpay themselves, the court can order them to return their ill-gotten gains. The court even has the power to remove the directors from offic e and replace them. In fac t , the legislation empowers the court to make any order it sees fit.

Bringing An Oppression Action The most widely used remed y by share- holders in Canada is called the oppression remedy. It applies when the actions or omissions of the corporation or its directors have oppressed or unfairly disre- gard ed or prejudiced the interests of the sharehold ers. The remedy is available when the reasonable expectations o f the shareholder about management cond uct have not been met. Conduct that the courts have foun d to be oppressive usually falls into the following categories:

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lack o f a valid corporate purpose for a transaction.

lack o f good faith on the part of the directors o f the corporation.

discrimi nation between shareholders with the effect of benefiting the majority sharehold er to the exclusion o r the detriment of the m inority shareholder.

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Dissent and appraisal right

The right of shareholders who dissent from certain fundamenta l changes to the corporation to have their shares purchased by the corporation at a fair price

Derivative action

A suit by a shareholder on beha lf of the corporation to enforce a corporate cause of action

Oppression remedy

A statutory remedy avai lable to shareholders and other stakeholders to protect their corporate interests.

lack of adequate and proper disclosure of material information to 1u.inority sharehold ers.

conflict of interest between the interests of the corporation and the personal interests of one or more directors.72

Raina may argue that Luke's actions in voting her off the board and ousting her from management for no good reason other than to show her who was boss were oppressive and against her reasonable expectations of continued involve- ment in Time-in.

The court is entitled to make such an order as it d eems just and appropriate, including ordering the corporation to purchase the complainant's shares, ordering the improper conduct to cease, and, in extreme circumstances, ordering the com- pany to be dissolved. The remedy is extremely flexible and has few attendant technicalities. Unlike a derivative action, which is brought on behalf of the cor- poration, the oppression remedy is a personal action, which can be brought by sharehold ers and specified stakeholders- security holders, creditors, directors, or offic ers.

Like all litigation, however, the process in securing a shareholder remedy is time consuming, costly, and unpredictable. Furthermore, the courts historically have been less than enthusiastic about getting involved in the internal affairs of corporations. Put another way, it is often a heavy and onerous burden to convince the court that the majority is in the wrong and has been oppressive.

As a way of avoiding litigation, shareholders may decide to enter into an agree- ment at the very beginning of their association in order to d eal with potentially contentious areas and to streamline the procedure leading to the resolution of any conflict. Depending on the jurisdiction, there are two possibilities in this regard: a sharehold ers' agreement and a unanimous shareholders' agreement (also called a USA) . Of course, such agreements do not guarantee that litigation will be avoided, since the meaning and enforceability o f these agreements can themselves become the subject matter of litigation.

M ennilto v lntram odal Inc, 2016 sec s1, c2016J 2 scR 438 THE BUSINESS CONTEXT: In the following case, the Supreme Court of Canada (SCC) clarifies how the oppression remedy operates in smaller, closely held corporations and assesses whether failure to observe formalities required by the Canada Business Corporations Act (CBCA) consti- tutes oppression.

FACTUAL BACKGROUND: In 2004, two friends, Johnny Mennillo and Mario Rosati, incorporated a road transportation company, lntramodal Inc.,

pursuant to the CECA. They agreed verbally that Mennillo would provid e financing to the com- pany by way of loans and guaranteeing d ebts, and Rosati would use his skills and expertise to manage the company. Mennillo was issued 49% of the shares and Rosati was issued 51 % and each became officers and directors. From the beginning, the parties conducted their affairs informally and did not often comply with the formal requirements of the CBCA. For example, 'When shares were issued, neither party paid for them and Mennillo's share certificate was not signed. They rarely put anything in writing and

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4 30 NEL

often agreed on matters by a simple handshake. There was no written shareholders' agreement, no partnership agreement, and no formal docu- mentation for the monetary advances made by Mennillo. As court noted, "this was a two-person, private company in which the dealings between the parties were marked by extreme informality:'

In May 2005, Mennillo no longer wanted to continue to guarantee the company's indebted- ness. He sent a letter to Intra modal resigning as a director and officer (but not as a shareholder). lntramodal filed a declaration with the corpo- rate registry removing Mennillo as director and shareholder but it did not follow legal formali- ties for transferring and registering the shares. Ra.ther, a number of months later Rosati uni- laterally adopted a backdated resolution to transfer the shares, which were not properly endorsed by Mennillo.

[n July 2007, Mennillo indicated discontent over not receiving any return on his investment despite the company's success. Rosati agreed to repay the outstanding loan of $440 000 plus an additional $150 000. After the money was paid, Mennillo realized that he was no longer a shareholder.

In 2010, Mennillo commenced an oppres- sion action against lntramodal and Rosati, alleging that he had been wrongfully removed as a sha.reholder.

TllE LEGAL QUESTION Did the failure to observe CBCA formaliti es when transferring shares constitute oppression?

RESOLUTION: The SCC confirmed the criteria for the oppression remedy and indicated a cim mant must

identify the expectations that he or she claims have been violated and establish that these expectations were reasonably held, and show how these reasonable expectations were violated by conduct that was

oppressive, unfairly prejudicial, or unfairly disregarding of his or her interests.

The court determined that as of May 2005, Mennillo no longer wished to remain a share- holder. This finding was based on the under· standing between Mennillo and Rosati that Mennillo would only remain a shareholder so long as he continued to guarantee the com- pany's debts. Therefore, at this point in time, as Mennillo dld not want to continue to guar- antee debts, he could not have had a reasonable expectation of being treated as a shareholder. Thus, the problem was not that Mennillo was stripped of shares but that lntramodal failed to observe corporate formalities when trans- ferring Mennillo's shares. The majority of the court found that the deficiencies in Intra· modal's complian ce with CBCA requirements did not, on their own, constitute oppressive conduct. The failure to observe the formalities associated with removing M ennillo as a share· holder was done in accordance with his wishes, and was not unfair or oppressive. Although Intramodal failed to comply with corporate law formalities in registering the transfer of shares, the sec affirmed that oppression is judged by "business realities", not "narrow legalities." That is, the courts will consider the oppression remedy in context, assessing the parties' reasonable expectations based on the nature of their relationship and how they con - ducted business.

CRITICAL ANALYSIS Although, in this case, the corporation's failure to follow the formal requirements of the CBCA did not result in an oppression remedy, the case does not exclude the possibility that the remedy will be awarded where non-compliance frustrates a sharehold- er's reasonable expectations. What factors are important in determining whether a claimant has a reasonable expectation?

Asserting a Remedy under a Shareholders' Agreement or a USA A shareholders' agreement is common, particularly in a small, closely held cor- poration. Shareholders' agreements serve a multitude of purposes, but in

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Shareholders' agreement

An agreement that defines the relationship among people who have an ownership interest in a corporation.

Unanimous shareholders' agreement (USA)

An agreement among all shareholders that restricts the powers of the directors to manage the corporation.

particular they allow sharehold ers to define their relationship in a mannerthat is different from that provided by the governing statute. Such agreements may ad dress, for example, how t11e corporation is to be managed, how shares will be transferred, and how msputes will be resolved.

A unanimous shareholders' agreement (USA) is a specialized kind of share- holders' agreement among all shareholders that restricts, in whole or in part, the powers of the directors to manage the corporation. The purpose of a USA is to ensure that control over matters d ealt with in the USA remains w ith the share- holders. When shareholders, through a USA, take management powers away from directors, those directors a re relieved of their duties and liabilities to the same extent. This means that if the sharehold ers improperly manage the corporation, they may be successfu lly sued fornegligence or breach of fiduciary duty, for example.

The objective of a sharehold ers' agreement is to comprehensively set out- by agreement and in advance of any conflict- what the shareholders' expectations a re, how the company is to be m anaged, and how disputes will be addressed . Sharehold ers' agreements seek to confront the reality that msagreements are inevitable and can be resolved according to mechanisms set up d uring the "hon- eymoon" phase of a business relationship.

Luke, Raina, and Roger most d efi nitely need a shareholders' agreement for the reasons given above.

BUSINESS APPLICATION OF THE LAW

MANAGING RISK THROUGH SHAREHOLDERS' AGREEMENTS A shareholders ' agreement allows the share- holders to d efine their relationsh ip, now and in the future. It should, as well, provid e mech- an isms and proced ures that can be employed when the relationship encounters difficulties, along with means for und oing the relationship if the need to d o so arises. An agreement must be tailored to meet the req uirements of the particular s ituation a nd should address the following issues:

1. Management of the company. Who will be responsible fo r management? What will their rights and obligations be? How will they be appointed or elected o r hi red? How will they be paid?

2. Protection fur the minority shareholder. How will the minority be protected from domination by the majority? How will representation on the board of d irectors be achieved? How will fu ndamental issues, such as mvidends, sale of assets, and the like, be handled?

3. Control over who the other shareholders will be. What are the qualific ations need ed for being a shareholder? What happens in the event of a shareholder's death, retirement, disability, or simple loss of interest in the company?

4. Provision of a market for shares.73 What are the circumstances that require a shareholder to sell her shares? What happens if a shareholder mes? Who will buy the shares and for how much? How will the purchase be funded?

73 Cornmon mocMn1sms in slla•et-.o\ders .YJfi:?\:!l'l'Y.!nlS 101 Seling sha1es inc'1de a right ot firsl refusal and a s~tgun ctause A ri9h1 of f1rSI 1efusal irrvotves a sha1eootder offering 10 set sM1es I<'> ot'ler sha1ei'dders; 11 1hey refuse 10 purchase. the!\ tor a UmitOO time, 1he shclrenokler may sel 10 somoo~cisa for the same prici'! A sh019un ctauso invdl/<;s a shn1~t•ddE!1off<iring10 seu sha1es .ll a ce1t.a,n p1ice to an01he1 sha1eh0bo1. v1r.o rnJSI e1lhe1 btiy at tne sha1es a1 11\al prce ors.al al lliS sMies al the sa'Tle p1C(!

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5. Cap ital co ntribution . What happens if the cor poration needs more cash? Who will provid e it , and how much? How will payment be compelled?

7. Mecharusm for terminating the agreement. How can the agreement be terminated? Can it be terminated on notice? How much notice?

6. Buy- sell arrangements in the event of a dispute. What (e.g., death, retirement, insolvency) triggers a sale? How will the shares be valued? What method

Critic1d An•lJSis: When should the share- hold ers o f a corporation consider entering into a shareholde rs' agreement?

will be chosen for thei r valuation (i.e., ind ependent third party, formula, value fixed in advance and updated annually)?

Sourc e: J~rnes w. Can. -sMH:'.!hdCt'H Ag1eerne!lt!( 11\ Al.'lwsl(Jg the Busmes.s Oiettt !£dmon1on· ioo Le9a.t £oucation SOciely of Alberta. 1995) ., 14- 16.

Creditor Protection A corporation is responsible fo r its own liabilities, including its debts. As such, the shareholders/ owners may be tempted to strip the entity of its assets in an attempt to defeat creclitors, but do ing so would be illegal. For example, if Time-in falls on hard fi nancial times, Luke cannot clean out the entire inventory of supplies an d bring it home with him to sell later. This is because the inventory belongs to the corporation, not to Luke, and the corporation's creclitors have a prior claim on such property.

To help prevent abuses by shareholders, a number oflegislative provisions have been enacted. For example, the Canada Business Corporations Act74 forbids the corporation to pay a dividend to shareholde rs if do ing so would jeoparclize its ability to pay its own d ebts as they fall due (the liquidity test). The same section forbids such a clividen d if that would make the company insolvent- that is, leave it without enough assets to cover its liabilities.75 Directors who consent to a dividend under such circumstances are personally liable to restore to the corporation any amounts so paid.

The Supreme Court of Canad a has also in clicated that d uty of care imposed on directors by the CBCA76 is owed not only to the corporation but also to the creditors.77 Also, the same court stated that creclitors can avail themselves of the oppression remedy as a means of protecting themselves from the prejudicial conduct o f directors. A summary of the rules regarding liability for corporate cond uct can be found in Figure 16.3.

Termination of the Corporation When and if the time comes for Time-in to shut down, it can be dissolved in sev- eral ways. In most jurisdictions, provisions in comparues legislation or a separate winding up act set out a process. The steps involved can be somewhat compli- cated, so in many instances it is more feasible simply to let the company lapse. This is particularly the case with a small, closely held corporation. The principals

74 SuprtJ no1e 4, s 42 75 1nsotveocy 1s d;SCtJSSOO inCMcte1 27 76 Supra no1e 4,. s 122 ll) l~) 71 P"°f>leS Oepanment S1otes Inc (l)usiee of) v Wise, 2004 SCC 68.1200413 SCR 461

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Winding up

The process of dissolving a corporation

FIGURE 16.3 Summary of Liability for Corporate Conduct

Liability in Tort Liability in Liability in Liability for Law Contract Law Criminal Law Regulatory

Offences

Identification Theory: Agency Theory: The Identification Theory: The legislation The corporation is corporation is liable so The corporation is specifies liability liable when a directing long as the agent was liable if a senior officer but generally the mind commits the acting within acrual or of the corporation corporation is liable tort in the course apparent authority. committed the offence when a person engages of carrying out at least partially in the prohibited her duties. in the interests of behaviour on behalf of Vicarious Liability: the corporation. the corporation. A corporation is Aseniorofficer is vicariously liable for someone who plays an the torts of employees important role in the (who are not directing establishment of the minds) committed corporation's policies in the course of or is responsible employment. for managing an

important aspect of the corporation's activities.

Law unclear and Agency Theory: Personally liable for Statutes may impose jurisdiction ·specific. No liability unless the commission of liability on directors, While formerly liable intended to assume criminal offences. officers, or both for a only for more extreme liability. corporation's conduct conduct, possibly liable for virtually any tort committed in the course of carrying out duties.

Generally not liable Generally not liable for No liability for No liability iniposed for corporation's corpor::acion's con tracts corporation's crimes. on shareholders torts unless corporate unle-ss corporate by statute. veil lifted. veil lifted.

may simply neglect to file their annual report or follow other reporting require- ments; tills will ultimately result in the company being struck from the corpo- rate register.

A court has the authority to order a company to be terminated when a share- hold er has been wrongfully treated and this i s the only way to do justice between the parties. As well, a corporation whose d ebts exceed its assets may eventually go bankrupt. The result of bankruptcy is usually the dissolution of the corporation.

BUSINESS LAW IN PRACTICE REVISITED

1. What obligations do Luke. Raina. and Roger have as corporate officers and directors?

As corporate o fficers and directors, Luke, Raina, and Roger are obliged to compe- tently manage the corporation and to act in the best interests of the corporation. This means, in effect, that they must not only apply their skills and knowled ge to

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the operations of the corporation but also put the corporation's interests above thejr own personal interests.

2. Are there any problems with Raina forming her own company to purchase a sports team?

If Raina d ecides to incorporate a company to purchase a sports team, she needs to be mind ful of her fid uciary obligations to Time-in. The law is somewhat unclear as to when a director may pursue an opportunity that came to her as a result of her position as director. However, as the company has rejected the opportunity, it would seem that Raina in the circumstances (she was in favour of T ime-in pur- suing the opportunity) is free to take it up on her own, particularly upon securing the informed consent of both Luke and Roger.

3. Can Raina do anything about Luke voting her off the board and ousting her from management?

Raina may bring an oppression action arguing that she has been wronged by the majority shareholder, Luke. In ord er to get relief, Raina needs to show that she had a reasonable expectation that Luke would not exercise his dominant position and vote her o ff the board of directors and oust her from management. Given her discussions with Luke about involvement in the m anagement and expansion of the business, Raina had the reasonable expectation that she would have a presence in T ime-in and participate in the company's future growth over the long term. Raina must show that her reasonable expectations were disappointed by Luke in a way that was oppressive, was unfairly prejudicial, or unfairly disregard ed her interests. Luke's cond uct was oppressive because he removed Raina for a petty reason- s imply to show her who was boss. If Raina's action is successful, the court has the discretion to make any order necessary to rectify the situation. If the parties can no longer work together, this may involve the compulsory buy-out o f shares. Raina can also seek compensation for lost remuneration.

4. Is nme-in liable for the failure to deduct and remit income tax? Does Roger, as an officer of Time-in, have any personal liability for the failure to deduct and remit the taxes?

The Income Tax Act imposes liability on a person for failure to withhold and remit income taxes, and as T ime-in is considered to be a person, it is liable for this fai lure. Additionally, the Act imposes liability on the directors of the corporation for the corporation's failure to withhold and remit taxes. Therefore, unless they have a valid defence, Luke and Raina are exposed to liability. The Act does not impose liability on officers, however; therefore, Roger is not exposed to personal liability on this front.

5. What are Roger's rights as a shareholder if he does not like how Time-in is being managed?

Roger could simply sell his shares, if he is permitted to do so and if he can find a buyer. Corporation legislation also provides for shareholder remedies; however, the reme- dies are not usually available simply because a shareholder dislikes how the corpora- tion is bejng managed. There must be something more, such as oppressive conduct by the directors. Even if oppression can be proven, litigation can be costly and time consuming. Again, this issue should have been considered in advance and a remedy or alternative course of action should have been built into a shareholder agreement.

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CHAPTER SUMMARY

Of particular concern to anyone launching a corpora tion is the potential liability, both civil and crim inal, that the cor poration and its stakehold ers are exposed to. A corporation, as a clistinct legal entity, may be liable in tort , in contract , and for criminal and regulatory offences. Likewise, directors and officers also may be liable in cr inlinal, civil, and regulatory law fo r actions relating to the business of the corporation.

Directors and officers who are charged with the management of the corpora- tion owe duties o f competence and fiduciary duties to the corporation, and they may be liable to the corporation for breach of these d uties.

Sha reholders generally fac e few liabilities with respect to the actions o f the corporation. There are, however, linlited exceptions to this general rule- most importantly when the corporate form is being used to commit a fraud . Share- hold ers do , however, have ce rt ain statutory rights with respect to the operations of the corporation- the r ight to vote, the r ight to information, an d financial rights. They also have remeclies to enforce their rights. Sharehold ers can enter into agreements that d efine their relationships with one another and that provide mechanisms for resolving clisputes and means for protecting their interests.

Creditors receive some specific protection und er corporate law provisions. Also, the Supreme Court of Canad a has indicated tha t clirectors owe creclitors a d uty o f care and creditors can avail themselves o f the oppression remed y. Crecli- tors can also negotiate for other rights.78

A corporation can enjoy perpetual existence; however, it can also be dissolved . The most common methods of clissolution are wincling-up proced ures and simply letting the corporation lapse.

CHAPTER STUDY

Key Terms and Concepts common share (p. 418 )

corporate opportunity (p. 407)

de rivative action (p. 421)

dire cting mind (p. 399)

dissent and appraisal ri ght (p. 4 21)

identification theory (p. 398)

indemnification (p. 41 6)

lifting the corporate veil (p. 417)

oppression remedy (p. 421)

pre-emptive right (p. 420 )

preferred share (p. 4 18)

proxy (p. 41 9)

regulatory offen ce (p. 4 03)

s elf-de aling contract (p. 4 06)

s hareholders' agreeme nt ( p. 424 )

unanimous s hareholders' agreeme nt (USA) (p. 424)

winding up (p. 425)

Questions for Review 1. How can a corporation be liable in tort law?

Explain.

2. How does a corporation enter a contract? Explain.

3. How is the criminal liability of a corporation deternlined?

7B See Chc11pter 26 for a OiSCusson of creditors' 1ights

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4. When is a director personally liable for comnlitting a tort?

5. To whom do directors owe duties?

6. What is a self-dealing contract?

7. What are the duties of clirectors and offic ers?

8 . Do clirectors owe duties to the corporation's creclitors? Explam.

9. Is a director liable for a corporation's contracts? Explain.

1 0. How may a clirector avoid personal liability when carrying out her corporate d uties?

11. What is meant by the term "lifting the corporate veil?" When will courts "lift the corporate veil?"

12. What three main rights do shareholders have?

1 3. What r ights to clividends do shareholders have?

1 4. When is the dissent and appraisal remedy appropriate?

1 5. What i s the difference between a derivative action and an oppression action?

1 6. When is a shareholder agreement appropriate? What i ssues should a shareholder agreement address?

1 7. What protection do creditors have from shareholders stripping the corporation of its assets?

1 8. How is a corporation tenninated?

Questions for Critical Thinking 1. What are the arguments for prosecuting,

convicting, and punishi ng corporations? Does holding corporations crinlinally responsible serve any social purpose? What are the arguments against prosecuting, convicting, and punishing corporations?

2. A d ual purpose or public benefi t corporation is a corporation that has both a profit motive and a mandated social purpose. In Canada, British Columbia 79 and Nova Scotia"° have legislation that enables companies to operate as dual purpose corporations. Ontario is studying the

79 Sus.viess CotpotMiort.'> Ar.t, SBC 2002. c 57, Dart 22 auo .. ·1~ 101 ·communrty ConlnbullOn Compar•i~:

80 An Act Respeczing Cotr'!mut1Jfy lnltuest Comp;m1es SNS 2012. c 38.

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concept.81 What mi ght a corporation gam from having a dual purpose?

3. There are literally dozens of statutes that impose personal liability on directors, and, in many cases, offic ers. Directors and officers face liability, for exan1ple, under securities, environmental, employment, tax, and bankruptcy and insolvency legislation. Why do you think this has occurred? What are the problems associated with holcling clirectors to higher standards? How can clirectors protect themselves in an increasingly litigious environment?

4. In Canadian Aero Service Ltd v O'Malley, the court set out fa ctors in deternlining whether the appropriation of an opportunity is a breach of a fid uciary duty. Do you see any problems with applying these factors? How can directors ensure that they have not breached a fid uciary d uty if they take a corporate opportunity for themselves?

5. Several countries- including the United States and the members of the United Kingdom- require public companies to hold annual shareholder votes on executive compensation (so called "say on pay" votes). In Canada, although such votes are proliferating, they are not mandatory. What is the purpose of such votes and should tl1ey be mandatory? Why or why not?

6. In Rea v Wildeboer,81 the plaintiffs alleged mfaappropriation of funds from a widely held public company by its offic ers and clirectors. They sought to recover the funds on behalf of the company. Are the plaintiffs able to proceed by way of the oppression remedy or must they take a derivative action? What is tl1e difference between the two remeclies?

Situations for Discussion 1. Breighley Touring Ltd is a small travel and tours

company owned by Terry Breigh and Tobin Eq ui pment Ltd . Terry Breigh is the only officer of Breighley and he is the sole shareholder

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82 2015 ONCA 373.1260R (3d)J78.

of Tobin Equipment Ltd. Breigh used a Ford Escape vehicle purchased by and registered to Breighley for the personal use of his family. The use of the vehicle by the corporation and family members was properly reflected in the corporation's financial statements and tax returns. The vehicle was also driven by Breighley's employees.

While Breigh's son Tim was driving the Escape, he was involved in a collision with another vehicle. At the time of the accident Tim had his father's permission to drive th; vehicle even though he had a poor driving record and had only recently had his driver's licence reinstated. The driver of the other vehicle, Marilyn Meadows, sustained serious injuries. She brought an action against Breighley as registered owner of the vehicle, T im as driver of the vehicle, and Terry Breigh ."" On what basis could Terry be potentially liable for Marilyn's injuries? What argument(s) could be presented o n behalf of Marilyn? What argument(s) could Terry use to avoid liability?

2. Roland Roy, an employee of Goodnuff Used Cars Ltd, turned back the odometers on several cars that were sold to unsuspecting customers. Goodnuff Used Cars Ltd was charged under the following provision of the Criminal Code:

s 380. (1) Every one who, by deceit, Wsehood or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, defrauds the public or any person,

whether ascertained or not , of any property, money or valuable security o.- any service,

(a) is guilty of an indictable offence and liable to a term of imprisonment not exceeding fourteen years, where the subject-matter of the offence is a testamentary instrument or

the value of the subject-matter of the offe.nce exceeds five thousand dollars ...

[s Goodnuff Used Cars Ltd guilty of the crime of fraud? [f Goodnuff Used Cars Ltd is convicted of the crime, what factors will the court consider in imposing punishment?

8.3 Basc.'<J on M:Jclt?ms v flilytt<V b Rqylltlk. 2016 PCSC 4 0. 273 AONS 13dl 183

3. Lennie purchased a quantity of pressure- treated lumber from GoodWood Building Ltd (GoodWood) in the spring. Lennie used the wood to build a deck around the front of his house. By the fall, however, he found that the wood was starting to rot, and it appeared that the stain used to treat the wood was peeling away. When Lennie tried to contact GoodWood, he discovered that the store had closed and the company was insolvent. Lennie managed to locate the salesman who had sold him the wood, and he agreed that the wood appeared to be defective. He also told Lennie that because the wood had been imported from Thailand, a lawsuit against the manufacturer would probably be long and expensive. He suggested that Lennie bring an action against the directors and shareholders of GoodWood . The sharehold ers and directors are J im, Tim, and Tom. What are Lennie's chances of success against the sharehold ers and directors? Does your answer change if Good Wood is an unincorporated business in which T im, Jim, and Tom are the owners a nd managers? What are Le nnie's chances of success against them in this circumstance?

4. When General Chemical Cana.da closed its plant in Amherstburg, Ontario, it left behind a badly contaminated lagoon, several environmental orders issued by the Ministry of the Environment (MOE), and estimated clean-up costs of over $60 million. As the company was on the verge of bankruptcy and unlikely to be in a position to pay the clean-up costs, the MOE issued clean-up orders against General Chemical's U.S. parent company anda number of directors and officers of both companies. The directors and officers appealed the MOE clean-up orders but ultimately agreed to pay more than $10 million to settle the case against them."' On what basis could directors and officers potentially be liable for a corporation's environmental transgressions? What can directors and officers do to protect against environmental liability?

5. Ryan and Sean are sharehold ers and directors of Springfield Mead ows Ltd (Springfield), a company that has d eveloped land for a

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438 NEL

large trailer park. Springfield has 20 other shareholders. Ryan and Sean are approached by Louise, who wants to create a company whose business will be to lease trailers. Ryan and Sean are interested in participating as directors and shareholders in this n ew company, since this would be a good way to fi ll up some of the vacant sites at Springfield's trailer park. The new company is a big success, and Sean and Ryan receive impressively hlgh dividends on a regular basis. Eventually, the other shareholders in Springfield learn about Sean and Ryan's new company and sue them for breach of their fiduciary duty. The shareholders contend that Sean and Ryan should have developed the opportunity to get into the trailer-leasing business for the benefit of Springfield and should not have taken that opportunity for themselves. Are Sean and Ryan in breach of their d uty to act in the best interest of Springfield?

6. Peter sold his barbershop business to And y for $ 25 000. As part of the agreement of purchase and sale, Peter agreed to a restrictive covenant that prohibited him from providing barbering services in an area within a 10-kilometre radius of his former shop for a period of one year. Withln a montl1 of the sale, Peter incotporated a company and commenced cutting hair in violation of the restrictive covenant.85 Can Andy do anything about this situation? Should he do anything?

7. In Allen v Aspen Group Resources Corporation,''" a class action lawsuit was certifi ed against a Yukon oil-and-gas firm for alleged misrepresentations and omissions in a takeover circular. Included among the defendants are WeirFoulds LLP, a prominent Toronto-based law fi rm that acted on behalf of Aspen and advised

SS B~d onCfJford Mo!ars Co vHome, 11933} Ch935 {CAJ. 86 12009), 81 CPC (61h) 298, 67BLR 14th! 9\l tOn1 ~p CO

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it in connection with the takeover bid, and one of the firm's partners, Wayne Egan. Egan acted as legal counsel for Aspen and had been a member of its board of directors. The plaintiffs argue that Egan's liability both for his work as a lawyer and in his capacity as a director extends to WeirFoulds. What are the problems with professionals, such as lawyers and accountants, serving as directors fo r cotporate clients? What are the advantages for the professional? What are the advantages for the corporation?

8. Basil Dobbin was a director of Sports Villas Inc., a company that was incorporated to acquire a lodge a nd golf course about 220 kilometres we.st of St. John's, Newfoundland and Labrador, at Port Blandford. The golf course catered primarily to golf vacationers and delegates to conferences. A large percentage of the clientele of the golf course came from the Avalon Peninsula (a large peninsula that makes up the southeast portion of Newfoundland; botl1 St. John's and Port Blandford are on the peninsula) and a large majority of them from St. John's. Approximately three years after tl1e incor poration of Sports Villa, Dobbin incorporated a company. Oovelly Golf Course Inc., for the purpose of the development of a golf course in St. John's. Thls golf course did not have a hotel and it catered to clientele interested in several hours of golf after work. The golf course at Clovelly was intent on fostering the new and beginner golfer as opposed to the more expert and experienced golfer.87 Is Dobbin's position as director of botl1 Sports Villas and Clovelly a breach of his fiduciary duty? Explain. There is a public or societal interest in ensuring that directors adhere to a strict code of conduct. What is the problem with holding directors to a strict code of conduct?

B7 Bosed on P!Ndy v Dobbin, 2000 NrCA IL 185 Nfld {, P£1R 2&1

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CHAPTER Introduction to Property Law

CHAPTER Intellectual Property

CHAPTER Real Property

MOST BUSINESS ACTMTY involves the O\vnershipor possession or use of various forms of property. Property consists of rights and interests in anything of valu e that can be owned or pos- sessed in a way that is enforceable by law. Property law enab les owners to protect their rights in relation to their property.

The law classifies property into d istinct categories and provides for the protection of rights and interests in property. Historically, property has been categorized as either real property or personal property. Real property refers tD Land and anything attached to it. All other forms of property are included under personal property, which consists of tangible and intangible items. Tangible personal property has a physical substance from which it d erives its value. Examples are trucks and appliances, which are sometimes called goods or chattels. Intangible personal property derives its value from legal rights rather than its physical form. Examples are the right to enforce a contract and copyright in a published work. A business is likely to own an interest in many different forms of property that are important to its operation and value. An appreciation of the distinctions is u seful for applying the rules that govern ownership and possession o f the variou s forms, and for u n derstanding the legal options for using property and generating value from it.

Rights in property can also take various forms other than ownership. While ownership confers the b road est rights in property, the temporary possession or the right to use property may be sufficient for a business's needs. For example, while a business could purchase land or other property to use in its business, it might be more economkal or practical to lease certain types of property. We also tend co think of possession of property as conferring particular rights to the holder of property, but possession can also create obligations for those who come into possession of property that is owned by others. For example, a business that repairs a customer's property might temporarily come into possession of a client's property and in doing so, may incur legal obligations relating to the careand protection of the property.

Knowledge of what the law recognizes as property, the var- ious forms of property, and the types of Legal interests in prop- erty and hoi.'/ the la\" protects those interests is an essential business asset.

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l- o:::: <( o_

OBJECTIVES After studying this chapter. you should have an understanding of

• the meaning of property

• the different forms of property

• how property can be acquired

• the types of leg al rights and oblig ations associated with property

BUSINESS LAW IN PRACTICE

Like many young men growing up in Saskatoon, Saskatchewan, Cranley Arcand spent many hours playing hockey in the arenas in and around the city. He started Ills amateur hockey career at the age of seven as a Novice, and progressed through the various mm or hockey levels, encling with a stint in the Midget AAA where he played until he "aged-out" when he turned eighteen . After completing high school, he worked for a few years at Ills uncle's fis hing lodge on the Churchlll ruver, where he met Ills partner, Terry, a fishlng guide who also grew up in Saskatoon.

Cranley and Terry moved back to Saskatoon one year ago and now own and operate a business called Cran-Terra Outdoor & Sporting Goods (Cran-Terra). Cran-Terra is a full-service sporting goods business that sells new and used sporting equipment for hockey, lacrosse, and soccer as well as goods for backpacking and camping, such as tents, canoes, and backpacks. The used equipment that is sold in their store is acquired through their sports exchange, whlch allows customers to buy, sell, or consign used sporting and outdoor equipment. They also serve their community by accepting donations of used sporting equipment that is made available to benefit less fortunate children and teens in the city.

Their first year was challenging but they managed to turn a modest profit. They are optimistic the business will do even better in the coming year, although not without some challenges. One problem that has come up is the space they are currently using for their business. Their one-year lease is due to expire in two months and they have been unable to reach an agreement with the landlord about the rent going forward. They feel the landlord is demancling too much for the rent but they are reluctant to move now that they have built up a customer base at their current location. There is another suitable retail property nearby but its owner is more interested in selling it than leasing. Another problem they face is a mounting col- lection of unsold second-hand gear left with them on consignment that appears to have been abandoned by its owners. Finally, they are optimistic about the future of their business and want to ensure that the Cran-Terra name cannot be used by a competitor in the future.

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441 NEL

1 . What types of property are used in Cran-Terra's business?

2. What are Cran-Terra's r ights and obligations in relation to the personal property that it acquires for its business?

3. How m ight Cran-Terra have avoided the problems it is now having wjth its lease?

4. How can Cran-Terra protect its name?1

Introduction to Property Law Property law consists of rules and laws that govern our relationship with things that can be owned .

Defining Property While we tend to think of property as consisting of tangible things such as eq uip- ment, inventory, and real estate, what the law counts as property is consid erably broader than physical things that can be held and touched. Property m ight even consist of something as esoteric as the r ight to use a particular industrial process or the r ight to use a particular business name. Nor d oes the mere fac t that some- thing has value and is worthy of protection make it property for the purposes of property law. For example, the right of citizenship is unquestionably valuable, but it is not a right that can be transferred or sold to others. One of the roles of prop- erty law is to d etermine what counts as property and thus can be owned. Property law also enables owners to protect their r ights in relation to their property.

Categories of Property Real Property H istorically, the law has evolved to place property into distinct categories. Real property (see Chapter 1 9) is sometimes called "immovable" property an d refers to land, whatever is permanently attached to it , and the associated legal r ights. Even a growing crop would constitute real property until it is harvested and is no longer attached to the lan d. Each province operates a comprehensive system for publicly registering title to land and legal interests related to land .'

Cran-Terra's lease constitutes a form of real property, and if Cran-Terra pur- chases the building for its business, it wjll become the owner of real property. In addition to the building itself, Cran-Terra would own the parking lot and possibly r ights pertaining to things below the surface of the land, such as the right to mine for natural gas or minerals. The building owner would also own any improvements to the land as well as any items that a re attached to the building, such as light and plumbing f ixtures. If Cran-Terra obtains a mortgage to finance the purchase o f the building, then the lender would also have an interest in the real property.

Aboriginal Title The Canadian legal tradit ion also recognizes' a unique form of title in certain lands in Canad a belonging to Indigenous

1 l n.telecti.Ja1 p1ope11y rght'\aM the 1sst.i<.'!OI rights 10 a r~mearediscuss«i ,n g1eate1 de~I in Chapter 18, and re.at property~"' aoo r 1ghlS ano ob(i~tiOos of a \esse~ are discussed in .great~· deaal i:\ Chapter 19. Tnese toocs a1e 1aised here to lust rate Iha range ot properly 1S!lJes app(ica~e to a business.

2 Soo CMptar 19. 3 Sec1ion 35(1) or too ConsUtut:anAct, J.982, 1ecogn12as and protect-s<"Jb01igiM!aod t1e.aty rights, ,nct!Jdtr)Q too

rights ol lr.digenous peo~s to ~rt<'Hl t.lrKJS 1nCal)Ada

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Real property

land and whatever is permanently affixed to it or part of it, such as buildings. mines. and minerals and the legal rights associated with those things.

peoples.• Ab original title, the name given to this interest, incorporates "rights similar to those associated with fee simple",• including the right to d ecide how land will be used; the right of enjoyment and occupancy of the land; the right to possess the land; the right to the economic benefits of the land; and the r ight to proactively use and manage the land.6

BUSINESS APPLICATION OF THE LAW

ABORIGINAL TITLE

If "[o]ne of the primary issues with which Cana- dian society has to come to grips is the histor- ical legacy o f its acquisit ion of Aborig inal la nds ",7 then aboriginal title m ight be seen as the legal method d eveloped by modern courts to address this legacy.8 Several types of aborig- inal lands exist witllin Canad a, including reserve lands within the meaning of the Indian Act9 and aborig inal title lan ds. ID While the courts have stated that the nature of the aboriginal interest is the same in both reser ve lands and aboriginal title lands, reserve lands are those formally set

apart by tlle Crown for the benefit of Indjans under the Indian Act, while aborig inal title arises out of the prior o ccupation or possession of lands by [ndigenous peoples. In recognizing that certain lands in Canada may be subject to aboriginal title, Canadjan courts have rejected a d o ctrine known as terra nullius (that no one owned the lands prior to European assertion of sovereignty) . u

In practice, an Indigenous g roup establishes aboriginal title by asserting a claim overpartic- ular lands based on proof of sufficient pre- sovereignty occupation that is continuous and

Aboriginal title

Title to land th<l t belongs to Indigenous peoples that is protected by section 35(1) of the Constitution Act. 1982. and which in corporates the right of enjoyment and occupancy. the right to possess the land; the right to the economic benefits of the land. and the right to proactively use and manage the land.

4 See TS'lhqOtin NatKJn v 8t1t1sh CoJumtm, 2014 sec 44 12014 ] 2 SCR 257 ISCC), Onlt~: <hllps //SOC•CSC .texum,eomlscc<sc/scc·csc.'en/1tem/l4246/!nde:x.do> woore LM court ct.lritied tMl s 35 cf tne Consttrutiott Acr, 1982, imoo~stimitso~ bOth the reoerat ana 01ovu"IC~9ov2rnments v1henaooting w1t'l\ano sub_iect to ab0ri91nal 11ne. wul\ ne11ne1 go\121nmen1 pe1m1ued 10 feg~ale in a v1ttt that 1eS\Jlts 1n mean1ngluf d1rn1r'll..llion of a~ aoo1 ;gtnat 01 trE!aty 1ignt uriass ftJSt t£d in toe bro.'.ld<.:r pubtC !nt~rest aoo consi$tent v111n tne Crov .. n·s fducoarydulyonder the dOCl•ine of joshlable 1nfrin92mant· pa1a 139 Th(} ;fnp(calionol thtS 1$ lhat p1ov1nc~ ~is ditected at at>Originat lJtieare ulttll vites J;.e., beyond ti"K'! )JriSdiCllOn of I.he p1ovinceS); h0\...e~1. p1ov1nc1.ll laws or gene1at apph:()tiOn !'nay stU aoP4y to taoo SUbJOCI to abor'ginat hi~. Alt itl\YS, f<:'!derat or orovinciat, witch a1e 1oosooo~. do 001 impose undue ha1osh1p, and do 001 deny t~ nctoe1 tha11 p1~le1r~d methOd 01 exe1c1Si1"t9 !he 1i9i'll, app!y 10 taoos sub~c110 abori9i~ l!ll¢. para J2:S tede1a1 arld 01ovincial taws 1M1 lnhif't9'° 1rust be exami~d on a case·by-Cas<! Msts tu~der 1~ doctrine of ftJSltfab4e !nfr,nge-neni. paras 124- 125.

5 Tne lee s1m~ concepr tS exp(.')•"E?d in Cl\apter 19. 6 Supt/I not~4 at pa1a 73 7 AC Ham lion and CM Sinct().1, Co'YlmiSsiOners, TheJuslin'!-'System ana Ab0r9 i!\21t Pee;* Repc1t of t he

Aboflg1nM Justce Inquiry of Manitoba. Vot 1, l'Ninn•;>eg Q;een-s Prinler, 1991J c 5al127 in .lol\n J BouOYIS and L~of\ard I Rot ma'\ AbOrtg1naJ LE?9tt.1 !Ssues Cases. Ma:erj/J1S & Corm'Jenr~. 3d ed lMa:ltham L.exisNaxtS.. 2007) at 194.

8 Tne ~uestonol v10011lar ahE! C1own cal\ even oesa1a to have Lruty ·acqui1eo· \arlds {pa11iculaT1y \cloos n01 sub~t to 11Mty agroemenls) rS v-eiy much a five rSS\Je, as demon:s1.ra1ed,. foreMmpk>,. Qy !ht'! 1ecomrnendaliollS of toe Tru th ano Recoocrlc)tOn ComrnisSK:ll\ of Canada see Otts 10 Action #4 5 aoa #47,. T1tJlh. aoa R~concliation CornmtSsion or CaMda, WM1 we Have LE1~1ooa ~11'lC1P'es cl Trutl') and Reconcl:atbn (Ottawa Libraiy .and Archives Car\Ma, 2015), onU~ <hllp//w,>1..Y.trc.ca/webs.tes/t1cins11tut iOn/ rle/2015/rioo 1 ~s/Pr ioc ipt.e s Y..20of %20T rut n%2()0) oo%20Reconc 1 a110:\. pd f >.

~ RSC 1985. c I S. 10 Supt/I not~4.Abo1igi~ ta<\ds in 11"'..e lormof re~rve \ands and ab011ginal 1 rtetandsare someL1mes 1efe11eo 10

as 'Indian f.()nc!s·, see Gue-An v. fl., [1984 12 SCR 33.S {SCC) at para 86. Otne1 types of abC>fi9,001 tanc!s ir\Ch..1de tr~.aty sentement itiinds aOO MetiS &ands Th<! d:scusson here wl locus on abOrig nal tit~ tanos a\1h0ugl\ re~r...e \ands sMre ti"K'! same unque fet.irurcs.

11 Supt a note 4 at para 69 ll shoukl be ooted tMt ou rmrous IOCigE'!na.Js te;:i~l ~ho\ars c!\aUenge tne cooccptiOn cl at:ort9100! t tlle 115(!11 as 01omJt9a1~d byC'.:Jnoo~ncourts ThiS chaleng~ qu<?Slions th2app1oact\cfC.:Jr\OO!t)n counsel 1ecognl:Z.ing Indigenous rights to iaoos asconsiShAg ol pas:1-<:ok>nial rigtus rat'W!r 11\a!"las pre,exlslrng a!ld h.itfy formed Indigenous s&verE!';;n 1ights tMt M.e !'l(!vt=!1 ba::!nexlinguished a~ 1e"l"lain pre~emp1Ne cl any claimed Cra.-..n 1igl'llS. See 101 exam;:'l4e, MJCl\aef Asel\ '~rom T(}rr() NulJUs 10 Art11ma11on Recot-c.":~1ng Aboriginal Rights With 1~ Cons t 1u1ion· 12014) 17 2 CJLS 23, Paoick Mack~m lnd.'genous tkllerettce ¥td the Const1lutio.~ otCan/M:/<1 tT01on10 Ul\lv~rSily of To1onto Press, 2001J, aoci Kent McNeil, £metgittg Justice? £S5a)'S on Indigenous R,ghts H'f Can/Jd~ and AJ.Jstrtt.1n'J tS<>si<.atOOn Native Law Centre. Unwe1s11y of ~Sl<alCheVl.ll\. 200IJ.

443 NEL

exclusive.u WhHe m any areas of Canad a are subject either to modern land claim agreements or to treaties that in corporate land surren der provisions, there are parts of Canad a where there is no land surrender treaty or modern land claim agreement in place and, accordingly, aboriginal title could be asserted in those areas. These areas include Nova Scotia and New Bruns- wick, 13 and parts of British Columbia, Quebec, Ontario, Yukon, and the Northwest Territories. At present, there are many ongoing court cases involving claims of aboriginal title.

As was discussed in Chapter 4, a d uty to con- sult and accommodate is triggered when the Crown has "knowled ge, real or constructive" of the potential existence o f aboriginal rights or title and that a proposed activity might adversely affect the aboriginal right or title.14 This d uty to consult is proportionate to the strength of the aboriginal claim. However, once aboriginal title is established, development of the land normally requires consent of the aboriginal title-holder. "

As the claim strength increases, the required level of consultation and accommodation corre- spondingly increases. Where a claim is particularly strong- for example, shortly before a court decla- ration of title- appropriate care must be taken to preserve the aboriginal interest pending final reso- lution of the claim. Finally, once title is established, the Crown cannot proceed with d evelopment of title land not consented to by the titleholding group unless it has discharged its duty to consult and the development is justifi ed. '6 Governments can in fri nge aboriginal rights conferred by

12 SuprtJ no1e 4 al pciira 30.

aboriginal title only where they can justify the infringements on the basis of a compelling and sub- stantial purpose and e.stablish they are consistent with the Crown's fid uciary duty to the title-holder.

Featur.es of Aharigina.l Title Aboriginal land interests are distinct from other mainstream legal interests in land, such as fee simple or leasehold interests that are discussed in th is chapter." [ndeed, Canadian courts describe this form of ti tie as sui generis to d enote that it is uniq ue compared to other forms ofown- ership and cannot be described with reference to traditional property law concepts."'

A Ce.llutil11t lllitltt Reflecting the o ccupancy of [ndigenous peoples pre-sovereignty, aboriginal title is a collective form of title, held not only for present title- holders but also for future generations. As a result, it cannot be alienated (e.g., sold) other than to the Crown. Nor can it be encumbered by its owners in ways that could prevent future gen- erations from using or enjoying it.19

alflit t• l'o-•, Errjoy, ~"• G1*I Oa:'-1'1 Aboriginal title confers the r ight of exclusive use and occupation of the land and such uses are not restricted to traditional uses.20 However, the use of the land must be consistent with the collec- tively held nature of tl1e title, cannot harm the rights of future generations, and cannot offen d the basis for a particular group's claim on partic- ular lands. For example, if occupation is estab- lished with reference to the use of the land as a

J3 Som~ot too earti~111Mties ~gotated by the Crov1n ,.,oe•e -~~e ~!ld lr:endsh,p- 11~a1tis \V l'IJCh dd not cont.'.'>:otand !rurr(!r\de1 01ovis1onsand occo1d1ng!y 11 iS poss,b(tl thAt lndqe~s ~pl.es in tt~e p1cv 1ncos could rMinlai!\ e\aims or ab01:9ina1 11Ua see N1g~ Bankes, f~ lmp(CatlOns of t ne Tsll'K!or1n (Wliam) and G!assy N.lrro-, .. -s tlfeewatinJ OecisiO~ or too So ore me Court of C-anMa lor the Na1ural ResO>.HCi'.!S Indus tr es·, .Journi!ll of fttergy & Natufi'll !?&sources Law, 333, 188--217, .al 189, Onf1ne <https //do1 or9/10.10S0/0264SSJ1 20151030916>

14 Ha.v:J<J Nat!Ottv Brlt1shCO&JrntNafM}(f1stetol FotestSi, 2004 SCC Sll !2004] 3 SC~ SU al nara 39. 15 Supra no1e 4 at paia 18 16 Su()ftl note 4 al pciira 91 11 Ab0•19if\alf lil~ fo1ms 11\e bass 01 tf\iS di!.CusSiOI\ allf\oH9h · 1 has ~" reco;;in;ze<J tool \Yh~e lhGir origins a;Uer.

1ese1vG tands and abo19;r~l L1Ue lttnds Sha rt'! Lile sama fee.tu res. Se°:'-'! De/(J<1muukY1 v Sr~11Sh Cdumbia, 119971 3 SCR 1010atporasl20· 121

18 Ts!Ulqor:r. Na11on. su(>r.'J note 4 al ~ra 72 t)nd Df!lgarnuuk'Y1, supta not~ li al oar.l 100. 19 15,\!hqof'lflNatJOn, sup1a OOtE' 4 al pa1a.'> 75 .. 75 20 De~amuukw, supta OOl<? 17 al p.lra 117

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hunting ground, then the group that successfully claims aboriginal title totl1atland may not use it in such a fashion as to destroy its value for such a use (e.g., by strip mining it).21

land to sustain future generations. As a result, and subject to negotiation, tl1e Crown d oes not have any right to benefit from tl1e use ofland subject to aboriginal title, such as a r ight to grant timber leases or collect royalties for its development.23 Rlafctto tW lico1t-lc lll!fl~t oftlu tmt.r

The courts have recognized iliat aboriginal title also includes the right to choose the uses to which land can be put, and that tl1e title· hold ers have the r ight to profit from its economic development.12

However, tltls right is subject to ilie ultimate limit that those uses cannot d estroy tl1e ability of the

Critic.al Anal1m: How m ight ilie unique fea- tures of aboriginal title impact how its owners use or d evelop thei r lan ds? How might iliese unique features potentially impact agreements negotiated between aboriginal title-holders and resource developers?

Personal property

All property. other than land and what is attached to it.

Tangible property

Persona l property that 1s mobil e. the value of which comes from its physical form.

Intangible property

Persona l property. the valu e of which comes from legal rights

Personal Property Personal property includ es everytlung other than what is includ ed as real prop- erty. Personal property falls into two major categories- tangible and intangible.

Tangible property refers to property that is concrete or material. In its business, Cran-Terra will acquire sporting a nd outdoor goods tl1at are not attached to land or a building. In law, tltls kind of personal property is known as chattels or moveables.

Intangible property derives its value from legal rights, railier ilian concrete, physical qualities. Examples of intangible property are insurance policies, accounts receivable, bank accounts, and customer records, as well as ilie various forms of intellectual property such as patents and trademarks. Internet domain names have been recognized as a fo rm of property.14 In law, iliese kinds of property are known as "choses in action." Intangible property is no less real or signifi cant tl1an tangible property- in fact, it drives much of our modern economy.

For example, any accounts receivable and insurance policies that Cran·Terra may acquire would be fo rms of intangible property. Cran-Terra may also acquire intellectual property such as ownership of its nan1e. These forms of property derive their value from ilie legal rights iliey provide their owners, such as the right to be compensated in the event of a fire and tl1e r ight to prevent others from using the name Cran ·Terra.

SHOULD EVERYTHING BE CAPABLE OF BEING PRIVATELY OWNED? OWNERSHIP OF WATER RIGHTS

that may be held by individuals or businesses. Th is begs the q uestion: should all things be capable o f being owned privately by in divid uals o r businesses?

Chapters 1 7- 1 9 desc ribe for ms of property that nught be descr ibed as private property, that is , real property and personal property

What constitutes property capa ble of being owned by individuals or businesses can change over time based on what a society ilirough its

21 Ce1gamuukY1, !JJptll oote 17 a1 ~1~ 128. 22 TSl!hqOl':n Nation, supt/I r.ole 4 at para 70. Soe atsc 0e~l}n1Uukw, !.l.Jprtl n01e 17 at pa1a 166. 23 Ts!hqof'1n Navan, supra note 4 at para 70. 24 7U::ows.corn Co v L~as l?eritter SA. 20ll O NCA S4a $ea\(! to ap~.<)I to SCC dismissed. 20 12 Clnlll 28:261 iSCC).

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state decides.25 One reason a society might d ecide to limit the ability of its citizens to own a partic- ular thi ng is that it considers that the tiling in question should be available to everyone and that if it can be owned privately, then its owner could limit access to something that is an essential human need or r ight. For example, most nations place limitations on the ability to privately own watercourses and bodies of water in the theory that the ability to use and access water must be preser ved for the benefit of all abutting property owners and also for the general benefit of society as a whole that might rely on that water for trans- portation, consumption, o r even recreation. In Canad a, the ownership of most bodies of water is vested in the provincial Crown. In Saskatchewan, for example, this is explicitly recognized in the Water Security Agency Act,26 which states: "[o]ut of every disposition of provincial land the property in, the right to, and the right to the use of all the water at any time in any river, stream, water- course, lake, creek, spring, ravine, canyon, lagoon, swamp, marsh, or other body of water, or con- tained or flowing into it are reserved to the Crown." However some have suggested that even the Crown's ownership is not true full and abso- lute ownership and that the fu ndamentalimpor- tance o f water to life necessarily means that this Crown ownership of water in situ,2'7 whether reflected in statute or not, is more in the nature of "custodianship" than "ownership.""'

~~~,'!j i ~ j Q

~ --~A .ii

Historically, western Canadian jurisdictions have managed the distribution of water r ights by prioritizi ng uses and issuing licences to users .29

British Columbia was one o f the last jurisdictions to create a system to regulate the withdrawal of

How can society best manage and e nsure ef{i.d ent use of its water resources?

groundwater."° In 2013, the lack of regulation of Br itish Columbia groundwater usage came to public attention when it was reported tlut Nestle Waters Canada, a division of the large Swiss-based company Nestle Group, was removing 265 mi llion litres of fresh water ever y year from an aquife r near the town of Hope without payment because the province's laws did not require payment for or even measurement of groundwater removed from wells.>L

According to the BC government, the first three years of tlle Water Sustainability Act (WSA) will be a transition period that will bring approximately 20000 existing non-domestic groundwater users into the new water licensing scheme.32 The fee charged for water removal will vary depending on the purpose of the withd rawal but most non- domestic users will pay $2.25per1 nlillion litres of water withdrawn. For example, under the new law, Nestle would pay approximately $600 for the 265 million litres removed annually from the Hope

25 CB MocPoerson. f."d, lhe tv'eaning of P1operty· 11'\ Propetty MtNttStrearl'J /Ind Cti:t('.111 Pos:!iOns tT01onto Un1VetSily of Tor0n10 P1'-"Ss. 1978) a1 u ... 12.

26 SA 2005.c S·35.03. 27 V/a1e1 in its ootu1a1 pl,OCG and Sl,jtte ~ op;:oscd to \Yater lh.'ll has be~n 11'.?ITY.)ved and boll!ed, lot instar.ce 28 Jane Malt~IS Gt~nn. "C10'.¥n 0\•1~rship ol Water Jn Situ ii\ Co1nmori law Canada Pi.Jbtic T1Us t.. CL"JSStc.11

Trusts and Fiduc:aiy Duties·. !.es C<Jhi&s de dro1t, VdtJme 51. ~me10 3-4. seotemtnt'!-d~cembre 2010, 4g:i .. 519

29 0.W!O R Pe1cy, "The rr.'.)mevn')1k ol W~s1e1rt alld Not11'1e1n Water Leg Slaton·. Resoorces.1986. No 16. l .. l 30 T~ w;,:a- Sustain~1ryAct. SBC 2014,c 15 came into er!ect on~ reoruary2016 31 Dan Fumaoo. "Nestld Tapoing BC 'Nate1 101 r1ee. Comp<1iny Tak.e! 265 Milton l 111es

Annually", The Province 114 Augusl 2013). Online o:n1to//ww.•1J!i0provioce.cornlnev'/slbc/ Nestle+ ~oping +v1ater +free+Company+t.ak~+ mlliol\+tittas + annu:Jty/10175100/s101y.h.Lml>.

32 See o:h.11p/Jv1ww2.9ov.bc.~/9ov/content/erw11onment/a1r-4and·w~tor.'wate1lv11,llG1.(cen!1rlg r:9hts/v1a1e.1 4CG')Ces..app10\ets/water~X.(caLioirl'°es·renla1•rates>, acc~ssed 5 September 2018

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aquifer. Rates charged for water usage vary consid- erably across tl1e country. For example, Nova Scotia charges more than $1 40 per million litres of water and users in Quebec pay $70 per million litres.33

BC 's rates will be among the lowest in the country. Meanwhile, in Ontario, where it is estimated iliat approximately one in five greater Toronto area homes use bottled water, ilie Ontario government has announced a moratorium on ground water pernlits until January 201 9 and has raised fees for

bottled-water comparues from $3. 71 per million litres to $500 per million litres. These changes were irutiated in response the controversial purchase by Nestle Waters Canada of ilie well supplying water to the township of Centre Wellington.'"'

Criticlll Anal~: Should water as a resource be made ilie subject of private property? Would private ownership of water rights promote more effici ent use o f water? Why is the issue of privat- izing fresh water supplies controversial?

There is no comprehensive system for publicly registering title to personal property as there is wiili real property, aliliough there are some specialized registries for items such as motor vehicles, patents, and trad emarks. One reason for ilie difference concerns the mobility of personal property. There is little utility in having a provincial registration system for most personal property when goods are so easily transported to another province. In addition, ilie value of individ ual items of personal property may not justify the cost of adnllnistering a registration system or the cost to owners of registering. Interests in personal property may be registered by creditors when property is used as security in its purchase on credit or later as collateral for a loan. Registration is considered econonlical because it protects ilie creditor's rights to ilie pledged property.35

Acquiring Property Rights The most obvious way to acquire property is to bring sometlung new into existence. However, property can be acquired by a business in a variety of ways. For example:

land may be acquired through purchase or lease.

the ownership of goods is acquired by purchasing or manufacturing iliem.36

insurance coverage is bought by paying prenliums and is d escribed in ilie insurance policy that gives ilie customer the right to recover losses in specified circumstances.37

accounts receivable are created by d elivering goods or services to customers, who agree to pay at a later date. The supplier acquires ilie r ight to collect the accounts, which can be sold to oilier businesses.38

while certain kinds of intellectual property, such as copyright, are owned as a result of being created, ownership of other for ms- such as a trad emark- is established ilirough use, or registration, or boili. Intellectual property can also be bought from other owners.39

33 Andrea Woo, "An (rwi1or11nen.La1 La .... Professo1's Tak.eon B.C:s P1ie i~ of GrouOOwale(, The Clobe an d M aiJ U6 Juty 2015), onf ,ne. <https//wvm.theglot<e;,ndma~~om/n0.Ys/br .lish+eotumb'~f an-en\'\rOnl'l'"(!nla! .. 01ofesso•s·1ake-on·bcs·Or1C1~-ol·91oundwater/arLide2SS43370/>.

3 4 Ai!lStieCruieksMnlC,, ·1 1nS Hou5'!rd:1s D rink Primanty Bottled Water, Stat~tcsC.a~da S!Jiveyr,oos 18 Per Cent O f Ho~ in Toronto Area Are Cooosil\g P\tlsuc Ov'C!• Tap·, 'Th,~ TOfonto S1a.r U Augus1 20171 onli~'. <https// w..v.t1.thes1a1 com/nev1.s/9 ia.'2017/08/01/or>£ ·in-fw<!·to1on10-a1ea•hocsehokls·er.oose OOtt'e.d"\•1ater html>

35 ThiS system o f H.::'9.!ilr()hon l!i gov€1~d t-y1egis(t)hon in each 01ov1no? a<\d tS d!SOJssed inCoop1e1 26. 36 See 100 s~eof gco:"ls in Chapte1 23. o.. ... "X'!rShip can &o be cr~ted by g1fl 01 inMn~nce. 37 SGe CMoter 28. 38 Known as ass19 nments of controc tu.;,t rights, ~e CMptt!t 9. 39 See Chaple• 18.

447 NEL

Ownership can also be acquired by finding and taking possession o f lost or aband oned personal property. In law, a finder of personal proper ty can assert ownership rights over the found property against everyone except its true owner. This aspect of the law illustrates how one person's r ights to property can vary relative to the r ights others might have in the same property. For example, if a traveller found a piece o f jewellery in an airport restroom, the find er's r ight to claim ownership would likely supersede the right of the airport operator, provided the finder was not trespassing.40 However, unless its original owner intentionally abandoned the jewellery, the finder could not assert her ownership rights over those of the original owner. Some provinces have now enacted legislation to assist owners to find lost personal property. Alberta, for example, has created a search- able database to assist owners to locate lost personal property and holders of tangible personal property are required to electronically report the property where its value exceeds $1 000. The Alberta legislation also deems unclaimed property aband oned after the passage of a certain period of time, in most cases, five years.41

Historically, ownership rights in relation to land could also be acquired by occu- pying land owned by someone else, such as by inadvertently misplacing a fence or building on someone else's land. These rights are sometimes referred to as "squat- ter's rights" and can be acquired if the occupation or "adverse possession" persists for a lengthy period of time.42

APPLICAl:ION

IS SPERM OR OTHER HUMAN TISSUE "PROPERTY" AND IF SO, WHAT LEGAL RIGHTS AND OBLIGATIONS SHOULD ATTACH TO THIS FORM OF PROPERTY?

Howard Lam was one of more than 400 men who, prior to undergoing treatment for cancer, entered into a contract with the University of British Columbia and paid a modest annual fee to have his sperm frozen and stored at a fac ility associated with the university. Unfortunately, d ue to a tripped circuit breaker, a failed alarm, and lack of a back-up power supply, the sperm thawed and was rend ered useless.

Lam and other men whose sperm was destroyed commenced a class action lawsuit

against the university and associated entities, alleging negligence and breach o f contract. In response, the university relied on a limitation of liability clause in their contract that absolved the university of liability for any malfunction, even if its cause was within its control. The plaintiffs in turn argued that the limitation of liability clause violated the province's Warehouse Receipt Act,43 which imposes a d uty on a warehouse oper- ator to exercise care and diligence with respect to goods and imposes corresponding liability fo r loss or damage to stored goods.

One of the issues the British Columbia Court of Appeal had to resolve was whether the stored sperm constituted "goods" - which were defined for the

40 See PtNket v Botish Alrwil)'S 8<wd, 11982] 1QB1004, !CAI v1hori.'! a gotd bracetet v1as found by a lravetc1 on 11\e ftoor of all ~xeo.itive toul\ge at 1ne Heathrov1A1po1L He tuHla:I the 01ac(!(e1 over 10 the occ:upier of tne a1rpor1 so ll'k'll its O\"i"iel coul1 be founo The airOOrl Cbi!'r'ed c,•1001si\1p of too brac~4el tss OCCtJpief ot the property but l~ COtHl round !Ml the a11port s ov1~1.sh1p coutd ollly 00 as~ned 1r rl had man1res1 control O\~H 1 nearea tn v1hiCh the t>race;et v1as tound. As tl'le bit!ICE!tet was (Ourxl in() pt.1bf,c area. the linder's 11gh1S 01~ai\ed over toose ot tne a1rporL

41 UndMned P&sottaJ tN!d VesrOO' Properry Acr, SA 2007. c U·l.S. S,mlar 4eq6talion ts in P'ate 1nOJebecand B11l 1Sh Cotumbk)

42 Most j:>:OV!OCes have t.')1\.e n steps to abof!Sn sqi.;atters- i';Jhts, \Y1th Albert.a be.ng tne 1nos1 recent prcvince to move U'l thiS cuecton, se"1 BU 204, Pro1ect1on of Property 1?1ghts Statutes kt'Jendmt:nl Acr, 2011. Thad Sesson. 29th Leq No..e Scotaaoo Oueba'.: con1;nue to 1ec:o9ni2:e !AJC:t\ 1tghLs.

43 Vl<tn?house l?ecetpl kt. RSBC 1996, c 481 s 13

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purposes of the legislation to include "all property other than things in action, money and land".44 'The majority of the court found that the sperm consti- tuted property and thus goods- at least for the pur- poses of entering into a contract for its storage and swng for its loss due to negligence.45

As one might expect, notwithstanding its status as propercy, legislation is in place that prohibits commercial trade of human sperm and ova. 46 This legislation also reqwres written consent of the donor before sperm or ova may be used, such as in fertility clinic. But what about commercial trade involving other types of human tissue? Should itbe treated the same as reproductive tissues and should consent be required prior to its use? ln May 2008, Dr. Abraham performed a colonoscopy on Snezana Piljak during which he removed a polyp from Ms. Piljak's colon. In August 2009, Ms. Piljak under- went unrelated testing at the hospital that revealed lesions on her liver and colon where the colonos- copy had been performed. She was cliagnosed with colorectal cancer and clied two years later. After her d eath, her estate commenced a negligence action against Dr. Abraham and other medical profes- sionals involved in her treatment. One of the alle- gations was that Dr. Abraham should have detected the cancer and failed to meet the standard of care. ln his defence, Dr. Abraham argued that unrelated medical conclitions caused his patient's death and he sought the court's permission to access the liver tissue that was stiD in the possession of the hospital in order to test for a genetic condition known as HNPCC or Lynch Syndrome, a conclition that is often undetected during colonoscopy and which increases the risk of certain types of cancer and causes cancer to develop very rapidly.

One of the issues raised in the case was the pos- sibility that the testing would also reveal genetic information about Ms. Piljak's family members, some of whom might not want the information and might therefore object to the testing.

44 JbJd bl s 1

Would treating human tissue like anyothu proptrty hw• ntga· tiv• implications for soc~ty?

Ontario's proced ural rules permit a court to make an order for the inspection of "real or personal property where it appears to be necessary for the proper d etermination of an issue in a proceeding." Therefo re, a prelimi nary issue the court had to d etermine was whether the tissue that had been removed from Ms. Piljak at the hospital counted as pel'.Sonal property.47 The court ultimately con- cluded that the tissue sample constituted personal property, "a moveable", and that while it had been ovmed by Ms. Piljak before its removal, it became the property of the hospital after its removal. According to the court, once excised, its posses- sion and ownership was transferred to the hos- pital by virtue of being part of the hospital's medical record. 48 As for the rights of the patient in regard to excised tissue, the court accepted that at best a patient is entitled to have "reasonable access" to the tissue sample.

Crltt ...... AA.... a. Do you agree with the courts' analysis that human sperm and other human tissue can become property? If so, should it be treated like any other property or should it be sub- ject to special legal safeguards limiting its use? II Ms. Piljak's excised tissue becomes the property of the hospital and the hospital uses the tissue to

45 1.<Nn v Unlvcrsliy ot BrJUSh ColuftlbNI, 2015 BCCA 2. 46 AsSJstcd llurt1iN"I Rc(>tOduaiott Act. SC 2004, c i. 47 P'fa>I< !stJtc v !lbr.lh"'1"•, 2014 O NSC 2893 4S U•d •• 26

449 NEL

develop a profitable patent, should the hospital have sole right to those profits? Should the hos- pital's right to use Ms. Piljak's tissue be subject to any limits?

Sourc;e s: RtcM1d Wa1nic:a. ·Human Tissue Ren;ov~d for Med1ratTesls IS 'Per~!W P•operty' cl IOSl1tution, Nol ~rsOI\ II Came rro1t1 Ruliog·

Na:k3n;,J Posr IS .lJne 2014) Online <l'illp'//nev1s.natio~pos1.coml f)E?V1s/canada/OOman-lisS(J<!·r~"n:.')v{'.!d·I01•!'r"Ed:c.lt•les1s·ls·pe1sonat

•PropEi!rly--ol·il\st tulton•l\Ol·Person•tt·camt'? •hOm•1ut1n9>, Mayo Oini~ "Diseases and Cooo11ons, Lynch Synd•on~·. oOOne <l'illp// v~,'lw.mayoctiniC.019/dise~ses·condit1o!'lS/ty'och•Syndrome/hascs /aer1n1tion/con·2002S6Sl>. a:-:ces~d 6 Aprl 2015, At1cja Puchl.'t "Human Sperm to Const11t;te Legat Properly. !.arri v Un1v&'.~ity of 8ntish Columbia· too Court.ca 118 r.ebruary 201S), ontioo <http// VNIW.lheCOUrt.Ca/~ man·S~I m-tO•cOnsl 1lt. l~·~gat~p1operty-"'l'n.Y ·university-Ol ·br liSh<:o\Jm~-;af> acce-sseo 15 JtJne 2017.

Legal Rights Associated with Property Unlike the Constitution of the Uruted States, Canada's Charter of Rights and Free- doms does not provid e for the constitutional protection of property. However, tlris is not to say that Canadian law d oes not provid e protections for property.•~ Alberta, for example, has enacted the Alberta Personal Property Bill of Rights, 50

wruch echoes the Fifth Amendment of the Bill of Rights of 1 791 insomuch as it renders void any provincial law that authorizes the Crown to acquire per manent title in personal property unless the law in corporates a process for provicling com- pensation for acquiring that title." The CanadianBil/ofRights'2 also provides that Canaclians have to right to "enjoyment o f property, and the r ight not to be d eprived thereof except by due process of law", although trus statute applies only to fed erally regulated matters and can be overridden by any other act o f Parlia- ment. Specialized legislation also exists to protect certain types of property. For example, intellectual property rights are protected by several federal statutes such as the Patent Act, 53 and p rivately owned land is protected from arbitrary expropri- ation by provincial statutes such as the Ontario Expropriations Act"' wruch also require governments to meet basic req uirements of procedural fa irness when expropriating privately owned land. Many of our r ights to protect our property exist in the common law. For exan1ple, the torts of trespass and nuisance protect a person's possession and enjoyment of land from interference, and the tort o f passing off protects the goodwill attached to the prod ucts of a business. 55

The Bundle of Rights The collection oflegal r ights associated wjth ownerslup of property is sometimes characterized as a bundle of rights, and included in thjs bundle are the r ight to exclude, tl1e right to possession, use, and enjoyment of property, and tl1e right to transfer or clispose of property.

The owner of property who is also in possession is entitled to d eal wjth it essentially as she sees fi t. Her options include:

selling the property and transferring ownership and possession to the buyer.

leasing tl1e property to another business wjth the intent of regrurung possession or selling it when the lease expires.

49 Bruce Zill ·ra1<.1ng L1t>erties Pro1ec10 0: 101 Pri\ali'! Prope11y in Caood(') · Moder:'I Studies H'l Prapetty Llw. Vol In (OxfO<d Han. 20051. 341

50 RSA 2000. c A· 3L 51 Jbkt at s 2 52 SC 1960. c 44. 53 RSC 1985. c P·4. 54 RSO 1990. c E 26. 55 T~se IOrl5 a1e OiSCUSS{ld 1nChapli'!r 12.

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Bundle of rights

The set of legal rights associated with property. which usually includes the right to exclude. the nght to possess and use. and the nght to transfer to others or d 1spose of property.

using the property as security for a loan, thereby giving the lender the right to seize or sell the property if the bor rower defa ults on the loan.

transferring possession of its chattels to another business for storage, repair, or transpor t with the corresponrung right to regain possession.

It should be noted that lands within Canada that are subject to aboriginal title also convey significant rights to the title-holder, including the r ight to possess, enjoy, manage, and occupy as well as the right to economic benefit of the land."' Sometimes these rights are in conflict with rights that were granted by the Crown to developers without regard to outstanding claims of Indigenous peoples, as occurred in Tsilhqot'in Nation v British Columbia.

Tsilhqot'in Nation v British Columbia, 2014 sec 44, (20141 2 SCR 257 {SCC)

THE BUSINESS CONTEXT: This decision clari- fies the obligations of the Crown when dealing with lands subject to claims of aboriginal title.

FACTUAL BACKGROUND : The Tsilhqot'in Nation, a grouping of six bands sharing a common culture and history, h ave lived for centuries in an area of land located in South Chilcotin, in the Cariboo region of Br it ish Columbia. The lands in q uestion had never been surrendered in a treaty and, until 1 983, the Tsilhqot'in people were one of hund reds of Indigenous groups in British Columbia with an unresolved land claim.

In 1 983, the province of Br itish Columbia granted Carrier Lumber Lt d a commercial licence permitting loggjng on land considered by the Tsilhqot'in people to be part of their tra- rutional territory. The First Nations government of the Xeni Gwet'in (one of the six bands that make up the Tsilhqot'in Nation) objected to the commercial loggjng licence and sought a decla- ration from the court prohibiting the loggjng on the lands in question. The dispute eventually led to the blockade of a bridge that Carrier Lumber Lt d was attempting to upgrade. The blockade ceased when the provincial premier promised there would be no m ore logging without con- sent of the Xeni Gwet'in. Although talks ensued, the parties were w1able to reach an agreement

and, in 1998, the group's original land claim was amended to include a claim for aboriginal title on behalf of all the Tsilhqot'in people.

The lands subject to the claim for aborig- inal title were confined to approximately 5% of what the Tsilhqot'in people regarded as their traditional territory and were sparsely popu- lated by about 200 (of the approximately 3000) Tsilhqot'in members, along with a handful of non-Indigenous people who also supported the Tsilhq ot'in claim to title.

THE LEGAL QUESTION: Did the historical evi- dence support the Tsilhqot'in Nation's claim of aboriginal title to the lands in q uestion?

RESOLUTION. The t r ial commenced in 2002 and continued for 339 days over a span of

Grand Chief Stewart Phillip describes a June 26 Supn?me O>urt dedsion on abariginal land tide as the beginning of a new era for First Nations' rel!Jtions with gJVernment and ind11stry.

56 ro1 further <lisaJSS10nOI ltK!ornque leaturesol ab0r9100! lilt~ see BusinessApp(JCalJOnOl Iha l..a'.,y Abor'fJtM1 T1l1e

451 NEL

five years. The trial judge, who spent time on the lands subject to the claim and heard extensive evidence from elders, historians, and experts, found that the Tsilh qot'in people were, in principle, entitled to a decla- ration of aboriginal title, although for proce- d ural reasons refused to make a declaration of title. On June 26, 201 4, in a unanimous decision, the Supreme Court of Canada held that the Tsilhqot'in had established aborig- inal title to the lands in question. According to the court, while the population was small, the evidence established that the lands were regularly used and continuously occupied by the Tsilhqot'in, who treated it exclusively as theirs, repelling other people from tlle land and requiring permission for outsiders to pass over it. Importantly, the court held that the t itle was not confin ed to specific, intensely occupied areas but also extended to lands used regularly for hunting, fishing, or other resources at the time of assertion of Euro- pean sovereignty. The court also held that, in addition to the government's duty to consult

Right to Exclude

and accommodate, once aboriginal t itle was established, a government may only infringe on the rights of the aboriginal title-holder for a compelling and substantial purpose and in a manner consistent with the Crown's good faith dut ies to the group.

In February 2 01 6, the provinc e and Tsilhqot'in Nation signed the Nenqay Deni Accord, which outlines eight pillars of reconcil- iation and clarifies the next steps in transi- tioning the title area to Tsilhqot'in management and control." Today, the Tsilhqot'in Nation permit public recreational uses of their land sudl as hiking and light camping but do not permit public hunting.58

CRJTICALANALYSIS: What are the implications of this case for resource extraction and other intrusions such as pipelines on lands that have been exclusively and continuously ocrnpied by Indigenous peoples? What sorts of government purposes might be sufficiently compelling and substantial to justify intrusions on aboriginal title lands?

One of the most important rights associated with property is the right to exclude others from accessing or interfering with it. For example, the property rights associated with land normally include the right to exclude others from entering upon land or interfering with the owner's use of tlle land. The property rights in a book that is subject to copyright include the right to prohibit others from copying or modifying the work in question. Most business activity involves the expenditure of energy and resources in order to create property or increase its holdings of property, and therefore the right to exclude is a fundamental and important right.59

Cran-Terra will have the right to exclude individuals from entering its business premises and may enforce that right by commencing a suit for the tort of tres- pass.60 Similarly, Cran-Terra can grant potential customers the legal right to enter its property by in vi ting them to enter the store during business hours. Cran-Terra could also exclude others from using any trademarks it has registered and could

Si Bril iS!\CdtJmbia Govl.'?l'nrrP-nt.. Tslhqonn NilliOn Oe:ta1~d T'tte Lar'ICl·,on1i(1e· Governm::?ntot Bri1 shCdtJmb1a < hn ps '/ /w..v"' 2.gov.bt': r.a/gov/co n1ent/s p-:nl s·ctJUo r~./ 1ec1i'?a1 on/I ish 1 !')Q•hu nl ;l')g/hu nti ng,ti mpo ria nl• notices/ lS I hqOI ·in.-l\C')t IOfl·deda1eo • I itk?..(and >

58 Jb.d. 59 ror a genor<'ll dtSOJsS1on 01') l h"1 right to ~xctude, SOO ~/ MeriU 1n "P10001ty ano HK! ~iQhl 10 CJOCtudG. U998) n

Neb l 730. 60 It snouki be oot'1?d 1ha1 hul'r\'.Hl1igl'HS ~giSt.ltiO:\ in e()Ch p1ovi0Ci'! 1es1rc1s a bus1nessoorso1ls nQl'H 10 refuse

lo ~JOpty900ds and 1er\'lceS v11\ere the reluSc'.:11 iS based on a 01oh1b,1ed 91ound of d1SCrim1r~Li0n such as 1ebtJoos befiel or .gender. 101 exam~. SeeChaoter 12. 001-= 31 for lu1the1 diS<:tJSSiOn.

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Lease

A contract that transfers possession of land or personal property 1n exchange for a fee.

Licence

Consent given by the own er of rights to someone to do something that only the owner can do.

enforce thls right by suing for d amages and seeking an injunction to prevent fur- ther unauthorized use.

Right to Possess and Use Another r ight usually associated with property is the r ight of possession. While the ownership of property and right to possess it are normally held by the same person or entity, it is often possible to separate these r ights so that ownership may rest with one party while the right of possession rests with someone else. This is essentially the nature of a lease,61 which results in one party owning the property while someone else has the r ight to possess that property for a perio d of time, after which posse.ssion is ultimately returned to the owner.

There are several examples o f possession rights i n the Cran-Terra scenario that are common in a business environment:

Cran-Terra's customers will be leaving their property on Cran-Terra's p remises, including goods that have been consigned. Unlike with donated goods, there is no intention that Cran-Ter ra will become the owner of the consigned property.

Cran-Terra could renew its lease with the building owner. By do ing so, Cran-Terra would get the benefi t of using the building without having to make the large capital outlay req uired to purchase it.

Some property cannot be physically possessed by its owner and its value lies in the r ight to control the use of the property. For instance, intangible property such as a specialized process that is protected by a patent has no physical existence that is capable of being possessed, but the right to use the process may be very valuable. An inventor who d evelops and patents a new product or process might choose to grant a licence to permi t someone else to manufac ture and sell the product or use the process in exchange for the right to recei ve royalties from the product's fu ture sales. Cran-Terra could grant a business a licence to use its name in another location.62

Right to Transfer or Dispose Normally, the rights associated with the ownership of property also include the right to dispose of the property or transfer the property (such as by selling it) to someone else. However, there a re exceptions. For example, the title to most land in Canada incorporates the right to sell the property, but it is also possible to own land only for the duration of one's life, after which the title reverts back to its initial owner or her estate. The owner of a life estate may be able to transfer the property to a third party but cannot transfer a greater interest than she possesses. As such, a buyer's interest will be surrendered upon the death of the original holder of the life estate.63

The ownership of personal property usually includes right to sell or transfer the property. However, there are some situations in which the property r ights in personal property do not includ e the r ight to sell or transfer the property. For

61 Lease$ a1e diSOJS~d ii\ Chapter 19. 62 SGe CMoter lB. 63 M~l Q!ld 1n CaMoa is owned in ·r~ sim~· v1nich is 1~ 1a19es1 o.Jndle ol iighls as.sociated with taod and

1oclttdes the nghl to set! the p1operly, out bnd can ~lsO be 0\"~6 as a "tile esi<>t~'.!°, which timil~ 1he hOkler"s nght to use the taoo to l~ du1at10o ol her me, alter \ ... nich the prooerty ustJa!y 1eve1ts tot~ lee s ;mplie owooi or his or ~1 estate. These concepts ar4'! OiSCussed further ,o Chaptt?r 19.

NEL 453

example, a person who rents or borrows personal property only has a temporary interest in the property and cannot sell it or otherwise dispose of it.

Personal property and real property r ights might also be subject to a trust. A trust arises when the owner of property transfers his or her rights in specific property to someone who holds the property (the "trustee") for the benefit of the trust's beneficiaries. Although a trustee has legal title to the trust property, he is normally prohibited from using the property for his own personal benefi t and owes fid uciary duties to the benefici aries of the trust. Trusts are often used in wills to control how property is used after the death of the testator, but trusts have many other purposes and business uses. For example, most pension plans are facilitated by use of the trust concept. A pension plan is usually admi nistered by pension trustees who hold legal title to the pension fu nd assets an d manage the funds for the benefi t of the plan's members who have the legal right to benefit from the assets held in the fu nd. The law of trusts is complex and a more detailed explanation of trusts is beyond the scope of this book.

Cran-Terra will acquire used sporting equipment under consignment arrange- ments and also through donation. The legal title in goods that are consigned to Cran-Terra will remain with the original owner; however, physical possession will transfer to Cran-Terra, most likely under contractual terms that will allow Cran-Terra to keep a portion of the sale proceeds. In contrast, the donors of used equipment will be surrendering both thei r legal title and physical possession; they will have no remaining property interest in the goods and cannot reclaim the goods once they have been donated.

Saulnier v Royal Bank of Canada 2008 sec 58, c2008J scR 166 THE BUSINESS CONTEXT: Is a commercial fi shing licence "a mere privilege to do what would otherwise be illegal" or does it consti· tute personal property that may be seized by creditors? Can something constitute property in one context, such as for commercial lending, but not another?

Trust

A legal arrangement that is characterized by one party holding lega l title of property for the benefit of someone else.

FACTUAL BACKGROUND: Mr. Saulnier held four commercial fishing licences and was the pre.sident and sole shareholder of Bingo Queen Fisheries Lim ited ("Bingo") . Not unlike m any fishers, he required loans to finance his fishing business and, in 1999, he signed a general secu- r ity agreement (GSA) w ith tlle Royal Bank. Four years later, in 2003, his corporation entered into another GSA with the Royal Bank and he exe- cuted a personal guarantee making him personally liable for his corporation's debt to the Royal Bank. The standard form GSA gave tlle Bank a security interest in: "all .. . present and after acquired

ls this wssel the fisher's most valuable asset?

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personal property including ... Intangibles ... and in all proceeds and renewals thereof ".

Unfortunately, by 2004 the business was fai ling and Mr . Saulnier and his corporation made an assignment into bankruptcy. At the time of his bankruptcy Mr. Saulnier owed the Royal Bank $129449 and his corporation owed a further $1 77 28 2 . While he reported total liabilities of $400 330, Saulnier's four fishing licences had a market value in excess

of $600 000. Four months after the bank- ruptcy, Saulnier purported to lease his lobster licence to Horizon Fisheries Limited, whose principal owner was his common law spouse. The following year, the receiver and trustee in bankruptcy entered into an agreement to sell Mr. Saulnier's fishlng licences and other assets to a third party for $630 000, with the sale being conditional on the trustee being able to effect a transfer of the licences. However, Mr. Saulnier refused to sign the necessary d ocuments to permit the fishlng licences to be transferred and argued that the licences did not constitute personal property and that each licence was merely a privilege to d o what would otherwise be illegal. Earlier trial level d ecisions in Nova Scotia had held that fi shlng licences were not property and were not claimable by the trustee in bankruptcy.

The Supreme Court of Canada had no cliffi- culty conducting that a fi shlnglicence is unques- tionably a commercial asset, and a valuable one at that, observing that "[a] commercial fi sher with a ramshackle boat and a licence to fish is much better off financially than a fisher with a great boat tied up at the wharf with no licence ..... In fact, it was the access to a fi shlng licence that unlocked the value in a fi sher's other marine assets, accorcling to the court. However, the court also noted the licences clid not wholly cor- respond to the full bundle of rights necessary to characterize somethi ng as property at common law. In particular, the court observed that the Fisheries Act and regulations provided that the granting of such licences was in the "absolute cliscretion of the Minister" and the legislation also provided that the document itself was the property of the Crown and not transferable."' Also problematic was that legislation explicitly

64 Al pa1a 13.

stated that issuance of a licence did not imply or confer any future right or privilege . This con- siderable discretion of the Minister to issue, renew, or cancel was seemingly at odds with the common law notion of rights associated with property.

However, it was also noted that despite these legislative provisions, in reality the commercial market operated on the assumption that licences could in fact be transferred on application to the Minister with the consent of the existing licence holder and furthermore, the Ministry normally renewed existing licences each year. The court also observed that the licence was coupled with a proprietary interest in the harvest from the fi sh ing effort and was therefore much more than merely permission to d o somethlng that was otherwise illegal. Despite these commercial realities, the court concluded that the licences clid not wholly correspond to the full range of rights necessary to characterize something as property at common law.

Nonetheless , the court found that Mr. Saulnier did possess property for purposes of the statutes in q uestion, namely the Bank- ruptcy and Insolvency Act (BIA)66 and Nova Scotia's Personal Property Security Act (PPSA) .67

The court observed that one of the objectives of the BIA was to make exempt assets avail- able to creditors in the event o f bankruptcy. Accordingly, the BIA defin it ion of property should be construed to in dud e as. 7(1) fi shlng licence .68 Similarly, g iven the purpose o f the PPSA of facilitating fi nancing by borrowers and the protection of creclitors, its d efini tion of "an intangible" as personal property should be read to includ e a fi shlng licence, notwith- stancling it m ight not meet tl1e common law defin ition of property.

65 Fisheries A.er. RSC J9BS, c F l4. ss. 7. 9. lishery /Cen<f>IJ ReguL>llons. SOR/93-Sl ss 2. 16. 66 RSC i9BS.c 6 ·3. 67 SNS 1995·96 c 13 68 Seeton 2 011ne BIA def ;nes ·property· to rte.ll"I ·any iype of prope11y .. and 1nclides mo~y, goods. Lhi!lQS

1n act.Or\ ta:ld and ev<?l'y descnptlO:\ or O'OPG'!rty, v1hether re.at 01 oorsollM, tega! 01 equ1tabk!, as vii'!I as obtigat,ons, easements an.c'l evory descnotiOnof est.ate. interest and profit, present 01 future, ves1~d or contil\9-:'?nt, 11'\ arising out or 01 i'X':ident to property·

455 NEL

CRITICAL ANALYSIS: In what ways do the rights confer red by a fishing licence correspond with the bundle of legal rights associated with prop- e rty? In what ways are Mr. Saulnier's fi shi ng

licences lacking some of the features nor- mally associated with property? Had the court d ecided clifferently, how m ight this have poten- tially impacted financing in this industry?

While we typically associate ownership of proper ty with rights, ownership might also entail legal obligations. Most municipalities impose a tax on the own- ership o f real property in o rder to fund municipal services such as police and fire protection, road maintenance, and infrastructure. Land owners may also have obligations under legislation to cooperate with certain intrusions on their land. For example, in British Columbia, where the province owns most subsurface oil and gas rights, a landowner can be required to grant a d eveloper access to the property. As with several other provinces, British Columbia imposes mand atory a rbitration in the event the resource d eveloper and surfac e land owner cannot agree on fees and terms of access.•• Similarly, landowners of environmentally sen- sitive property may have statutory obligations to protect the natural features of the property.70 A municipality may also impose land use rules in order to regulate local d evelopment and bylaws that require property owners to provide proper upkeep of their property.

&ailment of Personal Property One o f the unique features of personal property is portability. Because of thi s characteristic, owners are not always in constant possession of their personal property. A bailment is a temporary transfer of possession of personal property from the owner, known as a bailor, to another party, known as a bailee . A business or in clivid ual in possession of personal property belonging to a third party may have a d uty to care for the property, and, depencling on the nature of the baHment, may also have certain rights in the bailed property.

There are many examples of bailment in commercial transactions, including the following:

the rental of a vehicle.

the d elivery of property for repair or servicing.

the transport of property by a commercial carrier.

the storage of property.

consignment of personal property.

Bailments are also common in the non-commercial context, such as lencling a lawn mower to a neighbour or asking someone in a cafe to watch your laptop while you place your order.

In each o f the above situations, someone is in possession of someone else's property. The question that arises is: how much responsibility is entailed in pos· sessing someone else's property? For example, should a neighbour who borrows

69 Pe:rdeum and Ntnu1/JJ Gi>sAeJ, RSBC 19%, c 361 ss 152, 159. 10 See. for ex.lmp4e M.Jtttcl{>tJJ Gov&tumnt Aa RSA 2000, c M· 26, ss 664C3)

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Ballment Temporary transfer of possession of personal property from one person to another

Bailor The owner of property who transfers possession 1n a bailment.

Bailee The person who receives possession 1n a bailment

Ballment for value

Bailment involving payment or compensation

your lawn mower and a stranger who agrees to watch your laptop for a few nun- utes owe the same amount of responsibility for your property? Or, does someone who pays a fee to use your lawn mower owe the same level of care toward it as someone who has been allowed to use it for free? In business, liability issues can arise when some mishap o ccurs in relation to the property while it is in the pos- session o f the bailee.n For example, the skates and consigned goods o f Cran- Terra's customers nlight be lost or damaged while in Cran-Terra's possession. Ideally, the contracts between Cran-Terra and its customers will specify the extent of Cran-Terra's liability for these events.

Bailees may not escape their responsibilities by tunung over a bailed chattel to employees. If the d1attel is d amaged, lost, or stolen as a result of employees' negligence, the employer as bailee is vicariously liable so long as the employees were acting within the ordinary course or scope of their employment; that is, the employees were engaged in the performance o f their assigned duties. In addition, bailees are liable for the intentional wrongd oing of their employees. A bailee who entrusts bailed goods to an employee is personally (not vicariously) liable for the theft of the goods by the employee. Another basis of liability of a bailee for theft by an employee is the law of negligence. The employer has a d uty to hire honest, responsible people. Acco rdingly, failure to engage in proper hiring practices may result in lia bility for the employer.

In general, the liability of a bailee for bailed property will be governed by the common law of bailment, statutory rules that may be imposed on special types of bailees (e.g., warellouses and innkeepers) and the specific contract terms between the parties.

Common Law Liability of Bailees The common law obligations of bailees to care for the goods o f their bailors have evolved through various stages. Initially, bailees were 1 00% liable for the return of bailed chattels as well as for any d amage, whether the bailee caused tl1e damage or not and even where tl1e bailee exercised reasonable or even extreme diligence. Tod ay, in the absence of statutory rules or a formal agreement between the parties, all bailees are expected to exercise care toward the bailor's property; however, the degree of care expected will vary with the circumstances, including whether payment is involved, which party is ben- efit ing from tl1e baHment, the nature of tl1e property being bailed, and the expertise of the bailee.

Is Payment Involved? Most commercial bailments are based on a contract requiring payment for the use of the property or as compensation for storage or another service. This is known as a bailment for value.

Possession of property may also be transferred without payment by virtue of a loan or a free service. This would occur when, for example, a prospective buyer takes a ve!Ude for a test drive or someone parks his car in his neighbour's garage for the winter. Because there is no compensation involved in such arrangements,

71 Tn.awo1k.ol Prolesso1 £me1itus MO!fl$ l itrnanol 1ha racuttyot Lav;, Unrvers11yol A\berla, Ill this secLOI\ IS grateluty ack.nov/.eog~

457 NEL

such an instance is known as a gratuitous baihnent in the sense of bei ng free or "without reward ." In general, a bailee who receives a payment must show greater care than a gratuitous bailee.

For Whose Benefit Is the Bailment? The question of who benefi ts from a gratuitous bailment is particularly important, since the answer helps later to d etermine the bailee's responsibility for the prop- erty. Gratuitous bailments can benefi t the bailor or the bailee. If the bailment is gratuitous and for tl1e benefit of the bailor, the standard of care is very low. If the bailment is gratuitous and for the benefit of the bailee, the stand ard is very high. For example, when someone stores his car in a fr iend's garage for the winter at no charge, the bailee- the person who owns the garage- derives no ad vantage from the relationship, while the bailor- the person who owns the car- now has protection for his vehicle from harsh weatl1er. It is tl1e bailor, therefore, who gains from the bailmentand the standard of care is low. Conversely, when a person bor- rows his neighbour's lawn mower, the owner of the lawn mower- the bailor- is simply d oing a favour and does not derive any tangible benefit from the bailment. The borrower- the bailee- can now cut his grass without having to buy or lease a lawn mower from someone else and is tl1erefore tl1e party who profi ts from the relationship and the stand ard of care is very high.

Bailments that benefit both the bailor and the bailee are most common in the commercial world and usually involve bailments for value- that is, bailments in which one of the parties is paid for the provision of a service or other ben- efi t. For example, the owner of skates consigned to Cran-Terra benefits from the relationship since it receives the services of Cran-Terra in selling the property and Cran-Terra benefits from the customer's payment in tum. The obligation of Cran-Terra in these situations is to take the same care of the goods as a "prudent warel10useman acting reasonably" might be expected to take of his own goods.

The Nature and Value of the Bailed Property The stand ard of care expected of a bailee will be higher for more valuable property, and the care provided by the bailee should be appropriate for the type of prop- erty. For example, a bailee of valuable and d elicate property such as a rare antiq ue book would be expected to exercise a higher degree of care toward the book and m ight be expected to store it in a d ry and secure place. A jeweller making arrange- ments to ship a customer's valuable ringfor repairs might be expected to make certain the ring is transported in the safest possible manner and that ad equate insurance is in place in case of the ring's loss d uring its transportation.71

Special Circumstances in the Transaction Where the bailee is instructed by the bail or as to the value of tl1e goods or special storage requirements, for example, this increases the stand ard o f care that the bailee must meet.

The Expertise of the Bailee A bailee who specializes in a certain type of bailment (such as storage) is expected to take greater care tl1an an ordinary person.

72 Soo Punch v 5".ay~ Jewe/!e-s Lid [1986). 54 OR 12'1) 383 ION CA)

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Gratu itous bailment

Bailment that involves no payment.

Warehouser

A bailee who stores personal property

The Contract of Bailment In bailments for value, t11e contract between the baHor and ilie bailee is central. For example, ilie contract may raise or lower ilie standard o f care owed by the bailee or may set ilie standard at ordinary care and diligence but limit the amount of damages for which the bailee may be held liable.

The parties are free to negotiate ilie details o f ilieir own agreement. A contract will normally include a description of these aspects:

the services to be provid ed by the bailee.

the price to be paid by ilie bailor and payment terms.

the extent to which ilie bailee is liable for d amage or loss.

the remedies of the parties for failure to perform.

In a storage contract, for example, t11e focus is on the bailee's liability for loss to the chattels in question and the bailee's remedies for collecting storage charges. Because a warellouser d eals wiili ilie property of many customers in similar circumstances and is under p ressure to keep prices competitive, such a business is likely to have a standard form agreement that all customers are expected to sign. The main object from the perspective of ilie storage company is to minimize its responsibility for damage caused to property in its possession, in order to keep costs down. Limiting liability ilirough standard form agreements is common in the storage industry, as in the following clauses:

(a) The responsibility of a warehouseman in the absence of written provisions is the reasonable care and diligence required by the law.

(b) The warehouseman's liability on any one package is limited to $40 unless the holder has declared in writing a valuation in excess of $40 and paid the addi- tional charge specified to cover warehouse liability-"

While clause (b) may seem unfair- after all, if the warehouser's negligence causes more than $40 in damage, should it not have to pay ilie full tab? - its function is to signal which party should buy insurance on the item being stored: ilie bailor or the bailee. In tlus case, the onus is on the bailor (as ilie owner who

Who is resp<msible {or property damaJ§!dd1tring delivery? Who is resp<msible for damage ro a leased tr11d<?

73 Set:! London Drugs Lid v J<1.;ehne & Mgel Jn1ernati0f'ttil Lld, 119921 3 SCR 299, 119931 1 Vt/WR l 1n. CMptar 9.

NEL 459

is limited to a claim for $40) to purchase insurance, since the item being stored is likely worth much more than that amount.

The other focus of a bailment contract is on the remedies that the bailee can use to obtain payment from delinquent customers. For example, the contract may provide that the bailee is entitled to retain possession of stored items until pay- ment is received and may also give the bailee the r ight to sell stored items in order to apply the proceeds to the outstanding a ccount.

Specialized Bailments Impacted by Statute Certain types of bailments may be subject to special regulations or r ules that may set out the stand ard of care a nd other rights and obligations of parties to the bailment contract. Contracts to transport good s, for example, are subject to stand ard statutory terms that may set out the stand ard of care, and businesses that store or repair good s may have special statutor y remedies in the event of a customer's non-payment.

Transportation A bailee who receives property and t ransports it a ccording to the owner's instruc- tions is called a carrier. Common carriers are those who represent themselves to the public as carrie rs for reward , meaning they are prepared to t ransport any property for any owner so long as their fac ilities permit and they are paid for the service. Common carriers are held to a very high stand ard of care regarding the property they carry. If property is lost or damaged while in their possession, it is presumed that the carrier is liable. The owner is not req uired to prove fault by the carrier, m ainly because it is difficult for the owner to know what happened to the property duringthe transport. Carriers are required to account for their treatment o f the property and have limited legal defences which are mainly related to cir- cumstances witl"rin the control of the owner or beyond the control of tl1e carrier. For example, if the owner fai ls to pack fragile goods ad equately or the goods are d estroyed in a natural disaster, the carrier could be excused from liability.

As a result of tl"ris heavy responsibility based on legislation and the common law, carriers normally include provisions in their standard form agreements with cus- tomers that the carriers' liability will be severely limited, typically to a low dollar amount, should mishap occur with the property. Customers are protected by legis- lation covering eacll form of transport- rail, road , sea, and air- and clauses used in contracts on international or interprovind al routes must be approved by the Canadian Transport Agency. Carriers have a common law lien against the property for transport charges, but enjoy no corresponding right to sell thepropertyif the owner fails to pay.

Storage The general responsibility of a warehouser toward its customers' property is to t reat it as a "prud ent warehouseman" would deal with its own property. Thi s imposes a stand ard of reasonableness that includes responsibility for all foresee- able risks. Because the stand ard is high and tl1e potential losses are high, a ware- houser will typically li1nit its liability to its customers in its stand ard form agreements with them. The remedies of a storage bailee, or warehouser, are con- tained in legislation i n each province.74 The bailee has a lien over the property

74 See, lor gx.arnoCe, WMe.'rtOuM! uen Act RSBC 1996, c 480; VlhtehousE.¥ s Len A.ct, RSNL 1990, c Y.1·2; l?ep;,.•r t'N'ld Storage U&ls Act RSO 1990, c ~-25

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Carrier

A bailee who transports persona l property

Lien

until the owner pays the storage fees and, if payment is not forthcoming, a wa re- houser has the right to sell the property and apply the proceed s to d1e outstancling charges. Any surplus proceeds of the sale go to the owner. The legislation contains safeguards for the owner in that notice o f the intend ed sale must be given and the bailee must deal with the property in a reasonable manner- for example, not sell valuable property for the amount o f a relatively small storage bill.

Repairs

When the owner of property takes it to a repair shop, the main purpose of the transac- tion is the repairof d1e property. If the property is left at the shop, a storage bailment, which is incidental to the main purpose of the arrangement, is also created. At the appointed time for pickup, the owner- the bailor- expects to receive the property in a good state of repair and otherwise in the condition in which it was delivered.

From a business perspective, it makes sense to agree on a price in advance, but if the parties do not agree on the p rice for storage and repairs at the outset, the repairer's compensation will be a reasonable amount for the service provided . The repairer cannot charge more than is reasonable, nor can the owner refuse to pay anything, just because no price was agreed in advance, and some provinces pro- vide guidelines for d eterm ining the fair value of the storage and repair costs. For example, in Ontario, fair market value is determined based on the repairer's fixed costs, variable costs, clirect costs, indirect costs, and profit . 75

The right to retain possession of personal property until payment for service is received

Most provinces have legislation.,.; giving the bailee a lien against the property for the value of the repairs as long as the bailee has possession of the property.77

As w ith the storage situation, the bailee also has the right to sell the property (subject to procedural requirements) to recover the repair charges. In Alber ta, fo r example, a repairer has a lien fo r its repair and storage costs or other costs asso- ciated w ith caring for the property that is not retrieved within the time period specified in the contract or upon notice if there is no fi xed time in the contract. If an a ccount remains unpaid for a period of six months (three months in the case of motor vehicles), or the property is not retrieved within the time perio d in the contract or notice, then the repairer may sell the property upon meeting ce rtain notice requirements. This notice is waived in the case of goods valued at less than $300 and sudl good s may be sold at a price and by means the repairer considers reasonable. lf the repairer is unable to sell the good s, they may be clisposed of in a manner the repairer considers reasonable in the circumstances.711

Melrose v Halloway Holdings Ltd, 2004 Can Lii 50135 (ONSC)

THE BUSINESS CONTEXT: This case illustrates the risk tllat a storage company faces in exercising its rights to recover storage fees as well as the risk

15 Cenera.1 ReguJat1on, 0 ~9 421/15

that the user of a storage locker takes in leaving valuable property in the locker. The primacy of legislation over contracts is also explored .

FACTUAL BACKGROUND: Robert Melrose (RM) rented storage locker 1 41 5 from Halloway

76 See, for ex..ampte, Mochanlc.f Lien Act, ~NL 19-'.)(), c M·3; 8u;Jde1s' Uen Act. RSNS 1989, c 277, Reptlirers· Um Act, RSBC 1996, c 404. Rept1>r tN1d 5'for~e LJens Act, RSO 1990, c ~-25.

77 Sor're ~giS~lion also alCMS (or non-~sesso1y (\ens Msed Oil an. ~Ck'lO\•mdgmenl or ln.2 debt. $(.le Repair and Stora!}e UensAa. RSO 19;){), c R~2S

78 Possessory llertSAct RSA 2000, c P· l9. The 1>ghlS of thOse \Ylv.> r~pa.r ttnd store properly ~nd the p1oc<.->du1at re<:;u11emen1s tor enforcing tiens vary hom p1ov1oce to p1ovioce

NEL 461

Holdings Lt d (HH) in September 2001. Teri Melrose (TM), RM's wife, was listed on the rental agreement as an "authorized user" of the locker. According to TM, most of the tools, furniture, and household goods in locker 141 5 were hers. In November, RM rented another locker (13130) from HH. Both lease agreements exempted HH from " ... loss or damage, however caL1Sed .. ."; stated that failure to pay rent might result in the goods stored being sold; and stated that the price obtained for the goods was d eemed to be the best possible price. In March 2002, the Melroses separated. They cleared out locker 13130. moved TM's property to locker 1415, and provided a new address for RM. The locker rental fell into arrears. HH sent several notices to RM at his old address. No notice was sent to T M before the property was sold to an auction house for $800 in November. TM claimed the value of her prop- erty from HH, which she alleges was $60000.

THE LEGAL QUESTION: Was TM protected by the Repair and Storage L iens Act, (RSLA)'!" Was the sale of the property proper? Did the locker rental contract affect the rights provided in the RSLA? Ifnot, what is the quantum of damages?

RESOLUTION: TM was found to be a person from whom property was received for storage and for whi ch payment was made. Therefore, she was protected by the Act and entitled to her rights, even though she had no written contract with HH. HH was required to follow the statu- tory requirements and also owed her a common law duty of care as a bailee for value to treat the property as a prudent owner would do.

The sale by HH to the auction house did not conform to the requirements o f the RSLA because notice was not sent to RM's last known

BUSINESS APPLICATION Or THE LAW

DEFINING LIABILITY IN CONTRACTS OF BAILMENT

As demonstrated by the exclusion of liability in the Melrose v Halloway case above and the limit

79 RSO 1900. c R 25

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address as required, notice was never sent to TM as required, and the notice sent to RM's old address was d efici ent in several respects. It lacked a specific description of the goods, the details of payment, and how payment cowd be made before the sale. In terms of tl1e actual sale, there was no publicity, no attempt to ascertain the value of the property, and a huge gap between the sale price and the value alleged by T M.

The attempt by HH to have renters contract out of the provisions of the RSLA failed because the contract language was legalistic and in small print on the reverse of the agreement. There was no evid ence that the terms were brought to RM's attention and even if tl1ey had been, that he would have fully understood their sig- nificance. In addition,

IHHI disposed of t he goods in a fashion so cavalier and l acking in t he care t hat one might reasonably expect a bailee to exercise in rela- tion to goods over w hich it holds a lien that, in my view. it can fairly be said that IHH'sl con - duct amounted to a f undamental breach o f the contract o f bailment.

In the alternative, Justice Clark fou nd the offending terms to be unfair and unreason- able and therefore unconscionable. Regarding the quantum of damages, he ordered a trial to d etermine the contents of the locker, their fair market value, and any related damages.

CRITICAL ANALYSIS: Should there be a subse- quent trial to d eterm ine d amages? How could the participants in this transaction have better managed the risks arising from the locker rental? What changes in its business showd HH make as a result of this case?

of $40 in the London Drugs case in Chapter 9, a key aspect of a bailment contract is often limita- tion o f the liability tl1at the common law rwes of bailment create. The terms of these contracts are

normally written by the businesses whose liveli- hood is based on the bailment relationship. In the London Drugs case, the enforc eability o f the $40 clause between the customer and the ware· house company was not challenged . However, such clauses are vulnerable and can be challenged in various ways:

failure to bring the standard terms to the attention of the customer. See the Melrose v Halloway case above and tl1e Tilde n case in Chapter 7 for examples.

failure of the language in the clause to exclude liability in the circumstances.

serious d efect affecting the formation or performance of the contract such as fu nd amental breach or unconscionability. See the Melrose v Halloway case above and the Tercon Contractors case in Chapter 9.

Exemption and linutation clauses are also reg- ulated by statute:

New Brunswk k consumer protection legislation'"' applies to consumer sales that

Lodging

include leases. Clauses that limit liability will not be enforced unless tl1ey are considered to be "fai r and reasonable."

Ind ustry-specific legislation may set the terms.

The courts are inclined to apply differing stan- d a rds to commercial and consumer contracts. Courts may also consider the contract price in relation to potential losses in deciding whetl1er it is reasonable to enforce a limitation. 81

Critical A,..fyris: Do these contract terms indi- cate that some businesses are exploiting cus- tomers who are less knowledgeable, less aware, or weaker, or do these clauses illustrate effective r isk management? Are courts and legislatures justifie d in injecting ethical standards into busi- ness by applying stand ard s such as "unfair ", "unreasonable", and "unconscionable"?

Source: Meltosev Ha!lov1lljl 1-lokJN'tgS Ltd, 2004 Canlll 50135 (ONS(J

Innkeeper

Someone who offers lodging to the pub lic.

Someone who offers lodging to the public is known as an innkeeper. At common law, an innkeeper's responsibility for guests' property is similar to that of common carriers. They must take great care of guests' property and are responsible for loss or theft. There is an important practical distinct ion in tl1e d egree o f control between carriers and innkeepers. Carrier s have total control of the property when it is d elivered for shipment, while guests share control over their property through their occupation of rooms.

In some provinces, innkeepers are perm itted by legislation"' to linut their lia- bility to a specific amount ($40 to $150, depending on the province) if they post the legislated limits in the establishment. Their protection is lost if the loss to property is d ue to a negligent or d eliberate act of the innkeeper (or the inn's employees) or if the property has been deposited with the inn for safekeeping.

See Figure 1 7.1 for a summary o f the specialized b ailments discussed in this chapter.

BO Consumer Pr()(Juct Vltitr!Nlty and IJat>.VUy A.ct, SNB 1978, c C· l 8.l Ill See Frase- Jevel!M; (19821 Lid v Domm.bn £1ecl!lc Prota::oon Co 11997). 148 DLR 14th) 496 (ON 0,) 82 Set'.'. for ex.lmp!e, lnt1k!Epers· Act ~SO 1990, c 1· 7. a!ld Horel Keepe1s Act CCSM c H150

463 NEL

FIGURE 17.1 Summary of Specialized Bailments

Applicable legislation

Examples

Yes

Me/Josev Hallot~ay (Case)

Risk Management

.... Custo1ner

Repairer

Reasonable

Contract

Bailee

Lien, sale

Yes

Situation for Discussion #5

• • Shipper

Carrier

High

Conrract

Bailee

Lien

Situation for Discussion #8

The risks relating to property concern protection of ownership, rights to posses- sion, and the preservation of economic value. With tangible property, the major concern is with responsibility for loss or d amage to the property. In bailments for value, an additional risk is the failure of the customer to pay for services such as storage or repair.

Businesses subject to these r isks can use the risk management model to mini- m ize their impact on the success of the business. For example, with respect to its customers' property and any equipment that it rents out, Cran-Terra can negotiate contracts which will indicate who bears the loss in a variety of circumstances. The contracts can assign the loss and thereby indicate which party should seek to transfer its risk through appropriate insurance policies. As in most business situ- ations, the risks that cannot be avoided , reduced , or transferred will be retained .

BUSINESS LAW IN PRACTICE REVISITED

1. What types of property are used in Cran-Terra's business?

Cran-Terra will utilize a variety of property, including real property (the building that serves as its storefront and anythi ng permanently attached to the building and land), tangible personal property (inventory, shelving, customers' property, rental equipment) , and intangible personal property (trad emarks, accounts receiv- able). A typical business would use a similar range of property, including examples o f the major classifications of property.

2. What are Cran-Terra's rights and obligations in relation to the personal property that it acquires for its business?

Cran-Terra may lease a building to run its business. Alternatively, Cran-Terra may acquire its land by purchase. In either case, Cran-Terra will have the right to permit others to enter the property. Provid ed Cran-Terra is compliant with human r ights legislation prohibiting discrimination on the basis of gend er, religion, or

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Guest

Innkeeper

High

Legislation

Bailee

Lien

Yes

Question for Critical Thinking #3

other prohibited grounds, Cran-Terra will also have the right to exclud e individ- uals from its property. If it purchases a building, then as the owner of the land and building, Cran-Terra will also own the fixtures that are already attached to the building, such as the counter at the back of the store and lighting and plumbing fi xtures. As owner, Cran-Terra could lease the property to another business or sell the property. If Cran-Terra sold the property, the new owner would assume title to the land and building, as well as any personal property that has been permanently affi xed to the property.

For property it d oes not own, but of which it has temporary possession, Cran-Terra has more limi ted r ights. For example, Cran-Terra has the right (according to legislation) to hold customers' property until they pay the agreed fees. If customers don't pay, Cran-Terra can sell their property to recover the outstanding fees. It is important to emphasize these rights in the agreements with customers. For property it does not own and property it rents to customers, such as canoes and kayaks, Cran-Terra's obligations arise from the nature o f the transactions involving the property and the terms of the applicable contracts and legislation. For example, Cran-Terra has a duty to treat customers' property as a reasonably competent proprietor would treat its own property, subject to the protection for Cran-Terra contained in its stand ard form customer contracts. In addition, Cran-Terra's customers must take reasonable care of the rented equip- ment subject to normal wear and tear. The rental agreement will likely set out both Cran-Terra's obligations and those of its customers, including responsibility for d amage to the rented property and liability from its use, in considerable d etail.

3. How might Cran-Terra have avoided the problems it is now having with its lease?

Unfortunately, the terms of its initial lease were a matter for Cran-Terra to nego- tiate with its landlord and required long-term plann ing on the part of Cran-Terra . Ideally, Cran-Terra would have negotiated a renewal option and a manner for d etermin ing the amount of its rent in the fu ture renewals of its lease.

4. How can Cran-Terra protect its name?

Cran-Terra's name will be a registered trademark and is a form of intellectual property protected by legislation. If Cran-Terra d oes not register its tradename or trad emark, it may still be able to protect others from using it, although registra- tion would create a presumption of ownership and validity."' As an owner, Cran- Terra could license another business to use its name in another location. Cran-Terra also has the right to exclud e others from using the trademarks it has registered and could enforce this right by suing for d amages and seeking an injunction to prevent further unauthorized use.

CHAPTER SUMMARY

One of the roles of property law is to d etermine what counts as property and thus can be owned. Another role of property law is to enable owners to protect their rights in relation to property.

NEL 465

Property can be divided into real and personal. There are two categories of per- sonal property: tangible, wruch includes goods or chattels, and intangible, which includes various contractual and statutory rights.

Ownersrup is acquired by purchase or manufacture (goods); creation or pur- chase (intellectual property); or trading (accounts receivable). Typical rights associated with the ownersrup of property are the r ight to exclude others from interfering with the property, the right to possess and use the property, and the r ight to transfer or dispose of the property.

A bailment is the temporary transfer of possession with no change in owner- ship. Key issues in bailment are the standard of care that the bailee must observe in relation to the property and the remedies that the parties have for recovering fees. Standard form contracts are a common feature of commercial bailments.

The most common types of bailments are leasing, storage, repairs, transpor- tation, and lodging. Each has somewhat different rules for liability and remedies.

CHAPTER STUDY

Key Terms and Concepts aboriginal title (p. 436)

bailee (p. 449)

bailment (p. 449)

bailment for value (p. 450)

bailor (p. 449)

bundle of rights (p. 443)

carrier (p. 453)

gratuitousbailtnent (p.451)

innkeeper (p. 456)

intangible property (p. 438)

lease (p. 446)

licence (p. 446)

lien (p. 454)

personal property (p. 438)

real property (p. 435)

tang ible property (p. 438)

trust (p. 447)

warehouser (p. 452)

Questions for Review 1. Are all things capable of being privately owned?

2. What are some examples of real property?

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3. What is aboriginal title and in what ways does it differ from private ownership of real property?

4. How is personal property different from real property?

5. What are some examples of personal property?

6. How is tangible property different from intangible property?

7. How is ownershi p of real property acquired?

8. How is ownership of personal property acquired?

9. What is the "bundle of rights"?

10. What can the owner of personal property do w it11 it?

11. How is ownership of intangible property protected?

12. What is a bailment?

13. What are some examples of bailments?

14. How do bailments for value differ from gratuitous bailments?

15. What is the liability of a bailee for damage to the goods?

16. How can a bailee limit the liability for damage to t11e goods?

17. How can a bailee for value collect fees?

18. When are contractual limits on damages not enforced?

19. What role does insurance play in bailment?

Questions for Critical Thinking 1 . At law, a fi nder who takes possession of

lost per sonal property can a~sert ownership rights against everyone except its true owner. Should the rights of the true owner expire after a period of time (such as 10 years) or should a true owner's rights continue to exist indefin itely?

2. Our legal system counts as property such non-physical assets as recipes, manufac turing processes, and methods of extracting minerals, and allows owners of such property to exclud e others from using this knowledge. Is there any d ownside to allowing such things to be owned? What is the rationale for allowing such things to be owned?

3. Legislation governing innkeepers' liability for thejr guests' property was developed to d eal with an environment where guests were to a large extent at the mercy of innkeepers with regard to the safety of their property. Is this the case today, when most hotels are professionally owned and managed? Are guests still at r isk?

4. The stand ard of care in a bailment d epends on the type o f bailment and the particular circumstances of the transaction. Therefore, the obligations o f the bailor and bailee may be difficult to define in a contract in ad vance of a dispute. Would legjslation be an easier way to set the standard?

5. The self-storage i ndustry is growing rapidly as businesses and individ uals need extra space to store thei r exce.ss property. Does the rental of a storage locker fit the d efinition of bailment? Are there specific issues in this type of transaction that require a different set of rules from those in place for other bailment-type situations?

6. Commercial bailees generally try to minimize thei r liability in a stand ard form contract. They justify these low limits as a means o f controlling r isk and keeping their prices competitive. Is there a market opportunity for more generous liability terms? For example, could a storage

business increase market share by accepting a greater risk of liability than its competitors and chargjng a higher price?

Situations for Discussion 1. Abucan Resource Development Inc., a new

resource d evelopment company based in British Columbia, i s aware of a r ich deposit of copper located in a remote area of British Columbia. The land in question is currently held by the provincial Crown but is the subject of a long- standing unresolved land claim of Indigenous peoples in the area Abucan's business plan is to engage the province in lease negotiations before the land claim dispute is resolved . Is Abucan's business plan feasible?

2. Clancy's Cars Lt d engaged Rail co Ltd to transport several motor vehicles from Montreal to Halifax. The vehicles were to be d elivered to Clancy's on Wednesd ay, but they were d elayed. On Saturday, an employee of Railco informed Clancy's that the vehicles had arrived at Railco's faci lities in Halifa x and would be delivered to Clancy's on Mond ay. Over the weekend, a violent storm hit Halifax. Although tlle vellicles were parked in an area for safekeeping, they were severely damaged in the storm. When Clancy's claimed damages, Railco argued that the storm was so severe it was an "act of God ."114

Who is re.sponsible for the damage to the vehicles?

3. Two years ago, Nancy and Marta had a child using therapeutic insemination with sperm provid ed from a single sperm d onor and Marta's egg. The clinic that assisted with the insemination was left in possession o f one fertilized egg, which Nancy and Marta requested be destroyed . Recently, they learned that contrary to thei r instructions, the embryo was not destroyed and was in fact d onated to another couple without thejr consent. They are now considering suing the clinic. What issues might a court be concerned with in this case?

4. Black was looking to buy a q uality used luxury vehicle. He foun d a 2016 Audi at Dexter's Audi that met his needs. He examined the car on

B4 B.lSE?ll in Dart.. on Carro» Pontrac Bu/ck Ltd v Sl!!ataJI Cargo S.:.lfveys Lld. 2005 NSSM 12.

467 NEL

several occasions and took it for a couple of test drives. Discussions with Dexter 's salesperson, White, were prod uctive, and Black and Whlte were close to making a deal. Black wanted to have the car inspected by an expert mechanic before fi nally agreeing to buy it, so he asked to have the car over a long weekend so he could drive it further and complete the inspection. White agreed, but required Black to sign a draft agreement and pay a deposit on the purchase price. Black signed the document "subject to satisfactory inspection." Black took the car, but before the inspection could be done, he encountered a deer on the rughway. He swerved to avoid the deer, lost control, went off the road, and hit a tree at high speed. Black was not injured but the car was demolished :<l• Was this a bailment situation? Who is responsible for the vehicle?

5. Ying leased a machi ne to haul large logs in her lumbering business. The lease req uired Ying to keep the machine in good repair and fully insured, and to return it at the end of the lease in its original condition, subject to "normal wear and tear." The macrune never worked very well. Ying ran up large repair bills and began to suspect the machine was not heavy enough for the needs of her business. When she contacted the leasing company, she was remi nded that the lessor had made no promises about performance of the equipment. Ying is thinking about stopping her lease payments and insurance premiums and leasing a heavier machine from another dealer. She needs that heavier machine to maintain profitable levels of production. What factors should she consider? What would you advise her to do? Would your opinion be different if Ying had instead leased a truck for her personal use?

6. Roach owned a truck with a large crane attached. Roach took the truck to Vern's Auto to have the crane removed with the intention of mounting it on another vehicle in the future.

SS Based on Black v ~xtefs Auto.~aus, 200B N$$C 274

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468

Vern's allowed Roach to leave the crane in its yard, assuring him it would be safe. A few months later, Roach decided to sell the crane. When he went to get the crane, it was gone. Vern's had no idea what had happened to it, and because the company had charged nothing for storing the crane, it was not interested in finding out.86 Is Vern's responsible for the missing crane? What are the determining fac tors? What information is missing? What steps should Roach and Vern's have taken to safeguard the crane?

7. Horst is a collector of hockey memorabilia. He is particularly interested in hockey sticks that have been autographed by well-known players in the National Hockey League. When Horst checked on eBay, he found many autographed hockey sticks for sale, including several signed by his favourite players. He is prepared to pay the going rate, but wants to be sure that the autographs are authentic and that the current owners acquired the sticks legitimately. Horst has heard of organizations that purport to authenticate autographs, but has also heard of many "fake" autographs that were authenticated . What legal issues should Horst consider? How should he manage the risks facing him?

8. Canfor hired B.C. Rail to transport wood pulp from the interior of British Columbia to a shipping terminal for eventual delivery to a customer in Scotland . The contract between Canfor and B.C. Rail specified that the railcars would be dean and the pulp delivered free from contamination. Canfor insisted on wood-lined boxcars and also routinely inspected and swept out the cars before loading bales of pulp. When the pulp arrived in Scotland, it was contaminated with wood splinters and rejected by the customer. Canfor had to compensate its customer and pay for transporting the pulp back to B.C.87 Can Canfor recover its losses from B.C. Rail? Explain.

86 ilos<d on t.wte /DJJ f!!IBOJ Lrd v Roach 119941 131 NSR (2oJ 268 tSO. .rro 119951138 NSR (2") 79 (NS CA)

87 Sasadon.B.C. !ltJti UdvCa.'ii'ld1.tJn forest Products !.td 2005 BCC~ 369.

OBJECTIVES After studying this chapter. you should have an understanding of

• the nature o f intellectual property

• the rights that attach to intellectual property

• how intellectual property is acquired

• how to protect the intellectual property assets of an org anization

BUSINESS LAW IN PRACTICE

Since graduating from university three years ago, Estelle Perez has been employed in the engineering department of ELEXTechnologies Inc., a small manufacturer of electronic products including sensors, mobile phones, and wireless routers. Estelle's main responsibility has been to devise better and more effici ent production methods. Although she likes her job w ith ELEX, Estelle's ultimate goal is to start a company that would focus on her real passion, namely inven- tion and design. Driven by thls ambition, Estelle spends virtually every even ing and weekend experim enting with her own hlghly innovative product ideas.

Though ELEX is a successful company, it faces many challenges. For example, last year alone, as much as 1 5% of its products mal- functioned and were returned by customers, resulting in lost sales and profi ts. ELEX confirm ed that product breakdown was being caused by electrostatic discharge (ESD) during shlpping, a huge problem for electronics manufacturers across the board. Estelle con- cluded that the main industry solution relied upon by ELEX, that of using plastic packaging to reduce ESD, had been neither effici ent (witness ELEX's failure rate) nor environmentally fri endly (because all that plastic simply ended up in landfills). Estelle has come up with a seemingly optimal solution. She has designed protective packaging made ofrecydable conductive paper, which has the ability to absorb the damaging effects of static electricity.' Estelle's design calls for the static protection to be woven into the fibre of the paper, which could, in turn, be converted into boxes, bags, and envelopes. She has even figured out how to add colour options to the packaging, thereby providing customization opportunities to suit the commercial cus- tomer's individual marketing requirements.

Estelle believes in her new product and would like to quit her job with ELEX in order to work full time on it. However, she also worries about her lack of experience on the business side of product devel- opment and how she could ever keep her invention a secret while exploring the possibility of funding. Also, assuming the product is successful, Estelle is concerned that she will be required to share the proceeds of her invention with ELEX.

1 T he id~a 101 thiS ~Sif)E?SS Lavi 1n Practice~ tx'lise<J on p<)lented tcchoo\ogydeveb!X?d by YongM:> Ni. a c1olessor and am~cto1 ol 1ha Unwc1si1y of Nev; Bronswic::l-:"s Lim<:HICk Putp and P.'.)per f'«:!se.lrChCen11e See <VNM l(.rK'J1ucnou9e.com>

NEL 469

Estelle knows that the fu ture of her anticipated new prod uct will d epend, in part, on marketing, and she has alread y come up with a catchy name for her product- Chargeless. She does not think anyone else is using that name except a financial services company that d eploys it as part o f the slogan, "We charge less." Asher name has a clifferentspelling and is in an entirely clifferentbusinesssector, Estelle conclud es that she will be okay in using Chargeless as her product moniker.

1. ls Estelle's idea a patentable invention?

2. Who owns the r ights to Estelle's invention- Estelle or ELEX?

3. How can Estelle protect her idea while she seeks fun cling from potential lend ers and inve.stors?

4. Is Estelle entitled to use the name "Chargeless" for her product, and should she do anything to protect the name?

Introduction Intellectual property is a term often used to describe the results of intellectual or creative processes. Put another way, the term is used for d escribing ideas or ways of expressing ideas. Some common business examples of intellectual property are:

recipes and formulas for making prod ucts.

manufacturing processes.

methods of extracting minerals.

ad vertising jingles.

business and marketing plans.

the distinctive name given to a prod uct or service.

Estelle's method of weaving static protection into the fi bre of paper and the name for her prod uct are also examples.

The term "intellectual property"' is also used to describe the "bundle of rights" that people have regarcling their ideas or the ways in which they are expressed. These r ights are rewards or incentives for creating and developing ideas. There are cliffering r ights in intellectual property as the law gives varying types of pro- tection to its many forms. The main categories o f intellectual property laws are patents, trad emarks, copyrights, ind ustrial d e.signs, and confidential {business) information.• (See Figure 18.1 on page 490 for a comparison of these forms.) There are other laws, however, that provid e protection for specific types of intel- lectual property. For example, there are laws that protect plant varieties,• inte- grated circuit topographies,' and personality rights.•

2 Tile te1m ·in1etec1Ual p1ope11y· isused to 1eter to COin iOU)fl91~s-~JChas lde~and the1rcxo1esson.. fo1mu las, schel'l'les. t«ldemark.S, and tile u~-and rignLS that mayati;,ch to lhese H\IAOQ btes Hov.-eve1. oota!I intetloc tual p1operty can be tecm~icaty ca1$ed ·property· as the basis for p101ecti00 iS not .-J.w<'Jy·s ·property" 01;nC1ptes but or1nc ii*!s ol controct ano tort as \•RI as specific sU)tuto1y p1ov1sons.

3 The term ·conf ideru.icll info1malior( 1nctudes a brotY.l '""9'° of info1maLb1'. such as 9owrnmen1 secr~ts a<\d prv~te pe•sont.11 infcr!"l"lalOn. In LniS text.. tne 1e1m ·conft:ent<at business info1rMti0rl 1sos.?d to diSti"-~uiSil inlo11nalon of a comrn.2reoal MttJri'! trom otha1 types ot inlo1ma1ion.

4 Plllnt 8tee<1ers· Rlgf1:sAct, SC 1990,e: 20. ThiS oct ::no\l\des 20·y-ear pa1~n1-t:k.e p101ec1on for dis1incl ne11 ~1u varieties {25 years tor a t1£1e 01 V!OO).

5 Jntegr'*ed Citeu1~ Topography Act. SC: 1990, c 37 Tt'ttS <>:I provides 10•yaa1 nro1ecton for tayoul designs embe-dd«I in semconciuc1orchips orc ,rOJll OOl!iids te.g . mCrcchips).

6 ParsoMhty rights, 01 tha right no1 to have onEHi na1nE;'! 01 tiK.e!\ess app•op1~ted 101 al'l>Ot~(s ga·!l, are p1011:?ctoo unde1 tort ocuons, 1rMerra1k. 4eq1S\at>0n, and 011vacyte91stahon. sucn as B1111sh Cotumba s PtNtK:y Acr, RSBC: 1994 c373

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Intellectual property

The results of the creative process. such as ideas. the expression of id ea s. formulas. schemes. trademarks. and the like; also refers to the protection attached to id ea s through patent. copyright trademark. in du stria l design. and other sim1la r laws

Patent

A monopoly to make. use. or sell an invention.

Intellectual property is a necessary and critical asset in many ind ustries, as illustrated in these examples:

patents protect inventions and are essential to businesses in the pharmaceutical, electrorucs, chemical, and manufacturing industries, as patents may be used to exclude others from using new technology.

industrial designs protect the appearance of useful articles against copying and are relevant to businesses that offer goods to consumers.

trad emarks serve to distingttish the goods or services of one provider from those of another and are essential to all businesses that sell goods or services to the public.

copyright prevents the copying of certain works and is the basis for businesses involved in art, publishlng, music, communications, and software, as copyright provides the basis for a saleable product.

the law goverrung confidentiality is the means of protecting such information as marketing plans, customer lists, databases, and price lists, and is crucial to all businesses. 7

Intellectual property offers both opportunities and challenges to business. Businesses can g ain a competitive advantage by d eveloping new products, inno- vative business methods, and creatjve brand names. Also, they can exploit these thlngs by assigrung or licensing their use to other businesses. However, the d evel- opment o f various technologies- such as photocopie rs, video cameras, com- puters, and smartphones- has made it easier for others to "take" intellectual property.•

This chapter explores the creation, acquisition, and protection o f intellec- tual property.

Creation of Intellectual Property Rights Estelle's intellectual property comprises the method for weaving static protection into the fi bre, the name o f her prod uct , and any written materials such as draw- ings, plans, and brochures. Various aspects of her intellectual property may qualify for protection under different legal regimes.

Patents Estelle's method for protecting electroruc prod ucts may qualify for patent protec- tion. A patent is a statutory right' that provid es protection for inventions.

Patents Defined The PatentAct10 defines an invention as "any new and useful art, process, machlne, manufacture or composition of matter or any new and useful improvement" in

1 Shek!on ~1shtein. ·r.x.ocu11..es Rerr'0in Una-,.,.t)re of tne V.)kJe cl lnte~ctuat Property AsselS-. The ur,,1ye-s Wee>Jy 127 .>.me 1997) 23.

8 In reco9n1ti0nof t!'K? d 1tllcutlles In Po(ieJngcopyrignt 1nlm'19ernen1of muse. there ts ate-yon blank taoes and compact d iscs. Se.e Copyftght Act, RSC 19.SS. c C-42, s 92 UJ.

9 The feder<:i gove1rut'>2nl has )JriSdiCtion to mak.~ "''''s coocern;n9 '-'<)tents.. cooyiig'lts. aoo tr~emaik.S. See Con.S!tlufloo Act, JS61. s 91.

JO RSC 1985, c P-4 s 2 11 NiOOly parci'!ntof aU :>at~nls a1<.'! tor improvamen1s IOE!x~ling O<'>tt:!nt~ imenllO!')!i. See Ca~~n l"td\eClual

Property Office, A Gulde to Pt11ent'>, ont 1~ <https //vtv1w.c.9ct:.tJ/<.!1C/s.11e/cipo1n1'"' rK:t•m1e1~topc.nd/ en.gfn _wr03652 .l\l"l11>

NEL 471

any art, process, machine, manufa cture or composition o f matter." The d efinition is very broad and encompasses a number of different kinds of inventions such as

processes or methods (e.g., a pay-per-use billing system, a system for applying a selective heroicide to improve crop yield, a method of cleaning carpets).

machines or apparatuses (e.g., computer hardwa re, a hay rake, a vacuum cleaner).

prod ucts or compositions of matter (e.g., pharmaceuticals, chemical compounds, microorganisms).

Estelle's invention may qualify for patent protection as a new and improved method for protecting electronic products from electrostatic discharge.

Substances intend ed for food or medicine, as well as the processes for producing them, are patentable. The question of whether new life forms created as the result of genetic engineering should be patentable has been the subject of much controversy.

Monsanto v Schmeiser, 2004 SCC 34, [2004) 1 SCR 902

THE BUSINESS CONTEXT: In 2002, in Harvard College v Canada (Commissioner of Patents),11 the Supreme Court of Canada held by a narrow five- to-four margin that higher life fo rms are not patentable. Although the process for genetically modifying cells was held to be patentable, the end result, a mouse susceptible to cancer, was not. The decision was a large disappointment to many in the biotechnology industry, as Canada's major trading partners, including the United States, Europe, Australia, and Japan, per mit such patents. The decision also created uncer- t ainty as to the scope of protection afforded to biotechnology-related inventions.

FACTUAL BACKGROUND. Percy Schmeiser is a Saskatchewan farmer who grows canola . Monsanto is a multinational firm specializing in biotechnologies used in agriculture. In the 1990s, Monsanto introduced Roundup Ready canola, a variety of genetically modified canola containing genes and cells patented by Monsanto. Roundup Ready canola is resistant to Roundup, a pesti- cide, which means that the canola plants can be sprayed with Roundup to kill weeds but not harm the crop. Monsanto licensed its Round up Ready canola to farmers for a fee, provid ed the farmers purchased the canola seeds from an authorized Monsanto agent.

i2 2002 sec 76.120021 4 SCR 45.

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Schmeiser did not purchase Round up Ready canola seeds, nor did he obtain a licence from Monsanto. By chance, he discovered some Round up Ready canola growing on his property. It is unclear how the canola got onto his prop- erty, but it is possible that the seeds blew there from a neighbour's land. Schmeiser collected

and cultivated the seeds and most of his 1998 canola crop comprised Roundup Ready canola. Once his activities were d etected, Monsanto sued him for patent infringement.

THE LEGAL QUESTION: Had Schmeiser, by col- lecting and planting the seeds and harvesting and selling the plants, infringed Monsanto's patents relating to genetically modjfied canola?

RESOLUTION: By a narrow five-to-four margin, the Supreme Court of Canad a held that Monsanto's patents were valid and that Schmeiser had in fringed t11em. Schmeiser had argued that he had not "used" the invention by growing canola plants because the plants are not covered by Monsanto's patents, only the plant cells containing the modified gene. The majority disagreed. The court held that t11e plants were composed of modified plant cells containing the modified genes, and therefore growing the modified plants constituted use of the invention. The majority used the following analogy: "If an infringing use were alleged in building a structure with patented Lego blocks, it would be no bar to a finding of infringement that only the blocks were

used and not the whole structure." [n essence, the court confirmed the patentability of cells and genes, and held that the rights in patented genes and cells extend to plants containing them.

CRITICAL ANALYSIS: Are there any concerns with manipulating genes in order to obtain better weed control or higher yields? How does this d ecision support the Canadian biotech- nology ind ustry?

POSTSCRIPT: [n 2005, more of the genetically modified canola appeared on Percy and Louise Schmeiser's farm. They pulled it out themselves and sent Monsanto a bill for $600. Monsanto agreed to pay provid ed the Schmeisers signed a release stating they would never talk about the agreement. The Schmeisers refused and sued in small-claims court. [n 2008, the case settled with Monsanto paying the Schmeisers $660 but without the Schmeisers signing an agreement stopping them from talking a bout the terms of the settlement.

Source: Mall Ha1Lley, "G1ai!l r.:irme1 Oaims Moral VCIOrf If\ ~ed Satt!2" The C!obeand MaM t20 Ma1ch 2008) A3.

Exclusions from Patent Protection There a re also exclusions or exceptions to what may be patented. The most common are the following:

things that receive exclusive protection under other areas of the law. For example, computer progra ms (i.e., software) are not patentable, as they receive protection under copyright law. They could, however, receive patent protection as part of a broader patent, as, for exa mple, a computerized method of controlling the operation of a plant. 13

things that do not meet the definition of a patent. For example, scientific principles, natural phenomena, and abstract theorems are "discoveries" as opposed to inventions an d are therefore not patentable. A practical application of a theory could, however, qualify for protection.

things that are, for policy reasons, not patentable. For example, methods of medical or surgical treatment are not patentable; neither a re illicit objects. Also, historically, business methods such as franchising arrangements, accounting methods, insurance schemes, tax loopholes, and protocols for interacting with customer s have not been patentable.14 However, the

13 ~viO Vaver. Jnte.iJt'!Ctual P-1operty Lt1'.v Copynghts, Patents, Ti'tldem:vks, 2a ed {To1on10 ll\Yln Law. 20UJ at 314

14 Bustne1is•metht'>:1S paterd.s nave !X>eo ~...ed in 100 Uniled States. See SWe Sfreer Bank b 71-ust v Sgmrur~ Firarte1a.• OOLP.149 F f3o) 13681rec:1 C.11 1998) However, in. ~JlO, lhe U.S. Supreme Cour1JT'lad<?11 muchmo1~ difflCtJtl to obt.,insuch patenLS_ See in 1e 8.IJSk, 545 r 1111943, 88 USPO {2d) 1385 (Fed(:;, 2008) aff d sub romB»sX1v Jfd(:(JOS, 561 us 593.130 s Ct 3218. AJK:P.Co.pv a.s Bimk, No !3·298, ''P op.134 SCI 2347 tUSSC June 19. 2014).

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Canaclian Intellectual Property Office guidelines state that busjness methodsts are not automatically exclud ed from patent protection, and a number of busjness methods patents have been issued in Canada. The following case is the firs t legal d ecisjon in Canada upholcling the valiclity of a business methods patent.

Canada (Attorney General) v Amazon.com Inc, 2011 FCA 328, [2012) 2 FCR 459

BUSINESS CONTEXT: In both Canada and the United States, there has been much d ebate about the patentabilityof methods of conducting business.16 The following d ecision provid es some clarity on the law in Canada and brings it more in line with the law in the U ruted States. What is the d-Ownside to al/awing b11siness metlwds patents?

FACTUAL BACKGROUND. In 1 998, Amazon. com applied for a patent for an invention entitled "Method and system for placing a purchase order v ia a communications net - work." The invention is a system that allows a purchaser to reduce the number of inter- actions when ordering over the Internet. A purchaser can v is it a website, enter her user and payment information, and then be given an identifi er that can be stored as a cookie on her computer. On a subsequent visit to the website, a server will be able to recogruze the customer's computer with the identifying cookie and retrieve the user and payment information. By using this system, a customer could purchase an item with a single click of the mouse. The Canadian Intel- lectual Property Office rejected Amazon's "one-click" patent application on the basis that "a claimed invention whic h in form or in substance amounts to a business method is exclud ed from patentability" or alterna- tively, the claimed subject matter did not fall within the meaning of "art" in the Patent Act. Amazon.com appealed to the Federal Court.

LEGAL QUESTION: Is a busjness method patent- able?

RESOLU1TON: The Federal Court held that there is no authority in Canaclian law to exclude busj- ness methods from patentability. A busjness method can be patentable under appropriate circumstances. To be patentable, an invention must fall within one of the categories of art, pro- cess, machine, manufacture, or composjtion of matter. The category for busjness methods is "art." Relying on the Supreme Court of Canada's d ecision in Shell Oil Co v Commissioner of Pat- ents, 17 the court stated that to be a patentable art, the subject matter of the claim (a) must not be a disemboclied idea but have a method of practical application; (b) must be a new and inventive method of applying skill and knowl- ed ge; and (c) must have a commercially useful result. The court applied the test and held Amazon's one-click application to be patentable. The Commissjoner of Patents appealed.

The Federal Court of Appeal largely affirmed the lower court's legal analysjs. However, the Court granted the Commissjoner's appeal and ordered that the one-dick application be sent

15 Ca!lttd·a~ lntal5?c t1;aii P1ope1ly01riea M<J:1u<JI. Of Pt}teni O!f.eePrac1.1ce,al s 12.04. 02, onl100 -r.nu p://w·u.u c Po.ic.gc.caf eie/s It e,f c ipo lnl e1 oo I ·I nte 1 001 ope .n sf .'en.g/ll_ wr007 20 .hi ml>

16 Alan 1"1<'¥.:el<. ·cour1sVVres1te'J'ltth Sosiooss Methcd Patents". TheLa-..-¥?rs Weekly UOctobe• 2010) 13. 17 119821 2 SCR 536.11982! SCJ No 82.

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back to the Canadian Intellectual Property Offic e for re-evaluation. The court ruled that the lower court had insufficient evidence to determine whether the one-click application constitutes patentable subject matter.

CRITICAL ANALYSIS: This d ecision affi rms that there is no legal rationale for exclurung busi-

ness methods from patent protection. What is the impact of this decision on business sectors such as insurance, banking, financial services, and securities?

POSTSCRIPT: The Canaruan Intellectual Prop- erty Office ultimately allowed Amazon's patent application.

Requirements for Patentability Not all inventions, however wond erful, are patentable. A patent will be granted only for an invention that is new, useful, and unobvious.

New The invention must be new or novel. An invention need not be absolutely new, however. ta ! t is new if it has not been disclosed publicly. This means that any public rusclosure, public use, or sale of the invention prior to filing for a patent rend ers the invention old and unpatentable.19 For example, displaying the new prod uct at a trade show, rustributing marketing brochures that d escribe or rusplay the prod uct, or advertising the product in a way that reveals the invention20 is a disclosure and a bar to obtaining a patent.

There is, however, a one-yea r grace period . If the inventor or someone who derived knowledge from the inventor makes a rusdosurewithin the year precerung the filing of the application, this will not operate as public rusclosure.

Estelle needs to determ ine whether her new and improved method of pro- tecting electronic products from electrostatic discharge has been rusclosed to the public in some manner. She can have a patent agent search relevant literature so that an opinion can be forme d as to whether her invention is novel.

Useful An i nvention must solve some practical problem, and it must actually work- that is, it must do what it purports to d o. An invention that d oes not work is useless and unpatentable. The invention must have ind ustrial value, although it need not be commercially successful. The invention must have prac- tical use as opposed to being a mere scientific curiosity. For example, a perpetual motion machine21 lacks utility, as it d oes not have a practical use. Estelle's product meets the requirement o f usefu lness as it solves an identifi able industry problem and it apparently works.

Un obvious The third requirement relates to inventiveness. It means that there must be some ingenuity or inventive step involved in the invention.22 Changes to something that would be obvious to someone skilled in the art to which the

18 Supn1r'Y.)le13 al 320. 19 Also ot r<:k?vance to the iss\Je of noveUy are a:>ptKalons lor patents UM 1n otf¥!r count11es . CanOOa 1s a

signa101y to IX>tl\ the Pa1is Convention fo1 the Pro1ec110n of lndusl(at Prooerty and t~ Pat~nt Coope1atton T1eAty.An applican1, t!i lii""3 ina membercoon11y,canc\aim thlsd;,te il\Ot~1 coun11e-s so101'g as the corres;:iolld1ng appUcations are tledw1thino~yecu Th~ means LMt theeartier cat€ t:e:omes t!'K'! dlSdOsuie date for pu1pases of es~0Ush1ng no"teUy.

20 Rof\$.j Dimock., C:tt?tJditN: /vllNiletlng Lan tToronto RiCM1a OeBc'x), 1991) a1 3 .. 4 21 Supt;, not~ 13 at 340. 22 See Apoteic Inc v Sano! Synlhel/100 Canada Inc, 2008 SCC 61, !200BJ 3 SCR 265 (Or Ille test for °<.')!:>v1ousness.·

NEL 475

invention pertains would not be patentable. For example, simply using a different material for making a prod uct would not be patentable, as it d oes not involve an inventive step.

The test is difficult to apply in practice because it involves ascertaining the state of the art or knowledge prior to the invention and analyzing whether the invention was merely the obvious next step in the state of the knowledge or instead involves an inventive step.

The question of whether Estelle's new method is unobvious can be answered only by asking someone knowledgeable in the field of electrostatic discharge (ESD) . The patent agent who sea rches the literature to deter mine whether an invention is novel will also express an opinion on whether the invention is obvious. That said, the ind ustry's problems with ESD are indicative that Estelle's invention is unobvious and involves an inventive step.

Patent Protection and Application Patent protection, unlike some other intellectual property rights, does not arise automatically. An application for a patent must be filed with the Canadian Intel- lectual Property Office.23 Timing o f the application is a critical concern because the patent regime is based on a first-to-fi le system. This means, for exa mple, that if more than one person has independ ently invented the same process, method, or machine, the Canadian Intellectual Property Offic e gives priority to the fi rst person to file the application.

The inventor is generally the first owner of the invention and thus the person entitled to apply for a paten t. The Patent Act d oes not contain specific provisions for the ownership of inventions created by employees in the course of employ- ment; generally, however, a n employee will be the owner unless (1) the employee was specifically hired to prod uce the invention and makes the invention in the course o f employment, o r (2) there is an express or implied agreement that pre- cludes the employee from claiming ownership of inventions relating to and devel- oped in the course of employment.24 As Estelle has not been employed to produce a method to protect electronic prod ucts, and as she invented the method on her own time, she is the "inventor" and entitled to apply for a patent. Assuming she has not signed an agreement to the contrary, she has no obligation to share the invention and its proceeds with her employer. Employers should consider whether employment contracts, as well as contracts with consultants, address the owner- ship o f all intellectual property including inventions prod uced in the course of employment.

The preparation of a patent application is a h ighly complex matter and is nor· mally done by a patent agent, who has particular expertise in this area. The appli- cation has two main parts. One part descr ibes how the prod uct is made or the best way to perfo rm the process or method; this is known as the specifications. The other part, known as the claims,15 is the sequentially nwubered, single-sentence d efiniti ons of the invention. This part in effect d efi nes the exclusive rights enjoyed by the patent holder. In short, the specifications tell the reader how to put the

23 The Canadian lnt0k?Ch.J.ti PropertyOtric~(s patent daUtb<:ls~can IX? accessed at <htto//wv ...... .1c.9c.ca /opie-cipc>Jcpc!leng/1ntroducti0n.htrrl.>

24 SuprtJ no1e 13 at 368 .. 69. 25 r.01 an .aipp1ooc!\ fo1 interpre11~ a:'l<J defif')1ng cbi~ 1n patenlS, see Free Vlorld Trusr v Oearo San:e Inc, 2000

SCC 66.120001 2 SCR 1024. Wlwlpool C<xpv M;,ytag Corp. 2000 SCC 6B. !2000] 2 SCR JU6. IMurlpool Corp v Cameo Inc. 2000 SCC 67, i2000] 2 SCR 1067

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Patent agent

A professional trained in patent law and practice who can a ss1st 1n the pre pa ration of a patent application.

Specifications The descnpt1 on of an in ven ti on contained in a patent

Claims

The exclusive rights of the patent holder

invention into practice after the patent expires. The claims tell the reader what he cannot do prior to the expiry o f the patent.

The application is examined26 by the Canadian Intellectual Property Offic e to ensure that the invention has not already been invented and that the application complies with the Patent Act. If the a pplication is successful, a patent is issued upon the payment of the required fee. The word "patented" and the patent number may be put on all manufa ctured goods. Marking is not mandatory, but it is legally useful, as it notifi es others of the existence of a r ight and reduces the number of innocent infri ngers. Often manufac turers will put the term "patent pending" or "patent applied for " on their products before the patent is issued. This warns others that a patent may eventually be issued for these products and they could be liable to pay damages for infringingthe patent once the patent is granted. A patent gives the inventor the right to exclud e others from maki ng, selling, or using the inven- tion to which the patent relates for a period of 20years from the date of fili ng the application so long as the a ppropriate maintenance fees27 are paid.

Patents are national in nature in that they exist only in the country in whk h the applications are made and granted."' The r ights under a Canadian patent d o not apply elsewhere. For example, an owner of a Canadian patent cannot stop the use or sale of the invention in the United States, unless the owner also has a U.S. patent.

Estelle's method of weaving static protection into the fibre of paper q ualifies for patent protection if the method is considered to be new, useful, and unob- vious. If it is patentable, she will need to apply for a patent and pay the requisite fee. The patent process requires her to disclose her discovery to the world ( disclo- sure is d iscussed in the case below); in return, she receives a monopoly over the invention for 20 years. The patent process is costly a nd time consuming,29 so Estelle needs to evaluate the costs and benefits of pursuing this route.

Teva Canada Ltd v Pfizer Canada Inc, 2012 sec 60 , [2012) 3 SCR 625 BUSINESS CONTEXT: A phar maceutical com- pany can make millions of d ollars per year from a single patented d rug. It is not sur prising that competitors, in an effort to enter the lucrative d rug market, challenge the validity of d rug patents.

FACTUAL BACKGROUND: Teva Canada wanted to market a generic version o f the d rug

Viagra. In response, Pfizer, the owner o f the Viagra patent, commenced an action called a Patented Medicines Notice of Compliance, which stopped Teva from receiving approval to market generic Viagra until a court assessed the validity of the patent. In the lawsuit , Teva alleged, among other claims, that P fi zer 's Viagra patent was invalid fo r insuffici ency of disclosure. The PatentAct req uires that a patent must correctly and fu lly describe the invention and its operation or use.

26 Supt a note 10, s 35{1). An apptiCatiOn fo1 a oatel'IL is 001 autofnaucalyextJmin.cd. The apptieant !'nJSl spec11icany request l M t an e~m10A1ion be do!le. ~~uasts must ba made w1th1n I eve yeais o r fling t he app(icat:ol\ or tne app{1cati0!lwl be deemed abaooooed The deUry fo1 1eque!.tin9 an ex3minatong 1..es t'le applicant a ;::-erod of time to test the rM1k.e t for the inver11i0n

27 Annual' maintenance fee-s vary depen<Hng on ro-.u bttg a patent Ms been isStJed and v1!la tne1 l~ llo\Oer o f the pa1en1 Isa Srr'0tor~19e enrny Tile amount paid by 3\.:lrgeenlily Is \JS!.1"4tydouble t hal ~id bya small C"lil ilY

28 TOOri.'! rS nO such Lh1ng as an 1n1e1MtiOf\aol pa1i!!nt. l r.1e1MtiOf\At 1tea11es, ho\Yave•~ t\av€:! s;moUied I lle procedures 101 obt.,in1ng ;>atenLS in d1U~1en1 count 1ies

29 The av~1age time 10 Obl.')1n a patenl is abOut six ar'ld a hall years. SeE! ~CM1d S1oobe, ·How LO!lg Ck>es ll Tak.<.'! to Gel a P()t(!ntr FiSd UP t21 Now1nbe1 20161 online MOnd3.1 <h1tp//v1\¥...-.mondaa.com/ c<ilnada/x/S4S916/Pa1ent/How +Lo~+ Cbes +II+ Taite+ To+Gel +A+ Patent >.

477 NEL

LEGAL QUESTION: Did Pfizer disclose its inven- tion sufficiently in the patent?

RESOLUTION: Pfizer's patent indicated that four broad groups of compounds and an especia lly pre ferred group of compounds that included the compound sildenafil were effective in the treatment of erectile dysfunction. The Court, however, in examining Pfizer's actual work, found that Pfizer had only conducted tests that demonstrated that sildenafil was effecti ve. None of the other compounds ha d been shown to be effective. The specifications in the patent, however, failed to indicate that sildenafil was the effecti ve compound. The skilled person, having only the specifications, cou ld not put the invention into practice without doing further research to determine the e ffective ingredient. The Court held that the patent fai led to meet the disclosure requirements of the Patent Act and was invalid. In reaching its conclusion, the court provid ed a warning to patentees to make full disclosure, " .. . Pfizer gained a benefi t from the Act- exclusive monopoly rights -

What is dte effect on the patent holder when a patent is formdto be invalid?

while withholding disclosure in spite of its disclosure obligations under the Act. As a matter of polic y and sound statutory interpretation, patentees cannot be allowed to 'game' the system in this way."

CRITICAL ANALYSIS: What is the likely impact of this d ecision on future patent applications? Why is full disclosure so important in patents? What is the likely impact of th.is decision on patent-dominated industries?

Industrial Designs The Industrial Design Act3" provid es protection for the appearance of mass- produced (i.e., numbering more than SO) useful articles or objects."

Industrial Designs Defined The term industrial design is not d efined in the Act. An industrial d esign is usually taken to mean a feature of shape, configuration, pattern, or ornament, or any combination of tl1ese, that in a fini shed article appeals to and is judged solely by the eye.31 Put another way, an industrial d esign protects the shapes or ornamental aspects of a product but does not protect features that are dictated solely by function. Features that have botll a useful and a visually appealing aspect are protectable.33

30 RSC J98S. c 1.g_ 31 WorkS 1hat quat fyas iodus1ri<t. desigf\S may a\s-:'.) quaHy to1 p1otecti0!l under 1ne Copynght Act To addr~ss Ille

ow•tap, copynghL protoct:on iS nol 9rven 10 designs appted to i.sefut a11c\es tMt are prOducec! in <:;uant1ue-s of more 11\an 50. ~e Copyilghl Acr, RSC 1985, c C·42, s 64t2)

32 On: 16 .).:)nua1y 201'7. t'le Canaciia!\ ll'\tctt.t?ctuat P1operty Ofriee :ndi.cated IMt cotC1U1 may fo1m p.lrt of 1he comt>inatiOnof f~atures tMtco!'t$t1tol'2 ade>ign. S<'!e: ·cM~es 100fft:i'! Practci'!s-lndustriclt Oes;gn· CIPO 115 J,;,nua1y 20111 on11t\C'! <ht 1psJ/v1v1<N.iC.9c.ca/e'!C !s11e/cipo1n1e1oot~in1aroo1op1c. nsf/eng/v;i0419lht"nt>

33 Zero Sp/JI Systems/Inf~ Inc. v HeKie. 20JS rCA US. 130 CPR 14th) 29L

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In dust rial desig n

The visual features of shape. configuration. pattern. ornamentation. or any combination of these applied to a frnrshed article of manufacture.

n T

What feat1wes of consumer goods maybe protected by ind"strial design legislation?

Typical examples of industrial d esigns are the shape and ornamentations applied to toys, vehlcles, furruture, and household utensils, and the patterns applied to wallpaper or fabric. Also, computer keyboards, cell phones, computer interfaces, electroruc or computer-generated icons, and computer-generated aru- mated designs may be registered as industrial designs.34

Requirements for Registration To be registered, an industrial design must be original and novel. The originality standard is lower than the standard of inventiveness found in patents. A high d egree of ingenuity or creativity is not necessary. That said, an industrial d esign must be substantially different from prior art, be more than a simple variation, and contain some spark of inspiration.35

An industrial d esign must be novel. Disclosure or use of the industrial d esign or of articles displaying, bearing, or embodying the industrial d esign is a bar to registration unless it was within the year prior to filing the application.

Registration Process and Protection As with patents, industrial design protection does not arise automatically. An application, usually drafted by a patent agent, must be submitted to the Canadian Intellectual Property Offic e.

The owner of the rights in the design is entitled to make the application. The d esigner is the owner unless the d esign was ord ered and paid for by another. The application normally consists of a written description and a graphic d epiction, photograph, or drawing. If the application meets tl1e requirements of tl1e Act, a certificate of registration will be issued.

The registration gives the owner the exclusive right to make, import, or sell any article in respect to which the d esign is registered. Also, the owner of the design can stop competitors from manufacturing and selling a design that looks confus- ingly similar. An industrial design registration lasts for 10 years.

It is not mandatory to mark the design to indicate that it is registered; however, d oing so will enhance the owner's rights in a successful infringement action. If the product is marked, a court may award monetary damages for infringement.

34 Supra no1e 32 35 Bodum US.0. VI<. v /;udeau Cor!XJn>IK>n. 2012 FC ll28. i2013J 3 rCR 372.

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If there is no marking, the court is limited to awarding an injunction. The proper marking is a capital D inside a circle(<!)), set next to the name of the design owner.

Trademarks Estelle's intellectual property also includes the name of her prod uct - Chargeless. Th is aspect of her intellectual property may qualify for protect ion under trademark law.

Trademark Defined A trademark36 is a word, symbol, d esign, or any combination of these used to distinguish a person's products or services from those of others. Its fu nction is to indicate the source or origin of the goods or services.

Theoretically, a trademark could be anything, but it is usually one o f the following:

a word (e.g., Exxon, Xerox, Lego, Billabong).

words (e.g., The Body Shop, The Pink Panther, Shake 'n Bake).

a slogan (e.g., ".Just d o it", "Mr. Christie, you make good cookies").

a design (e.g., McDonald's golden arches, Disney's cartoon characters).

a series of letters (e.g., ABC for a laundry d etergent, BMW for a car) .

nwubers (e.g., 6149 for lottery services, 900 service for telephone operations). a symbol (e.g., a series of Chinese characters, Nike's "swoosh").

a distinguishing guise (e.g., Coca-Cola bottle, Perrier bottle).

any combination of the above (e.g., the words "London Fog" with a depiction of Big Ben for a brand of clothing).

A colour is not registrable as a trademark, but colour37 (such as pink for insu- lation) may be claimed as part of a trad emark. Smells or od ours have not been registered as trademarks in Canad a; sounds, however, are registrable.38

Trade Names Closely related to trademarks are trade names, which also receive protection under trademark law. A trade name is the name under whk h a business is carried on and it may overlap with the business's trad emarks. For example, in the case of Apple, the company name "Apple Inc." is the same as the company's main trade- mark. In other cases, the trade name (i.e., Research in Mo tion Inc. until it changed its name to Blackberry Inc.) is completely different from the trademark (i. e., Blackberry). An important connection between the two is that the adoption of a trademark may prevent the use of an identical or similar trad e name, and vice versa- that is, the adoption of a trad e name can prevent the adoption o f a

36 In <>:1d11i0n to toe 1ypeof 1100emark used by a ousiness to iden11lygooOC1s or se1Viees. aoolher categoiy ol tra:k'?m.lrk. is too certifcatiOn ma1k. T his mark. ~usoo 10 1noiCate tMt a o•O::iuc101 Soe!Vici'! conforms toa pa11cular standard. F'o1 ex.am~. lhe WOC4rnarl( ts a ce1t1l lcalot\ mt.t1k used by the V/oo113.ureau ct Canada to iden11fy garments made from OtJre oov1 woe(. a~ the Ca~ian Standards AssociatiOn uses ·cs.~ Appr~d· 10 1ndic::t.t1e produClS ol a certain S!.a'\dard. Cert.fiCatiOn markS ate not owood tty producers: thus, they are not useo to d1Sl1ngutsh one p1oduce1 horn al\OllWf lnsteM. the ma•k. certifies li'\al a p10duCl m~ts a defit')eo sta"ldard.

3i Supt;J r.ote 13 at469. Thevatld1tyot 1E!gis1ernlQ smetsas aradE!matk.s iS uocen...,·n 38 See 'T1ado·Marlt Cons1s1in-;;1 of a Sourv.:r CIPO. 28 March 2012, al <htt;:>s'//v1v1...,.ic.9c.calec/s11e/cipoin1e1net

·inler~topc nsffeng/wr03"139.n1mt>

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Trademark

A word. symbol. design. or any combination of these used to di stingu 1sh a person's products or services from those of others.

Distinguishing guise

A sh<lping of wares or their con ta in er. or a mode of wrapping or packaging wares.

Trade name

The name under which a sole propriet orship. a partnership. or a corporation does business .

Domain n ame

The unique address of a website.

trademark. For example, if Estelle calls her business Chargeless, then her adoption of this as a trade name prevents others from using the na me or a similar one as a trad emark in the same line of business.

Common Law Trademarks Trad emarks may be registered or unregistered. If unregistered, they are o ften referred to as common law trad emarks. Whether registered or unreg- istered, trademarks receive protection und e r both the common law a n d the Trade -marks Act. 39

A common law trad emar k comes into existence when a business simply adopts and uses it. If Estelle starts using Chargeless to d escribe her prod uct , then she has a common law trad emark. Such a trademark is considered to be part o f the good will of a company, and rights attach to it in much the same manner as they do to registered trad emarks. Infri ngement o f the trad emark by a co mpetitor using the same or a similar trademark can be addressed through the tort o f p assing off.

The rights that attach to common law trademarks, however, tend to be more restrictive, and there are certai n ad vantages associated with registration. A common law trademark has r ights only in the geographic areas in which it has been used and in areas into which the reputation of the owner has spread . For example, Estelle can prevent others from using her trademark or a similar one only in the areas where her reputation is known. A registered trademark enjoys protection throughout the country. Registration is also advantageous in that it creates a presumption o f ownership and validity.

Trademarks and Domain Names A domain name is essentially a n Internet address. It consists of two or more elements divid ed into a hierarchi cal field separated by a "dot." To the r ight of the d ot is a n abbreviation describing the root identifier or a top-level d omain (TLD). A TLD is ei ther generic (such as .com, .org, or .net) or country-specific (such as .ca for Canad a or .uk for the United Kingd om). To the left of the dot is the second -level d omain, which is usually a business name, trad emark, or other identifi er. For example, in Nelson.com, ".com " i s the T LD and "Nelson" is the second -level d omain.

Domain names are controlled by various organizations that act as registrars. Generic d omain names such as .com, .org, .net, and .biz are controlled by the Internet Corporation fo r Assigned Names and Numbers (!CANN) , a U.S. non- profit corporation.40 The country-specific domain names are assigned by national authorities. For example, in Canada, the Canadian Internet Registration Authority (CI RA)" is responsible for maintain ing Canada's Internet domain names. The registrars issue names for a fee on a first-come, first-served basis.

Domain names come into conflict with trademarks when a domain n ame is issued that includ es another's trad emark. Sometime this occurs when two par- ties both have a legitimate interest in the t rad emark. For exa mple, businesses such as Imperial Tobacco, Imperial Oil, and Imperial Margarine would all have a legitimate interest in a d omain name containing "Imperial." These disputes

39 RSCJ9SS.cT·l3. 40 r.01 mo1e into1ma1i0n, see <l\t10//w\YV1.icann.org>.O~r 1300 rttNI 1op·~vi'!tdoma!I\ na~so1 ·:ra1i!\9s· are or

w41 be av<iilai.'.l6e 10 t~ ocxt le<w y-aars. £.xam~s of recen1 addctons ()1(! .hOlets, daU), .lood, and .N1T. 41 ro1 more informato n.. soo <hllp //wWN.ci1tl.ca>

NEL 481

can be settled through litigation using the general law on the ad option and use o f trad emarks. Often, however, domain names are registered for illegitimate purposes, such as for the purpose of selling them to the trad emark owners, or as a means o f advertising the registrant's own services or products, or to redi- rect traffic to the registrant's own website, or to prevent the trad emark owners from using them. These activities are generally known as cyber- squatting. In such cases, a complainant may negotiate the purchase of the domain name, institute court proceedings for trad emark infringement, or use the dispute resolution procedures set up by the domain name provid er. Both ICANN41 and C!RA43 provide a quick and cheap dispute resolution system to deal with bad - faith registration. To be successful, a complainant must prove that the domain name is identical or confusingly s imilar to the complainant's trademark, that the registrant has no legitimate interest in the domain name, and that the name is being used in bad faith by the registrant.44 If the complainant is suc- cessful, the registrar can cancel the domain registration or transfer it to the trad emark owner.

Requirements for Registration To register a trad emark, an applicant must demonstrate that he has title to the trademark (this requirement is sometimes simply referred to as use), that the trademark is distinctive or capable of becoming distinctive, and that the trade- mark is registrable.

Title An applicant may register only a trademark that he owns. Ownership or title is not established by inventing or selecting a mark. It comes from

use of the trad emark.

filing an application to register a proposed trademark.

making it known in Canada.

A trademark is d eemed to be in use in Canada if the trademark is on the good s or tl1e packaging at the time of any transfer in the ordinary course of business. With respect to services, a trademark is deemed to be in use if it is used or dis- played in the performance or advertising of the services.

A trademark can be registered if it is not yet in use, as long as the registrant proposes to use it as a trademark in Canada and actual use commences prior to the grant of registration. Estelle may make an application to register "Chargeless" on this basis.

An application to register can be made on the basis that the mark, although not in use in Canada, is nonetheless well known in Canada. An applicant would need to demonstrate iliat the mark is, in fact, well known in Canada, that knowl- edge of the mark arose from advertisements that circulated in Canada, and that the applicant used the mark in another country.45

The following box indicates that several aspects of trad emark law are about to change, most notably, the use requirement.

42 The di$pul1"! rcsdutiOn poucy isavai\S>bfea1 ..::l\ttps//w,v"'·icann.org/r<!S001~t.,/pages/pd.Cy 2012..()2·2S·en> 43 Tn.a diSpute 1esdullon po(1cy 1s ava;1abhl (")l <h11ps //c1ra.~/Ci1a·dOrn.')in•nal'l"Xl·disPoJle-1esott;t'orl*pC:itt:y> 44 Also. to succeed under lhe LIRA dispu1e resduto"' procedure. lM com~tMnt mus! satisfy a Cal\c)d~n

01.esence re(!ui•eme'.ll. 45 Tn.a lo1e19ncoun1iy must Mvl.! be\:!nacounlly 1ho'l1 1sa membe1 or the Paris Conv121\tono1 the Wooto liMe

Or9an1zalion

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Cyber-squatting

The bad-faith practice of registering trademarks or trade names of others as domain names for the purpose of selling the do ma in name to the rightful owner or preventing the rightful owner from obtaining the domain name.

BUSINESS AND LEGISLATION

AMENDMENTS TO THE TRADE-MARKS ACT

On June 1 9, 201 4, the fed eral government passed the Economic Action Plan 2014Act, No 1.46

Buried in the 350 plus pages of the Act are amendments to the Trade-marks Act. Among the amendments47 are the following:

the name of the Act is changed from Trade-marks Act to Trademarks Act.

the d efi nition of trad emark is expanded to includ e, among other things, a hologram, a moving image, a sound , a scent, a taste, and a texture.

the term of protection for new registra- tions is reduced from 15 to 10 years.

the registration req uirements no longer require applicants to provide a declaration of use or a d ate o f proposed use.

The last change is the most controversial. Rather than making the use of a trademark an essential condition for the creation of enforce- able trademark rights, registration alone creates an enforceable right. The elimination of use as a req uirement for registration is a fund amental d eparture from Canada's trademark system. The amendments will still allow a trademark to be attacked on the basis of non-use, but only three years after registration.

Critical Analysis: By do ing away with the use req uirements, the an1end ments may simplify the process of trademark registration. What are d1e concerns with tl1e changes to use?

Source: A~Lonio Tu1co & Shet.lon Bu1snt~:n. ·ru~~ment.lt CMnge to Trade-. Mark l aw Opoosed by Sus!ooss aOO TradQ· Mark PfOles• sionat!i", IP O.t,goode (13 .Al~ 2014). ontine <h1tps·//v1,,1w.;oosgoode ca/2014/06/lund~~n~\.cMnge 104tra::le·ma111.·~\"'•ooposE?d•by •bus1ness-and•1rooe-.nar1t•professrooals/>.

Distinctiveness The second general requirement goes to the heart of trad emark law. The mark must be distinctive-in otherwords, itmustactually distinguish the good s or services in association with which it is used. Invented word s like "Lego", "Exxon", and "Kod ak" are ideal candidates as they are inherently distinctive. Other, more descriptive words- such as "pleasant", "sudsy", and "shiny"- do not have the same quality of distinctiveness. They may gain this quality only through use in business and ad vertising.

Registrability The Trade -marks Act specifies that a mark must be "registrable." To be registrable, the trademark must not be

primarily the name or surname of an individual who is living or has died within the preceding 30 years (e.g., "Smith" or "Joe Enman").

d escriptive48 of the character or quality of the wares or services, or their place of origin (e.g., "sweet" for apples, "Ontario wines" for wines from Ontario, or "shredded wheat" for cereal49).

d eceptively m isd escriptive of the character or quality o f the wares or services, or their place of origin {e.g., "sugar sweet" for candy that is artificially sweetened , or "all-silk" for a cotton blouse).

46 SC 2014 c 20. 4 7 Theam.-?ndmen1sa1e not in. force al the 1!me otwnting but a1e ex~ted to be in torce in~lfy 20J9. 4B No t<? thaldescuptivev.Qrds canoe usoo tss pa1lof a l ra::Jema1k. sokir.g as thetu:ciieant il\dudes adiSdaimE!1

indlC<->llf')Q that ha does no1 C\a;ff; exdusi...e nghts 10 the descnptive words 49 CaniJd:an Shr<dded Whe>t Co Lid v Kellogg Co Of Canada Lid. U938] 2 DLR 145. !19381 1 CR 618 fPCJ.

NEL 483

the name in any language of any ware or service in connection 'With which it is used or proposed to be used (e.g., "avfon" for airplanes, "wurst" for sausages).

confusing with regard to another registered trademark (e.g., "Mego" for children's plastic building blocks; "Devi on" for hair care products) .

an official'° or prohibited" mark .

Estelle's product name "Chargeless" may be registrable depending on the above fac tors. Although another business is using "charge less" in its slogan, this would not prevent the registration of Estelle's name, as "charge less" is not being used as a trademark, and it is being used in an entirely different busin ess. A key concern, however, will be whether the same or a sim ilar trademark has been registered in the same industry and whether the mark is considered suf- fici ently distinctive.

Diageo Canada Inc. v Heaven Hill Distilleries et al, 2017 FC 571, [2017) FCJ No598

THE BUSINESS CONTEXT: The sale of alcoholic beverages is big business and companies spend significant dollar s protecting their brands 52

and market share. Diageo Canada Inc. ( Diageo) - the Canadian subs idiar y of London-based Diageo pie, one of the world's largest producers of alcoholic beverages- sells several varieties of CAPTAIN MORGAN , Canada's best-selling rum. Diageo spends approximately $1 7 million per year advertising CA PTAIN MORGAN rum, and sales in Canada are over $300 million per year, representing over 30% of the Canadian rum market. It is not therefore surprising that Diageo moved aggressively to prevent disruption to the value of its brand by the intrusion of a competitor into the Canadian market.

FACTUAL BACKGROUND: Diageo sells all vari- eties of its rum under the brand, CA PTAIN MORGAN, which features a nautical theme and a fancifu l depiction of the seventeenth century privateer, Sir Henry Morgan. Diageo owns 1 0 Canadian trademark registrations covering various d ep ictions of Sir Henry Morgan.

Heaven Hills, the seventh largest alcohol sup- plier in the world, is a family-owned American company that sells rum products among other alcoholic beverages. Its fi ve varieties of rum sold in Canada under the ADMIRAL NELSON brand also have a nautical theme and feature a fanciful depiction of the eighteenth century British naval officer, Vice Admiral Horatio Lord Nelson.

After Diageo learned of Heaven Hills's sale of rum products to Canadian retailers, it sued for passing off, 53 infringement of registered trademarks, and the depreciation of goodwill.

S() Pubticautho11t,es have Iha n~lll toadoo1anolt1Cia! ma1k.ttnd u~ tMl 1ra1k. v11lll 1espec110 t!la 11 v1a1es 01

s~rvices. roreMm~. loo Oftic:~ ls\clnd S101e 1s a'l offic::at rn.l1k or Gateway Vl~'= Devek>pmen1 Inc. of Prioce Ed\Y~td l st~nd

51 Proh:b tcd ma•lc.s 11X:lldtl rnarit.S that ar(! t1k(!t1 to be mi.Sl()k.en 101 symbds 01 (!mi:Jliems ol govcrn!'nent, royally,

a1!'000 rorces. O! 11"'..e Royal Cttnad~rt Mounted Potiei'!, I.he? Red Cross. t he Rea C1<!!.Cen1, 01 tl')e U nited ""'ions. fta;is <'!Ind fy!'f'lbcis of otne1 coontries, and symbds cf pu~ic inshl!.JtiOns. Also p1ohlb1led aie sca~.1fous, 1mmo1al afl('l ob.scene words, and anylhing that sug9asts a conrK?ClOn \Yilh a trvi~ 01 1ecenttyd~ceas<:d 1l'K'Hvidua!

52 The 1e1m br.ff1d isch~n used in1erchangea0ity \V1t h 1r.tdemwk, t'lul a ~r~OO iS usuatfy toe Mme LMt a buSiMSS chOose-s toi its goods or servces, v1h1le a lraderra1k. is a ma1k.1Symb:')t Mme. desqn. (!IC) used to dlSl·nQutSh tne source of goods or servle<!s

53 Passing elf is atso diSCtJSsed ,n CMpter 12. f\blt'! t!\al there is a paiss1ng 011 action bOthat common t.w1 andunde1 the Trllde--marksAct Tha dtflereoce is that, to p1oceoo urv.:101 the Act, tile plAintift 1ni;s1 prcvG possess,on of a vatld and ento1ceab4e, 1eg stt?red 01 ume9is1e1ed 11aoemark.

Nfl

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TlllJ LEGAL QUBSTION(S). Has Heaven Hills passed off its rum products as the goods of Diageo? Has Heaven Hills infringed Diageo's registered trademarks? Has Heaven Hills depre- dat.ed the value of the goodwill associated with Diageo 's trademarks?

RE OLUT 0 The Court held that Heaven Hills had passed off its ADMIRAL NELSON rum products as those of Diageo's CAPTAIN MORGAN. The Court determined the unreg· istered trade dress or "get up" (the overall visual appearance of the goods) associated with the CAPTAIN MORGAN rum products constituted a valid and enforceable common law trademark. The three components of pass ing off were proven: (1) Diageo had sig· ruficant goodwill (a positive association that draws consumers) in the CAPTA IN MORGAN brand. This was established by reference to the sales of CAPTACN MORGAN rum products and the extens ive amount of money spent on marketing and promotion efforts; (2) Heaven Hills deceived the public by directing atten· tion to ADMIRAL NELSON rum products in such a way as to cause or likely to cause confusion with the CAPTAIN MORGAN brand. Confusion occurs if the use of both trademarks would lead to the conclusion that the goods came from the same source. The test is whether the average or ordinary con· sumer somewhat in a hurry would likely be confused. Evidence of source confusion was established by surveys conducted by experts; and (3) as a result, Diageo could potentially sustain damage.

The Court also held that Heavens Hills's use of its ADMIRAL NELSON'S trademarks in association with rum products infringed Diageo's registered trademarks. The resem· blance between the ADMIRAL NELSON character and the CAPTAIN MORGAN char· acter is significant and is likely to cause confusion between ADMIRAL NELSON rum produ cts and nine of Diageo's registered trademarks.

Finally, the court held that although Heaven Hills had not actually used any of Diageo's

485

Is the casual or ordinary purchaser of rum prod11(tslikely to/M confused os to the souruof ADMIRAL NELSON rum? Why or why not?

trademarks, use of the ADMIRAL NELSON trademarks is likely to depreciate the value of the goodwill associated with Diageo's trade· marks. This was particularly the case as some of the ADMIRAL NELSON products exhibited quality control issues.

The Court awarded Diageo damages or profits and costs and permanently enjoined Heaven Hills from using the ADMIRAL NELSON character or trade dress in Canada. It also ordered the destruction of all ADMIRAL NELSON bottles, materials, packages, labels, and advertising material in Canada.

CRITICAL ANALYSIS: This case illustrates the protection provided by the law to registered and unregistered trademarks. What is the justification for protection of trademarks? Does the protection of trademarks st ifl e competition?

NEL

Registration Process and Protection The fi rst person who uses or makes a trad emark known in Canad a is entitled to trademark registration. In the absence of use, the first to file a trademark appli- cation is entitled to registration.54

Prior to applying for registration, a trademark agent usually does a search o f the trad emarks offic e database'" to ensure that the trademark or a similar one is not already registered. Federal and provincial business name registries and other sources such as trad e journals, telephone directories, and specialty magazines are also consulted to detenmne whether there are common law rights.

The application must complywitl1 all the provisions of the Act, including the provi- sion ofa comprehensive list of products or services associated with the trademark. An examiner reviews the application, and if it is acceptable the trademarks office adver· tises the trademark in the trademark journal. Any interested members of the public can object to the registration on the grounds that they have a better title to the trade- mark than the applicant, that the trademarl< is not distinctive, or that the trademarl< d oes not meet the requirements of registrability. If there is no opposition or the oppo- sition is overcome, the registration will be issued on payment of the appropriate fee.

A trademark registration g ives the owner the exclusive right to use the trademarl< in association with the goods and services specified in the registration. It also provides a right to p revent others from using a confusingly similar trademark. A trademark owner should clearly indicate its ownership of a trad emark with the following marl<s:

., for registered trad emarks.

no for unregistered trad emarks.

Registration provides protection across Canada for a period of 1 5 years.56 The registration can be renewed for additional 1 5-year terms as long as the renewal fee is paid and the trad emark continues in use.

ETHICAL CONSIDERATIONS

OFFENSIVE NAMES IN SPORTS

Sports teams almost always have a name. Most often the name represents the team's identity, reflects a geographic locale, or imputes attributes of skill and strength.57 Some names are o ffensive to some groups and individuals, however, as the

names embod y a racial or ethnic slur, disrespect or mock Indigenous people, or amount to cultural appropriation. 58 Consider tl1e following: Cleveland Indians, Kansas City Chiefs, Washington Redskins, Atlanta Braves, Chicago Blackhawks,and Ed monton Eskimos.

54 Ca'l.)ja is a signalory to the Part$ Conwn1:on. wh!Ch means 1001 aootc:m1s hom m~mbe1 coun1ries have 1oc1p1oca1 r9hLs v1:th 1~pec1 to n:ng in mnmbe1 coun11 ies. Tile date of u;ng in a convenlion COtH"lilry oocomes tne Canaoian f:l1~ data so ton-;j as 100 C..aM11anapp1catK>n iS noo ,.,.11nin stx. rnont~ of 100 <.!at<! or Ille f11sl U:u')Q 1n a COrwE!nlioncounlrf

55 Tile C.a1·a:hln lnt~lectuat PropertyOlf,afs 11.xiem.:irk da(.t)baS~ c<;in. 00 occes~d a1 <hi tps.-//v1vm.1c.9c ca/ app/o pie~ iPo /trd m rk.s !srch /ho:ne ?&a ng =o f)Q >.

56 Supra no1e 39, s 46UJ Too Ii~ 00110d tS expec1ed Lo change to 10 yeafS in 2019. 51 Ami1<lh HMLI'\ "The Gendered La~uag~ ol Soorts Te<'lms Na11es aoo Logos·. The Pennsyi\enia State

U nwersily, On(ine <~Up//lorms.gf.le!SCh.psu,edu/dtve•sily/mc!\alidmcMir _JH\t201L'fik?s/1-ie;,1h.pdf> 58 Cuttur~ ~opiopr!t':llJOtt 1s r.ol ttltut{?d to coocern over offi:!osive names iospo11. There are ma'\y ex.lrnplies in

~siooss lpart1cuta1ty 1ne f~hon atKI !T'l\JsiC: iodust1ies) a'ld ii\ 1he ar1 v1orSd of 1napprop1iate uSf:! ol Indigenous symbOls, SO!')QS, aOO images. $~e, 101 Q.YJ)m~, Andre~ Hu near, 'App1op1i~t•:>n ii\ Ail Indigenous Koock-Olfs ror S<*-:> al NalOM1 ($0E!r$ Gathe1ing Spaiks Outrage· CBC News ll5 Semem~r 2017), oriu~ <http llvr<1r<11 cbcc.a/ne\"1S/canada/OOmon1on/indi~nous·a1t·edmonton-0Jlturat-appropflator)ol.4291257>

Nfl

4 86

Since the 1960s, Native American" activists have been fighting to force the Washington Redski ns football team to change its name (many conside r this name to be the worst racial slur in the world of professional sports).60 In 2014, the United States Patent and Trademark Offic e (USPTO) cancelled six trad emarks registered by the team on the basis that the trademarks "dis- parage" Native Americans . ., An appeal from this d ecision was put on hold pending the decision of the United States Supreme Court in Mata/ v Tam.62 In that case, an Asian American rock group appealed a d ecision of the USPTO denying regis- tration of its nan1e- the Slants- because it was disparaging of Asian Americans. The Supreme Court unanimously ruled that the refu sal to reg- ister disparaging trad emarks violates the fr ee speech clause of the First Amendment of the U.S. Constitution. Justice Alito wrote, "Speech that d emeans on the basis of race, ethnicity, gend er, religion, age, disability, or any other similar ground is hatefu l; but the proudest boast of our free speech jurisprudence is that we protect the freed om to express 'the thought that we hate.'"63

Simon Tam, the founder of the band, said that the point of d1e band's name is not to disparage but is "an attempt to reclaim a slur and use it as

a badge of prid e ... it's been about the rights of all marginalized communities to determine what's best for ourselves.64

Daniel Snyder, the owner of the Washington football tean1, stated in response to the decision, "I am THRILLED. Hail to the Redskins.''"' The team indicated that the decision vindicates its position and resolves the dispute with the government.

Native American groups opposing the na me said the ruling d oes not change the fact that the name "is a dictionary-defined racial slur.''66

In Canad a, there have been calls for tl1e Edmonton Eskimos football team to change its name. The word .&kimo is used to refer to the Indig- enous people of the northern circwupolar region. 67

Although some d o not object to the term,66 most Inuit in Canada consider it to be derogatory because it wa~ given by non-native colonizers and was pop- ularly nnderstood to mean "eaters of raw meat.""'

Justice Murray Sinclair, chair of Canad a's Truth and Reconciliation Commission, has stated that sports teams witl1 offensive names have no place in a country tryi ng to come to grips with racism in its past. "It's only Indigenous peoples' symbols that a re being utilized by sports teams. I don't think there is any cultural group that is subject to that anymore. People need to

59 The lerminoklgyos.?d by IMi9eoous ::.-eo~~ cf tneAmeriC<:is to describe themsehes and how they prefer to be 1<:l~ned LO by otnen. vanes Tn.a cott11t;onlyus<:d te11n 1n L!le Un.led S~tes to de!t'.:11be the descendants cl 1ne Originc#. peo~sol NorthArne11Ccl Is NatNeAme1iCa!'I

60 Jell G(tiY, ~f«:?dsk.ir\S. Tra:iema11t DecisK:l" ~ SymbotiC Vietory·, TheClbbe and /vl&il UB June 2014). onlioo <hltos l/be~.t!leybbmndma•.comlr~port~on-bus 1ness/lrv.:lustry•oewslrna•k.et 1~/ redsk i ns-11 ace rmr k •dee is 01')-<l• syrnbOfc •\l\cto1y/ ar1 c~ 192 27569/? !e I= hllP>

61 Sect en 2ta) of toe LMharn Act, IS USC sl052 010l\1b1ts the 1egiStr()tiO!\ or tra:iema1k.S thal may "dis~rage .. or bnng. into con1emot or disreput(! any ·pe1v.>ns, tN1rlg 01 df!ad •

62 582 us 12017) 63 Jb:d. Tn!S iS a ~uote ffom Justiee CUvcr w~ooel Hd!'l"les Jr ·s diSsent !o Ut'lf!ed S!a!es v Scrr.-ntrYnet, 279 US

644 U929J. a ca~ dt'.lnying c11t2<.'!nsh1p to a pacrist 64 Robert ~r~s.. ·.suoieme Cour1 ~ejecting Tradem<nltS Thal Oispa1a;ie· Others Vdates 1ne First Ameoomenr.

The Vla.~hington Post U9 Juoe 2017), onli()e <h1tps .'/wvN1.v.·ashi091onpos1.com.!pot:tiCs/cou1ts_tm~/ supremo<:ou1t•rejec1ng~l1adema1k.S·l~t-d1sparage-ot!lers·v.dates•lhe·hrst.-amendment/2017/00/J9/2&.3311a ·23b3·llE!?·alb3·1arf0034e2de_s101y.html?u1m_te1m=.M>242diE:!d)3c>

65 Sam H.aMrX'!l ".}JSliCes $¢ry- Lavi 01\0fte:\S'vE! T1a::lemark.s IS UOCO!'tSliltJllOMt". TheAssoch'JJ.ed Pt~SS 119 .)Joo 20171 onl10C PBS <i'tlPS//vN1w.pbsorg/newshou1/001on/JUSltts-~~w-oflensw~tradema•k.s-u!\COnstit.:llOM!>.

60 !bid. 67 In 1917,al the l irst 1ruilC:1cu:npo~1 Conrereoce, dete~tes hom the urtted States, Ca~a. a1'C'1 Gieeola:'l<f

~.iccted t he ustl or the IE!fr'n £.skKl'JO 10 desc111X! lnu I. Se<: The Can/Jdn'Nl Efl')<:k'.J(x?dli1, Onl10C <hllp //\Y\'l\"I 1he<.':anaidta!l(?OCydoped1a.calen/artc5e/esk;mof> {accessed 15 May 2017)

6B Ibid. 69 Tn.a or'9 Jrt of the v..010 iS con1enhous. AtthOugh u·.ou9ht to be an ObJ1bv1a v101d meanil\g ·e;,ters of ra,•1 m~l".

ot~r schCltars betieve ti Ms an lnnu·a1rnul\ origin and n-eal\S ·one v1h0 faces :S'l0v1Sh0es •

NEL 487

immoral." None of the words a re d efi ned in the Act or regulations, there has been very little judi- cial interpretation of them, and the Canadian Trad emarks Offic e has not always been consis- tent in its applicatio n of them.72 There i s also a question whether this provision of the Trade -

~ marks Act is in breach of freedom of expression v ;; gua ranteed by subsection 2(b) of the Canadian • ~ Charter of Rights and Freedoms. " For its part, the Edmonton football team has i no plans to change its name. The president and 15 chief executive officer, Len Rhod es, has stated, ~ "We are proud of our team's herit age. We always

Whywortlda reamcontinrtewithanametltatsomeamsideroo use our name within an aura of respect fo r all be offensive?

re-examine their behaviour- all aspects of their behaviour- the way they are doing business."70

Natan Obed, president of Inuit Tapirit Kanatami, the national Inuit organization, has stated, "If I was called an Eskimo or introd uced as an Eskimo by anyone else, I would be offended by that. It is some- thing that was accepted at one time but now just isn't. It's time forthe team to change its name.""

Whether the name Ed monton Eskimos could be successfully challenged on the basis of Canada's Trade-marks Act is unclear. The Act d oes not have a provision preventing disparaging trademarks. The closest is in section 9(1)Q), which prohibits trad emarks that are "scand alous, obscene or

members of our community. We d o n ot believe that we d o anything in a derogator y fashion as it relates to our name."73

Tanya Tagaq, an lnuk singer from Nunavut, h as tweeted that it would be "a glorious message" to the country if "@Ed montonEsks changed their name. It would set a new precedent of respect."74

Critical Analysis: Who d etermines whether a name is o ffensive? Should the Ed monton team change its name? Why or why not?

The authOrS qratefutl'y ackoov.<€dge the \ery hetptul comme1us on an eaT1E1 01af1 by lhe ldbw1ng scholars Or. Lariy CM1lrand A<:ooem<: 0 11ector ot 1he NalN~ Lavi C~nLre !Unive:s1ry er Saskatchev1anJ and Prcft5sorontm-.e from the ~ocuttyol Law al the Un1W!rS1Ly of Onawa, and ASSOCl<'lil(! Proressor Or. ~riGrabenol too Too Ro;'jers Sc:ooot of Bu sin.e:ss ~nagement.. Ryerson University

Copyright Estelle's intellectual property may also include promotional brochures, business plans, drawings, and other written material. All such works may q ualify for copyright protection.

10 Chin!<) Pux&ey. -Stop USi"Q Oflensive looigeoous Mascots il\SPorts,Justice Mun~$1ndar1 S<r1s· TheCt1nadian Press (15 Nov<'!mbe: 2015), Online The Star <hllps//wv.-..1.theS(t)r .com/news/ca~a/201Sfll/l5/s100·\4S1ng• oltensive·ind9e!Y.llJs·rnas<:oLc;·1~ports•.ftJSl!<:e-.n;i.Jrri!tf•S1nt\a1r-says.htll'i>

11 CBC N'.?v1!0, "(dmon1on Csk•mos M!JSI CMngi! Offensive N~rne . ll'ltJ t LeOOer Sa-1s· 12? NoV<:?mba1 2015). on(1ne <h.ltp//wvN1.Ctx::.Ca/ttev'IS/ca!'kY.Jaleamonton.ledmon1on-eskimos·fOOl~·Mme•c:Mng~l.3341456>.

72 The C.anadtan 1ia1t'Hna11ts Olri<:e has oo~cted to the re9~1rat011 ol "Lticky Bas!a1d· lor vOOka <.=?vt':I\ though l has granted ·rAT BASTARD· lor \ ... +ne. See .~x tv\lcPt-.erson.. "Nol Sucn<l Lucky ~slard· S<ls!Gatoon D1sti!e1yrights Feds Over ·sc<lnd~O.JS'Tra::Jemarl( Posrma'/ia News {11 December 201SJ. onl:ne. Nauor.a.• Post <hll;> //!\atOnatpcstcom/news/caM:ia/ OOl SUCh•<l'tLiClc.y·~~fd•saSkalOO!\•dlSllk'.?ry·ligiUS ledS•OVe1-scaodttouS•tr.OOel'l1t)1k.>

73 Ge11y M:'>dde;on.ge, "E:dmonton Eslc.imos ~n to Stick. With N<lrrie Daspile C.,.ls to Change 1r. Ea1Mnton Journi'll {24 August 2017J. ont; ne· <hllp //(:dmontoopurn.atcom/spcrLWlootbal/ctt,'earnonto11-esk.imosl (!drnonton-eslurnos·Mv<?-no•p\.ll\S·lO•CMnge-nan-e•S<JyS•ceop1esi0ent>

74 Pac" Simons. Time 10 Hra1 Tany~ Tagoo·s fsk.imos Chatlel'\ge·. f(J1nonton Jo/J1nf).' Ill A<.J9~JSl 2017), On1i~· nigh t 101 AtbOrla <h1tps ·//1ightl01a(berta.ca!v11on9•!0r•.,.be11.a/ ~.Jla·sirnons·time-oea1•tal\y<l·la9aqs.esk1mos-cha~nge/>.

Nfl

488

The rig ht to prevent others from copying or modifying certain works.

Does copyright applyt.o body art or t.att.oos?

Copyright is intended to provid e a right of exploitation to authors of certain works. As its name suggests, copyright is intended to prevent the copying of works. In other words, subject to certain exemptions, only the author (or the owner of the copyright) has the right to copy a work. Others are not entitled to copy the work unless they fall within one of the exemption categories or have the author's permission to make a copy. This "right to copy" or "copy- right" does not protect the author's underlying ideas or facts, how- ever. For example, no one has copyright in the life story of Ken Thomson or K.C . Imng, but once the story is written, copyright resides in the expression of the life story.

Copyright Defined Copyright applies to both traditional and non-traditional works. Copyright applies to every original literary, dramatic, musical, and artistic work, such as the following:

literary works- books, pamphlets, compilations, translations, and computer programs.

dramatic works- any piece for recitation, choreographic works, scenic arrangements, and cinematography productions such as plays, operas, mime, films, videos, and screenplays.

musical works- any comb ination of melody and harmony, including sheet music.

artistic work- paintings, drawings, maps, charts, plans, photographs, engravings, sculptures, works of artistic craftsmanship, and architectural works of art.

In essence, copyright extends to almost anything written, composed, drawn, or shaped. Items not protected include facts, names, slogans, short phrases, and most titles. The examples of works included in each category are non-exhaustive, which means the categories can encompass new technologies and new forms of expression . Copyright also applies to non-traditional works such as sound record- ings, performances , and broadcasts.76

There are many business examples of these various kinds of works. In fact, whole industries are founded on works of this nature, particularly the entertain- ment and publishing industries. Businesses that are not so directly affected still create many works that may attract copyright protection, such as advertising copy, photographs, manuals, memorandums, plans, sketches, and computer programs, to name a few co1U1Uon examples.

Requirements for Protection To attract copyright protection, a work must meet requirements of originality and fi xation.77 Originality means that the work must originate from the author, not be copied from another, and involve the exercise of skill and judgment. In CCH

75 RSC 1985. c C·42. 76 .Ibid. SS 1S. 18. 21 71 The nato~ry 1equi1e~en1 iS oo fe!\Q<!r "1t'?ry i!TlPorl.'.U'I. as Canad~ has im;::«:?men100 too Agtee"TienL on T1.00E? •

Re~1ed Aspects of l!lleUec tua! Pioporty 1~9hts tTRIPSJ. ThiS ag1(!e1mn1 metiins tM l \'\ft!Jaly11 very v•01k. ouat<t:es 101 p101ec: ti0f'\ re9ll1d!ess ol the au tl')o(s nat:onatity

NEL 489

Canadian Ltd v Law Sodety of Upper Canada,78 the Supreme Court of Canada held that the headnotes (a short summary of a case and key words) of a legal decision are original works; however, the edited version of a court d ecision is not original because it involves only minor changes and additions- a mere mechanical exer- cise too trivial to warrant copyright protection.

The requirement of fixation79 means that the work must be expressed in some fixed form, such as on paper or on disk . Works such as speeches, luncheon addresses, and interviews that do not exist in a fixed form do not attract copy- r ight. The fi xation requirement exists to separate unprotectable ideas from pro- tectable expression and to provid e a means of comparison for judging whether copyright has been infringed.

Registration Process and Protection Copyright protection arises automatically on the creation of a work. There is an optional registration process that has an evidentiary advantage in that registra- tion provides a presumption of ownership. The owner of a copyright may mark a work; however, there is no requirement to do so to enforce copyright in Canada. The mark can, however, enhance international protection of the work. The fol- lowing is the typical form of a copyright notice:

Under the Copyright Act, the author"° of a work is the copyright owner unless there is an agreement to the contrary. The major exception is for works created in the course of employment, in which case the employer is the owner. Copyright protection is generally for the life of the author or composer plus 50 years. 8 1

Rights under Copyright Copyright gives certain rights to the owner of the copyright (the rights may vary somewhat depending on the type of work). These rights include:

reproduction- the right to reproduce the work or a substantial part of it in any material form.

public perfi>rmance- the right to perform the work or a substantial part of it.

publication- the right, if the work is unpublished, to publish the work.

translation- the right to produce, reproduce, perform, or publish any translation of the work.

adaptation- the r ight to convert works into other formats (e.g., a book into a movie).

mechanical reproduction - the right to make sound recordings or cinematographic recordings.

dnematographic presentation- the right to reproduce, adapt, and publicly present the work by filming or videotaping.

78 2004 sec l l !2004J I SCR 339 79 Tile lixatiO!\ r(!qum.~mt?nl is ®cp1e>Sly found ii\ 1~Copyngn1 Aa ofiy ror d1amaL1C: vK>rk.s and compu1t?1

p1ograms The re~uirement in relatiOn to 01hE!1 vi01k..o; has de'-'!bped through 1hecommo""1w. 80 Copy•ighl lc)\v recognizes 1neconcep1or JOinl autlv.>rsh,p; oo .... eve1. con11iOution toa c10,iec1 does not in

a!\CI o r Lsetf creak~ )Oir'd authOrship. The P.lrt es must intend 10 be j01nl au1h0rs. Set'.! Neudorfv Neuvterk Produclions. !2000] 3 WNR 522. 71 BCLR i3d] 290 ~CJ.

81 ro1 pubfis""'d sound 1eco1a1n-;1sand a pe1!01rn~1 s ~fl01mances, the te1mof p1otcclion 1$ 70 years.5upta, note 75. s 23

Nfl

4 90

communication - the right to communicate the work to the public by telecom mum cation.

exhibition- the right to present in public, for purposes other than sale or hire, an artistic work."'

rental- the right to rent out sound recorrungs and computer programs.

authorization- the right to "authorize" any of the other r ights.

Copyright is infringed when anyone d oes, wHhout the consent of the owner, anything only the owner can d o. This includes, for example, copying all or a sub- stantial part of a work.

The q uestion of what is substantial is vexing. It is generally thought that sub- stantial has both a qualitative and a q uantitative aspect. The test seems to be whether the part that is taken is a key or rustinctive part.""

Cinar Corporation v Robi nson, 2013 sec 73, c2013J 3 scR 1168 BUSINESS CONTEXT: It is not uncommon for a new work such as an arumated television program aimed at children to be based on or inspired by a work in the public d omain . When two such works are created or prod uced, the issue of copyright infringement is likely to arise.

FACTUAL BACKGROUND: In 1 982, Claud e Robinson, an artist and cartoorust, prepared sketches, storyboards, scripts, synopses, and promotional material for a new children's tele- vision show titled Robinson Curiosity (Curiosity). He obtafoed copyright registration for his work in 1985. In an effort to find a prod ucer, he con- tacted a number of comparues indurung Cinar Corporation, a Montreal-based arumation com- pany. He was not successful. In 1995, a new tele- vision show titled Robinson Sucroe (Sucroi!) and produced by Cinar aired in Quebec. Robinson brought an action for copyright infringement.

Curiosity and Sucroi! were both inspired by the novel Robinson Crusoe written by Darnel Defoe in 1719. Both shows featured a protago- nist who wore a beard, glasses, and a straw hat and lived on a tropical island interacting with characters who shared common personality traits. There were, however, also differences.

Qaillle Robinson

The secondary characters in Curiosity were animals, whereas the secondary characters in Sucroe were mostly human and featured pirate villains. Also, the main personality trait of the protagorust in Curiosity was curiosity, whereas the protagonist in Sucroi! was not particu- larly curious.

82 Tnis 1igll1 does 001.appty 1ocl\aits . maps, ~nd ~ns 83 Supra no1e 13 at 1ss .. 1S6.

491 NEL

LEGAL QUESTION Had Cinar infringed Robinson's copyright in Robinson Curiosity by copying a substantial part of his work?

RESOLUTION. Under the Copyright Act, copying all or a substantial part of a work without the copyright owner's permission is prima facie copyright infringement. The court noted that a substantial part of a work is a "flexible notion" and "a matter of degree" and that substantially is measured by the quality rather than the quantity of the original work. Further, infringement is not confined to a lit- eral reproduction of a protected work but may also include non-literal copying. According to the court:

A substantial part of a work is not limited to the words on the page or the brushstrokes on the canvas. The Act protects authors against both literal and non -literal copying. so long as the copied material forms a substantial part of the infringed work. As the House of Lords put it . the "part" which is regarded as substantial can be a featu re or combination of featu res of the work. abstrac ted from it rathe r than form ing a discre te part (Tfhe o riginal elements in the plot of a play or novel may be a substantial

part. so that co~right may be infringed by a wori< which does not reproduce a single sen - tence of the original.

The court also confirmed that the proper approach to determining infringement was qual- itative and holistic, considering the cumulative effect of the copied features rather than dissecting the two works as a whole. Using this approach, the court held Cinar had "copied a numberoffeatures from Curiosity, including the visual appearance of the main protagonist, the personality traits of the main protagonist and the other characters, visual aspects of the setting, and recurringscenographic elements" and that "considered as a whole, the copied features constituted a substantial part of Robinson's work."

Robinson was awarded over $4 million, including $400 000 in non· pecun iary dam- ages for psychological harm and $500 000 in punitive damages. He was also awarded costs including trial costs o f $1.5 million.

CRITICAL AN ALYS IS: Do you think the compen· sation awarded Robinson was generous? What does this case say about access to justice?

It is also infringement for anyone to authorize doing anything that only the copyright owner is allowed to do. Authorization means to "sanction, approve and countenance."14 A person does not, however, authorize infringement by merely providing the means that could be used to infringe copyright. For example, the provision of photocopiers does not constitute authorization of the use of the copiers to infringe copyright, particularly in the case where the provider has little control over the user.

The enforcement of rights has been problematic, particularly the collection of fees and royalties for the use of copyrighted works. These problems have been addressed by provisions in the Copyright Act for the establishment o f collectives that negotiate agreements with users on royalties and use. For example, Access Copyright (The Canadian Copyright Licensing Agency, formerly known as Can- Copy) represents numerous publishers and authors and negotiates agreements with institutions such as universities, libraries, and copy shops, providing for the payment of royalties for photocopying from books. Similar collectives such as the Society of Composers, Authors and Music Publishers of Canada (SOCAN) operate in the music industry.

8 4 Suprll nolC' 78

NEL

492

Moral Rights Moral r ig hts

The author's rights to have work properly attributed and not pre Jud 1cially modified or associated with products.

The author of a work has what are known as moral r ights. Moral rights exist ind ependently of copyright and provid e authors with some control over how their works are used and exploited. Moral rights include the following:

• paternity. The author has the right to be associated with the work as its author by name or under a pseud onym and the right to remain anonymous if reasonable in the circumstances.

integrity. The author has the right to object to d ealings or uses of the work if they are prejudicial to the author's reputation or honour.

• association. The author has the right to object to the work being used in association with a product, service, cause, or institution.

Snow v The Eaton Centre Ltd (1982), 70 CPR (2d) 105, [1982) OJ No 3645 (Ont HC.)

THE BUSINESS CONTEXT: Many works that receive copyright protection are created for the purpose of making a profit through a sale. How- ever, the sale of a work does not extinguish all of the author's or creator's rights.

FACTUAL BACKGROUND : Michael Snow cre- ated a sc ulpture o f geese known as Flight Stop, wh ich was sold to the owners of the Eaton Centre in Toronto. In connection with a Christmas display, the Eaton Centre attached red r ibbons to the necks of the 60 geese forming the sculpture. Snow claimed that his naturalistic composition had been mad e to look ridiculous by the addit ion. In short, he alleged that his moral r ights in the sculpture had been infringed.

THE LEGAL QUESTION: Were the acts of the Eaton Centre a distortion or modification of Snow's work that would be prejudicial to his honour and reputation?

RESOLUTION: The court held that the ribbons distorted and modified Snow's work and that Snow's concern that this was prejudicial to his honour and reputation was reasonable in the circumstances. The Eaton Centre was required to remove the ribbons.

Michael Snows Flight S top

able to d o as it wants with the sculpture? Would the outcome have been the same if

CRITICAL ANALYSIS: Since tl1e Eaton Centre the sculpture had been sent to the d ump or paid for the sculpture, why should it not be otherwise destroyed?

493 NEL

Exemptions There are a large number of exceptions or d efences under the Copyright Act. Aside from specific exemptions for libraries, museums, archives, people with disabili- ties, and educational institutions, there are exemptions for copying for private purposes,85 combining or using copyrighted material to create a "mash-up",86 and making a back-up and an adaptation copy of computer software.87 In addition and most relevant to business is the fair dealing exemption. This exemption permits the copying of works for the purposes of private study, research, criticism, review, education, parod y, or satire. The test for fai r dealing involves a two-step analysis. First, the copying must be for one of the enumerated purposes. In CCH Canadian Ltd v Law Society of Upper Canada,"" the Supreme Court ruled that research must be given a large and liberal interpretation and not be limited to non-commercial or private research. Further, research is not limited to creative purposes but can includ e consumer r esearch for the purpose of purchasing goods or ser vices.•• Second, the d ealing must also be fair. In assessing whether the d ealing is f air, the followjng factors are considered:

the purposes of the dealing.

the character o f the d ealing.

the amount of the dealing.

alternatives to the dealing.

the nature of the work.

the effect o f the d ealing on the work.90

Confidential Business Information There is no specific statutory protection for confidential business information91

and therefore no statutor y d efinition for the term. Generally, however, the term refers to information that is used in a business or commercial context and is private or secret.

The general categories of business i nformation that is used or is capable of being used in business are:

strategic business information (e.g., customer lists, price lists, bookkeeping methods, presentation programs, advertising campaigns).

prod ucts (e.g., recipes, formulas).

SS H is nol an 1n.trin.gement of copy19hl 10 !eproduC<.'! a \ .. '.">fit 1n10 a~Lher fo1!'Mt Uor~t sh1fl!ng). to rep1oauce a v101k: lor f()ter fist i"-;'J 01 v1a•11ng fiime sn.fU!'\QL or to reproduce a work. for W-k.up ~Hpcses providea the sourca \Y01k. is not al\ 1nfi,~IOQ\•101k, tilt'! v..01k. v1as k<9atyob1airK'.!d toot boriov..edo1 1entec), and a Tecnnobg:cal Prolecto~ t«'le<'lg;re '"~snot circumvent~CI Supra note 75 ss 2922. 2923.

86 h 1$ oot a'\ infringement to c1e;,1econttuH by comb'ntf'Q and i.si~ copyrigtu matE!r;.ll to c1ea1e a ·1t1ashu;:i: of dips, 01 to add musiC to a per.SOM v idoo provided the ptupOse IS n0rrcorr1mcncia! the source lwhere 1Msonab4e) is m~n1oni'.ld. 1ne indiviouat beiiev{ld the source rrateri<at v1as non-inlringing, a!'ld t'lere v1<lS no su1>stan1iat ooverseetfect on the copy1't;ht hO!der"s ex;*>11.ati0n of his wor!(.. Su(>ltl oote 75, s 29.21.

87 In ood1l 10n to the b<x:k:op a!'Y.I adaptaliOn exemo11ott. the1e are provisions that soccify IMl C<} PY'fl9 a computes orogram is notaf\ inhi~em<?nl I 11 is 1oob1a1n info1mati0!l to ma*<.e 1101 another program 1nt~ropera~ .. 10 assess 1ne wtoorabitrly of 01 cor•ec t any seo.Hity ft.'.)\ ... in the com01Jte1 01 compu ter system. 01 10 temp.:>ra• t y use the cop-fas pa11 or a tochook>;Jrca1 process 10 ft)CUate au~ tMt rS n011nh1ng.ng. Suwa note 75, ss 30.61 30.62. 30.63

88 SufN" oote 78. 89 So:.e1y of Composets, Authors and Muse PubJ1Shers of Ct1n/Jda v Ben Can~a 2012 SCC 36, !20121 2 SCR 326. 90 The Supreme Court or CaMoa eodo1sed t~se f.x:torS 1n llJt-eaa (£ducauonJ v Canad,otJ.'l Copyffght LiCMSing

Agency /Access Copyr>ghtJ 2012 SCC 37, 120121 2 SCR 345. 91 TOO 1c11n ·11ade secre1· is at so sometimes usad citha1 intercMnget)bty v1 il h ·conf1denti.Y. !)o.JSi~ss inlo11naton·

or as a sut>s~t or ·confioentiat 1nfo1mati0n:The terms are used intercMnge<'lbfy 1n l hiS text

Nfl

494

Fair dealing

A defence to copyright infringement that permits the copying of works for pa rtl cular purposes.

Confidential business Information

lnforma tlon that provides a business advantage as a resul t of the fact that 1t is kept secret.

compilations (e.g., d atabases). technological secrets (e.g., scientific processes, know-how).

Requirements for Protection A key requirement for protection is the secrecy or confidentiality of the informa- tion. A number of fac tors a re consid ered in ascertaining whether the info rmation is confidential:

economic value as a result of not being gen erally known . The information must have some commercial value to the company or its competitors. An indication of the commercial value o f the information may be the efforts by others to obtain it. The value o f the information derives in large measure from the fac t that it is not known by some or is not generally known.

subject to efforts to keep it secret. There must be efforts to keep the information secret. Thus, if a company is careless about information or fails to take steps to protect the confidentiality of information, the information may indeed lose its confid ential status.

n ot generally known in the industry. Information does not have to be absolutely confidential; it can be a compilation of readily available information from various sources. Also, information can be known by some and still maintain its status. In thi s regard, the extent to which the information is known within the company, as well as outside the company, is relevant.

Process and Scope of Protection Con fid ential business information may be protected forever so long as the information is not disclosed to the general public. Recipes for well-known prod - ucts such as Coca-Cola Classic, Hostess Twinkies, Mrs. Fields' Chocolate Chip Cookies, Listerine, and Kentucky Fried Chicken have been "secret" fo r many years. There a re no application proced ures for protection. In for mation rece ives protection through claims for breach o f express or implied terms, and fo r breach of confid ence.

Parties may have express obligations to keep information confidential. Non- disclosure agreements require recipients of information to respect its confidenti- ality by agreeing not to discuss, disclose, or use it. Estelle could require potential lend ers and investors to sign a confidentiality agreement prior to discussing her invention with them. In the absence of an express provision regarding confidence, an obligation of confid ence may be implied in a contract or arise by virtue of a fiduciary relationship. This is the case in the employment context, particularly in ind ustries in which there is a lot of confid ential in formation and the importance of confiden tiality is stressed.

Finally, an obligation of confidence can exist when information was conveyed in circumstances suggesting a relationship of confidence. The following case is a leading d ecision on rece ipt o f confidential information in circumstances of confidentiality.

NEL 495

LAC Minerals Ltd v International Corona Resources Ltd, [19891 2 SCR 574, (1989) SCJ No 83.

THE HISTORICAL CONTEXT: In the negoti- ations preceding a contract, the parties may divulge a great deal of information, some of which is sensitive and confidential This is often necessary in order to reach contractual consensus. This case explores the obligations of the recipient of the information to the revealer of the information, in the absence of a contract of confidentiality.

FACTUAL BACKGROUND: Corona was the owner of a group of mining claims that it was exploring. Being a junior company, it was eager to attract investors and had publicized certa in information about its property. LAC Minerals, a major mining corporation, became interested, and a site visit was arranged. The LAC geologists were shown core samples and sections, and the parties discussed the geology of Corona's site as well as the prop- erty to the west, known as the Williams prop- erty. Another meeting was held a couple of days later in Toronto, during which it was again mentioned that Corona was attempting to purchase the Williams property. No men- tion was made of confidentiality. Following this meeting, there were further discussions and an exchange of joint venture ideas, as well as a full presentation by Corona of its results and its interest in the Williams property. A short time after these meetings, negotiations between LAC and Corona broke down. Subse- quently, LAC made an offer to purchase the Williams property. The offer was accepted, and LAC proceeded to develop the property

Limitations on Protection

on its own. It turned out to be the biggest gold mine in Canada. and LAC made huge profits. Corona sued for breach of confidence and breach of fiduciary duty.

THE LEGAL QUESTION: Was LAC liable for breach of confidence or breach offiduciaryduty?

RESOLUTION: The Supreme Court of Canada unanimously found LAC liable on the grounds of breach of confidence. The court confirmed that three elements must be established to impose liability on this ground:

the information conveyed was confidential.

it was communicated in circumstances in which a duty of confidence arises.

• it was misused by the party to whom it was communicated.

Although some of the informati on conveyed by Corona was not confidential, clearly most of it was, and LAC used it to acquire the Williams property. The court sai d the information was communicated wid1 the mutual understanding that the parties were working towards a joint venture or some other arrangement. A reason- able person in the position of LAC would know that the information was being given in confi - dence. LAC used the information to its gain and at the expense of Corona. Although the court did not go so far as to find a breach of a fidu- ciary duty, there was a violation of confidence.

CRITICAL ANALYSIS : What is the importance of this case for business? How can a business determine whether information is confidential? Would it have been easier for Corona simply to have had LAC sign an express confidentiality agreement at the outset?

Confidential business information loses the protection of the law when the infor- mation is no longer secret, either because the information has been divulged or because the information has been discovered by independent development using

NEL

496

publicly avaHable information, or by reverse engineering (i.e., finding the secret or confidential information by examining or dissecting a product). For example, if Estelle keeps her method a secret and at the same time manufactures and sells products using the method, she will not be able to prevent others who discover the method through reverse engineering from using it.

Information is also no longer confidential when it becomes part of the employee's personal knowledge, skill, or expertise (i.e., trad e information). In distinguishing between information that is confidential and trade information, the courts attempt to strike a balance between the employee's right to use the skills, knowledge, and experience gained during the course of employment and the employer's right to protect its information.

Figure 18.1 compares the major forms of intellectual property.

FIGURE 18.1 A Comparison of Major Forms of Intellectual Property

Patents Industrial Trademarks Copyrights Confidential

Inventions

Designs Business

Sha~,

configuration, pattern, ornamentation

Word, symbol, design

Literary, dramatic, musica~ and artistic

works; sound recordings, ~rformances, broadcasts

Information•

Busint?ss information (e.g., technology, product recipes, d>tabases)

New, useful, unobvious

Original, novel Title, distinctiveness, registrable

Original, fixed Economic value, efforts to keep secret, generally not known

Use, sale, Use, sale, Use Copying, modifying Disclosure, use manufacture manufacture

20 years 10 years

Inventor D<!signer

15 + 15 + + 15 years

First person to use or apply

Life + SO years

Author

Indefinite (until disclosure)

Creator

Mand>tory l\llan&tory M.md>tory' Optional Not applkable

Microwave oven

D<!sign on the outside of oven

Name of the oven

User's manual

Acquisition and Protection of Intellectual Property

Ideas for improvement

Intellectual property rights can be extremely valuable to a business. Intellectual property is often created within the business in much the same manner as Estelle invented her method of protecting electronic prod ucts and chose her product name. The process of doing so can be time consuming and costly. This suggests that an effective intellectual property program should be put in place to ensure

NEL 497

that intellectual assets are valid, enforceable, and effectively exploited. Such a program should include the identification of all intellectual property assets; the determinat ion of the nature, scope, and valiruty of the assets; and the evaluation of any potential risks and opportunities.

Assignments and Licences Although intellectual property may be created in-house, i t is also possible to pur- chase or receive an assignment of intellectual property rights or to receive a licence to use the intellectual property. By the same token, it is possible for a business to exploit its r ights by assigning them or licensing their use. An assignment involves a change of ownership from the assignor to the assignee. As a general rnle, all intellectual property rights are assignable in whole or in part. An exception to the general rule is that moral rights cannot be assigned, although they may be waived.

A business may also obtain a licence to use another's intellectual property. A licence is consent or permission to use the right on the terms specified in the licence. All intellectual property rights are capable of being licensed. This approach may be a viable way for Estelle to exploit her invention.

The process of getting an assignment or licence of intellectual property is not always easy. The process is often complicated by technological developments. Con- sider, for example, multimerua works that integrate text, graphics, still images, sounds, music, animation, or video, and with which the user can interact. The product involves various forms of merua working together and may rely on liter- ally thousands of sources, including copyrighted text, images, and music, for its content. The developer of the multimerua work has to ensure that all the relevant r ights to these copyrighted works have been obtained, either through ownership or some form of licence or other permission.

Intellectual rights are often subject to compulsory licensing. For example, the Canaruan Intellectual Property Office may order a patent holder to grant a licence if the exclusive rights under the patent are deemed to be "abused." Examples of abuses are refusal by the patent holder to grant a licence on reasonable terms, thereby prejurucing trade or industry, and failure by the patent holder to meet local d emand for a patented article.

Protection of Intellectual Property Intellectual property is an asset in the same manner as other business assets. Just as an organization takes measures to protect its buildings, land, equipment, and personnel, so too must it take steps to protect its intellectual property. It is not sufficient for Estelle to simply "create" intellectual property rights. Her rights require continuous monitoring and protection .

Use Intellectual property rights are subject to loss if they are not properly used and maintained, as is shown in the following examples:

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a patent may be considered abused if, among other things, insufficient quantities of the patented item are produced to meet d emand in Canada . As a result, a licence to use the patent may be granted to another, or the patent may even be revoked.

industrial d esign rights may be substantially reduced if the goods are not properly marked. A defence of innocent infringement is available

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Assignment

The transfer of a right by an assignor to an assignee

Licence

Consent given by the owner of rights to someone to do something that only the owner can do

unless proper notice (i.e.,@) is used on articles or their containers. The d efence has the effect of limiting the owner's remed y for infringement to injunctive relief.

a trad emark can be subject to attacks for non-use or abandonment if it is not used continuously in association with the goods or services for which it is registered. A trademark may also be lost if it loses its distinctiveness, as when it slips into everyd ay usage. For example, nylon, kleenex, zipper, escalator, cellophane, and dry ice, once trad emarks, lost their distinctiveness and thus their status as trademarks by falling into everyday usage and becoming generic terms.

confidential business information is lost once it is disclosed . A business needs to be particularly vigilant in protecting confidential business information. A business can implement a program for maintaining security that includ es restricting access to confid ential i nformation, implementing physical security measures (e.g., labelling documents "secret" or "confid ential", locking areas where the information is kept, and changing computer passwords), and using confid entiality agreements that require others to maintain confidences.

INTERNATIONAL PERSPECTIVE

THE GLOBAL REACH OF CANADIAN INJUNCTIONS

Equustek, a small British Columbia technology company that d esigns, manufactures, and sells in dustrial network interface hardware, sued one of its former product distributors, Data- link Technologies Gateways, for trad emark infringement and appropriation o f trad e secrets. Eq uustek alleged that Datalink re-labelled one of Eq uustek's prod ucts and passed it off as its own and misappropriated confidential information and trade secrets and used tl1em to design and manufac ture a competing product. Despite a series of ord ers restraining its conduct pending trial, Datalink relocated outside o f Canada and continued to sell the impugned products on its websites to customers all over the world.

Frustrated w ith Datalink's behaviour, Equustek asked Google to prevent access to Datalink's websites by removing them from its search results. Google removed 345 webpages from google.ca- Google's Canadian d omain- but refused to block Datalink's entire web d omains from all Google sites. The removal of

~Vhen sho1Jd a court grant an injunction against someone who is not a party to the 1mderlying laws!tit?

thewebpages proved to be ineffective as Datalink simply moved the content to new pages witllin its websites, and as Google had only taken steps in respect to its google. ca service, users con- d ucting searches on google.com or otl1er Google d omains could still a ccess Datalink's webpages. Eq uustek turned once agai n to the courts and obtained an injunction preventing Google from displaying any part of the distributor's websites

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on any o f its search engines worldwide. Google objected but the d ecision was upheld by the Br itish Columbia Court of Appeal.

Google fu rther appealed , a rguing in part that the extraterrit orial reach of the ord er was inap- propriate. The Supreme Court o f Canad a in a seven-to· two de cision92 upheld tl1e lower courts' d ecisions and affi rmed that Canaruan courts have authority to block Internet search results outside Canad a's bord ers. In particular, when it is necessary to ensure an injunction's effective- ness, a court can grant an injunction enjoining conduct anywhere in tl1e world . Writing for the majority, Justice Abella stated:

The probl em in this case is occurring o nline and gl obally. The I ntemet has no borders- its natural habitat is global. The o nly way to ensure that the interlocutory injunction attained its objective was to have it apply w here Google operates- glo bally. If the injunction were restricted to Canada al on e or to google.ca. as Googl e

suggests it should have been. the remedy would be deprived o f its intended ability to prevent irreparabl e harm. Purchasers o utside Canada coul d easily continue purchasing from Oata- link's websites. and Canadian purchasers could easily find Datalink's websites even if those web- sites were deindexed o n google.ca.93

Critical Analysis : What are implications o f this d ecision for Canadian intellectual property owners? Are there any problems with the decision?

Postscript: The saga is far from over as a court in the Northern District of California has issued an injunction preventingEquutek from enforcing the o rder.94

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Litigation At some point it may be necessary to engage in litigation in order to protect intel- lectual property r ights. Intellectual proper ty litigation is complex and expensive, often requiring the ser\rices of experts.

In many intellectual proper ty in fri ngement cases, it is common for the plaintiff to seek an injunction befo re trial to p revent the infri nger from con- t in uing to d amage the business of the plaintiff. An injunction is granted if the applicant can d emonstrate that there is a serious issue to be tried, irrepa ra ble harm may be caused , an d the balance of convenience favours the applicant. In addit ion, because infringers may flee and d estroy e\rid ence, the law pro\rid es for the seizure of property before jud gment. An Anton Pillar order allows the plaintiff to a ccess the defendant's premises to inspect and seize e\rid ence o f infringement.

The most common intellectual property actions are as follows:

patent in fringemen t. Infringement is not d efined in the Patent Act, but it is generally taken to mean an unlicensed intrusion on the patent hold er's rights (i.e., making, selling, using, or constructing something that comes

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Anton Pillar order

A pretrial order allowing the seizure of material. including material that infringes intellectual property rights.

within the scope of the patent claims). There is no requirement to show that the infri nger intend ed to infringe on the patent, nor is it a req uirement that the in fri nger's act ion come within the precise language o f the clai ms. As long as the infri nger is taking the substance o f the invention, that will suffic e. A successful action for patent infringement may result in the infringer having to pay d amages or turn profits over to the patent hold er, also known as the patentee. The patentee may also be entitled to an injunction prior to trial or after trial to prevent further infringement, and a "d elivering-up" o f the infringing prod uct.

copyright infringement. Copyright is infringed whenever anyone, without the consent of the owner of the copyright, does anything that only the owner has the r ight to d o. As noted above, this could involve various activities- copying, publishing, performing, translating, and the like. The copyright owner has a full range of remedies. An owner may also elect statutory d amages of up to $5000 for non-commercial infringement and up to $20 000 for commercial infringement instead of d amages and profi ts!" Also, the infringer is subject to crim inal sanctions of fines up to $1 million and/or five years in jail.

industrial design infringement. The Industrial Design Act prohi bits anyone from applying a registered ind ustrial d esign to the ornamentation of any article w ithout the permission o f the owner. The proh ibit ion also includ es applying a confusingly similar d esign. The traditional remedies fo r infri ngement are an injunction to restrain further use o f the d esign, d amages, and an accounting o f profi ts mad e by the d efend ant in using the d esign. The Act also provides for nominal crim inal sanctions.

trademark infringement. Infringement of trademark is protected by both the Trade-marks Act and the tort of passing off. The action can be brought against a trad er who misrepresents the source of goods or services so as to deceive the public. This may be done by using the same or a similar trademark. Remedies fo r trademark infringement includ e injunctions, d amages or an accounting of profits, and the destruction or d elivery of the offending goods or the means to produce them, as well as cr iminal sanctions. confidential business information . There is no statutory cause of action related to the misappropriation of confidential business information. There are, however, common law actions for breach of express and implied terms and breach of confiden ce, as discussed above. It must be shown that the inform ation was confidential, that the information was disclosed under circumstances of confidence, and that the recipient misused the info rmation to the d etriment o f the owner. Remedies available include injunctions, d amages, an a ccounting, and/or a d eclaration o f the entitlement to the information.

501 NEL

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INTERNATIONAL PERSPECTIVE

PROTECTING INTELLECTUAL PROPERTY ABROAD

It is difficult to protect intellectual property in a domestic setting; however, it is even more diffi· cult to protect it in an international setting as, unlike tangible property, intellectual property is not bow1d by borders or geography. Protection is not just a question of designing and implementing rules for protection. There are very different perspectives on whether intellectual property should receive protection. Developing COW1tries have little incentive to provide protection, as they need intellectual property to grow and prosper. Developed coW1tries have a somewhat different perspective, as they consider intellectual property a valuable investment and worthy of protection.

Canada is a signatory to a number of treaties that give international protection to intellectual property rights. The major in ternational agree· men ts and conventions are as follows:

Paris Convention for the Prot.ection of Industrial Property provides national treatment and foreign filing priorities for patents, trademarks, and industrial designs.

Patent Cooperation Treaty facilitates the acquisition of patent protection in multiple countries around the world. Benefits are available only to nationals of contracting states.

Berne Convention applies to literaxy and artistic works, provides for automatic copyright protection to nationals of member states without any requirement for formalities.

Universal Copyright Convenrion provides national treatment for foreign copyrighted works provided the copyright symbol, the name of the copyright owner, and the date of publication are on the work.

• Agreement on Trade-Related Aspects of Intellectual Property (TRTPS) is an agreement of the World Trade Organization (WTO) that establishes certain minimum standards of

502

intellectual property protection for patents, trademarks, and copyrights. The agreement provides that a country should treat foreign nationals no less favourably than its own nationals with respect to intellectual property rights.

World Tntellectual Property Organization's (WIPO's) Copyright Treaty (WCT) protects literary and axtistic works by preventing the circumvention of encrypted information and the removal of digital tracking measures.

WI.PO's Performan<.es and Phonograms Treaty (WPPT) protects performers and producers of sound recordings by providing moral rights for performers and requiring measures against decryption and the circumvention of digital tracking measures.

• Anri-Counterfeiting Trade Agreement (ACTA) establishes international standards for intellectual property rights enforcement by establishing an internati onal framework for targeting counterfeit goods, generic medicines, and copyright infringement on the Internet. Canada has signed the agreement but it is not yet in force.

The Canadian government has also tabled five other WIPO treaties (Hague Agreement, Madrid Protocol, Nice Agreement, Patent Law Treaty and Singapore Treaty) to further harmonize Canada's patent, trademark, and industrial design law with its trading partners' laws.

The broad intent of the international agree- ments is to provide protection for foreign intel- lectual property. For example, works that have copyright protection in Canada have protection in countries that are signatories to the Berne Convention. By the same token, an author who is a citizen of a convention country receives copy- right protection in Canada.

Critical Analysis: What is the justification for providing protection for foreign intellectual property? When intellectual property protection is extended in this manner, whose interests are curtailed?

BUSINESS LAW IN PRACTICE REVISITED

1. Is Estelle's idea a patentable invention?

Estelle's method for weaving static protection into the fi bre of paper qualifies as an invention under the Patent Act. It is patentable if she can demonstrate that it is new, useful, and unobvious. Although there are currently methods of protecting products from electrostatic discharge, Estelle's method is new and an improve- ment over these methods. The very serious problems experienced by the elec- tronic products industry indicate that Estelle's invention is useful and probably unobvious. The cost of patenting is expensive but as the potential for the product is great, the investment is most likely to be worthwhile.

Keeping the method confidential or a trade secret is not really a feasible option for Estelle. Although secrecy does not cost anything in terms of filing fees, and secrecy can last forever, it hinders Estelle's ability to capitalize on her invention. As soon as she manufactures and sells a product utilizing her invention, other manufacturers, through the process of reverse engineering, may be able to dis- cover her secrets. In such a case, nothing prevents them from copying and using Estelle's invention.

2. Who owns the rights to Estelle's invention- Estelle or E LEX?

Estelle owns the rights to her invention. Although Estelle is employed as an engi- neer for a manufacturer o f electronic products, she is entitled to ownership of her invention as she was not hired to invent a method of p rotecting products from electrostatic discharge, and she made the discover y on her own time. Only if she had signed an agreement regarding the ownership of inventions would she be required to transfer the patent (assuming a patent is granted) to her employer.

3. How can Estelle protect her idea while she seeks funding from potential lenders and investors?

Estelle can protect her idea while she seeks funding from potential investors and lenders by having them sign a confidentiality agreement. In the absence of an agreement, there may also be an implied obligation to keep the information con- fid ential as the information would be conveyed in circumstances that suggest confidentiality.

4. Is Estelle entitled to use the name "Chargeless" for her product. and should she do anything to protect the name?

Estelle may start using the name "Chargeless" for her product so long as no one else has registered or is using the same or a similar name in the same line of business. By simply using a name and not registering it, however, she runs the risk of someone else adopting the same or a similar name in another part of the country. A common law (unregistered) trademark only provid es protection in the area where a person's reputation has spread.

Estelle should register her name as a t rademark to obtain national protection. To do so, she must meet requirements of use, distinctiveness, and registrability. Although another company in the financial services is using "charge less" as part of its slogan, this should not pose a problem because the use is in an entirely dif- ferent industry. Estelle will have to have a trademark agent determine whether the name is in use as a trademark in the same industry and if it sufficiently distinctive.

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CHAPTER SUMMARY The term "intellectual property" is used to descr ibe the results of a n intellectual or creative process. The term is also used to d escribe the rights people have or acquire in ideas and in the ways they express those ideas. The main categories of intel- lectual property rights are patents, ind ustrial d esigns, trade marks, copyrights, a nd confid ential information. The rights that attach to each category vary but generally encompass the r ight to use a nd the r ight to exclud e others from using.

The.re is considerable overlap between the va rious categories o f intellectual property. It is possible for more than one area of intellectual property law to pro- tect different aspects of a s ingle prod uct or process. Also, there may be alterna- tives for protecting a single prod uct. For example, an invention may qualify for patent protection, or the invention can be kept secret through the mechanism o f a trade secret. Patent protection provid es a monopoly for a perio d of time, but the price of the monopoly is the requirement to disclose the invention. A trade secret is just that- a secret. Once disclosure o ccurs, there is no protection . The ornamentation of a prod uct subject to patent protection may recei ve in dustrial d esign protection.

Businesses acquire intellectual property in a number of ways. A lot of intel- lectual property is created in-house by employees, but it can also be bought or acquired through a licensing agreement.

Intellectual property, like other business assets, must be protected. An effec- tive intellectual property policy should encompass its acquisition and proper use. Failure to acquire and maintain intellectual property rights may result in m issed opportunities a nd losses for the business. In some cases, intellectual prop- erty rights ultimately may need to be protected by bringing legal action against infringers.

CHAPTER STUDY

Key Terms and Concepts Ant on Pillar order (p. 493 )

assignment (p. 49 1 )

claims (p. 469)

confidential business information (p. 48 7)

copyrig ht (p. 481)

cyber-squatting (p. 475)

distinguishing guise (p. 4 73)

domain name (p. 474)

fair dealing (p. 487)

industrial de sign ( p. 471)

intellectual property (p. 4 63)

licence (p. 491 )

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moral rights (p. 4 86)

pate nt ( p. 464)

patent agent (p. 469)

specifications (p. 469)

trade name (p. 473)

trademark (p. 4 73)

Questions for Review 1. What is intellectual property?

2. What are the major forms of intellectual property rights?

3. What is a patent? Give an example.

4. Are life forms patenta ble in Canada? Explain .

5. Are co mputer programs patentable in Canad a? Explain.

6. What are the three requirements for patentabili ty?

7. What is the mfference between specifications and claims in a patent application?

8. How long d oes patent protection last?

9. What is an industrial design? What are the requirements for industrial design registration? How long d oes an industrial d esign registration last?

10. What is the advantage of marking an ind ustrial design to in m cate that the d esign is registered?

11. What is the purpose of a trademark?

12. What is the relationship between trad emarks and trade names?

13. Must trad emarks be registered to receive legal protection? Explain .

14. What is meant by the term "cyber-squatting"?

15. Who owns the copyright in a book? How long d oes copyright last?

16. What are the moral rights of an author? Give an example.

17. One of the exemptions under the Copyright Act is fair dealing. What is fair dealing?

18. What are the requirements for the protection of confidential business information?

19. What is the mfference between an intellectual property assignment and a licence?

20. Give an example of how intellectual property r ights may be lost if they are not properly used.

21. How is injunctive relief used in intellectual property disputes?

22. What are the penalties for copyright infringement?

Quest ions fo r Critical T hinking 1 . Three-dimensional printers have the capacity to

reprod uce solid objects. Using computer modelling software, they can reproduce an object using materials such as rubber, plastics, ceramics, and metals. The potential is to reprod uce everything from automobile parts to

toys to household items.96 How does this technology possibly impact intellectual property rights holders? How should compani es deal with the risk posed by this technology?

2. The legalization of non-memcal marijuana creates business opportunities for those who are entering or have alread y entered the marijuana market. Marijuana related inventions such as new varieties of plants, growing methods and techniq ues, cannabinoid compounds, and ancillary items and equipment will contribute to the business opportunities.97

How d oes Canada's intellectual property system protect inventions related to the marijuana ind ustry?

3. Websites on the Internet o ffer powerful marketing opportunities for businesses. However, the websites, and the domain names that identify them, also present opportunities for others to take unfair advantage of the goodwill that a business has worked hard to establish. "Cyber-squatters" d o this by registering domain names that include a business's trademark. How can a business, short o f litigating, protect its portfolio of trademarks from cyber-squatters?

4 . The United States Patent and Trad emark Office has allowed patents for all manner of business methods, inclumng, for example, Amazon's one-d ick method for purchasing goods on the Internet; Priceline's name-your-own price reverse-auction process; and Mattel's system that allows its customers to order personalized toys. Patents have even been granted for reserving offic e bathrooms, for enticing customers to order more foo d at fast-service restaurants, and for the process o f obtaining a patent. The Fed eral Court of Appeal's decision in Canada (Attorney General) v Amazon .com Inc. (see page 467) opens the d oor to similar patents being granted in Canad a . Are business· method

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patents good for Canadian business? Some business-method patents have been criticized because they have covered subject matter that is old or obvious. What are other criticisms of allowing patents for business methods?

5. An inventor has a new and improved method to cure and smoke ribs using flavoured wood chips. She may be able to protect her method by obtaining a patent or by keeping it a secret. What are the advantages and disadvantages of patents versus trade secrets? What factors should be considered in making a choice between secrecy and patenting?

6. The intellectual property regimes of many countries, including all members of the European Un ion, contain droit de suite protection or artist resale rights. This right entitles artists for a term usually equal to copyright protection to a share of revenue (e.g., 53 of gross profit) when their art is resold. The artwork that carries this protection is generally visual artistic works such as paintings, photographs, engravings, sculptures, carvings, and the like.°" Should Canadian copyright legislation contain adroit de suite right? What are the arguments for and against such a right?

Situations for Discussion 1. Masterpiece, an Alberta corporation, applied to

register the trademark "MASTERPIECE LIVING" in relation to the retirement industry. The application was denied because Alavida, an Ontario company, had already been granted a registration for the same trademark for the same services. Masterpiece then applied to the Federal Court to expunge Alavida's trademark registration on the basis that Masterpiece had been using a confusingly similar trademark ("MASTERPIECE THE ART OF LIVlNG") prior to Alavida's application for trademark registration. Masterpiece failed at both the Federal Court and the Federal Court of Appeal but was successful at the Supreme Court o f Canada.09 What is the relationship between

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registered trademarks and common law trademarks? What are the most important business lessons to be learned from this decision? Is Masterpiece entitled to register "MASTERPIECE" for retirement services? Explain.

2 Duncan, a small town on Vancouver Island, is known as the "City of Totems." Almost 80 totem poles can be found spread throughout the city, both in its downtown core and on the Trans-Canada Highway. In 2007, the city council created a copyright policy to govern the use of images of the totem poles. The policy states that the city holds the copyright policy on the totem collection, that the use of the totem images requires approval from the city, a nd that the city reserves the right to levy a copyright charge.100 On what basis could Duncan claim to own copyright in the various totem poles located in the town? [f Duncan owns copyright in the totem poles, could people be prevented from taking pictures of the totem p oles? Is existing copyright law suitable for the protection of aboriginal cultural property, such as traditional legends, stories, songs, and knowledge?

3. Canada Goose Inc. is one of the world's leading makers of winter outerwear. ln an effort to protect the brand associated with its high quality, fur-trimmed, down-filled parkas with the red, white, and blue circular patch on the left sleeve, it has sued competing manufacturers for trademark infringement. It has alleged that both International Clothiers and Sears Canada intentionally designed logos and positioned them on the sleeves of jackets to confuse consumers into thinking their jackets were genuine Canada Goose jackets.

The International Clothiers jackets featured a white maple leaf on a red circular patch with three geese flying by and the words "Canada Weather Gear" and "Super Triple Goose" above a nd below the maple leaf. The Canada Goose patch has red trim on a blue background, a white silhouette o f Antarctica in the middle,

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and the words "Canad a Goose- Arctic program" around the edge.10 1 The matter has been settled out of court and the terms are confidential. The lawsujt agffinst Sears has also been settled out o f court.

What is the harm in trademark infringement? Why do you th;nk these cases were settled out of court?

4. Tabatha Pelkey had worked at Physical Fitness Eqwpment Sales Lt d as its manager for six years; she left fo llowjng a pay dispute wjth the owner. A few weeks later, she opened her own store just 18 blocks from Physical's site. She sold the same exercise equipment to the same market and featured an almost identical sign. Her business was instantly successful and had a serious negative impact on Physical's operations.102 Could Physical successfu lly sue Pelkey for breach of confidence? What would Physical need to prove to be successfu l? How could Physical have protected itself from competition from Pelkey?

5. The sale of counterfejt and pirated goods is big business. The estimated value of tl1e Canadfan counterfeit ma rket is between $20 billion and $30 billion. Fake iPhones, NBA jerseys, Oakley sunglasses, Calvjn Kie;n boxers, a nd Canad a Goose parkas can be purchased in street

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markets, boutiques, and malls in many parts of Canad a. Counterfot goods a re not limjted to brand ed goods. Increasingly less expensive items like CDs, DVDs, pharmaceuticals, makeup, batteries and toys, are being counterfejted, mass-produced, and sold. '03

What are the legal, eth;cal, and economjc problems posed by the manufacture and sale of counterfeit goods? Why do some people vjew counterfeiting as a vjctimless crime? Do you agree wjtl1 that vjew?

6. Coco Sharpe is a software developer specializing in online games and puzzles. He has d eveloped a revolutionary new poker game ffimed at enhancing the skills of would-be poker players. Coco believes that he can m ake a lot of money selling the game online. Coco calls hls game Coco Cardsharp, and he has received a registered trademark for tl1e name. However, when Coco applies to register the d omain n ame, he ruscovers that <www.co cocardsharp.com> is registered to Janet Rollins. When contacted by Coco, Janet d ffims that she knows noth;ng about Coco's game but that she is willing to sell the rigllts in the domain name to Coco for $50000. What are Coco's options? How should Coco attempt to settle the dfoputewjthJ anet? What a re the advantages and disadvantages of purswng online ruspute resolution? What are

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the advantages and disadvantages of pursuing litigation?

7. In 1969, Cynthia and Frederick Brick opened a high-end furniture store in Winnipeg. They called the store Brick's Fine Furniture. In 1988, Brick Warehouse Corp., a national chain of lower priced furniture, sent the Bricks a letter demanding that they stop using "Brick" as part of their business name. In 1977, Brick Warehouse had filed a number of trademark applications, which included the word "Brick." The Bricks had not registered the word "Brick" as a trademark. As they had used the same name for over 20 years, they refused to comply with Brick Warehouse's demand. The furniture cha in sued and after a protracted legal battle that cost the Bricks $178000 in legal fees, the case settled. The parties agreed to co-exist in Winnipeg.'°' What legal arguments were available to the Bricks? How could the Bricks have prevented th is dispute?

8. An em ployee of Coca-Cola Co. was convicted of conspiracy to steal and sell Coca-Cola's trade secrets. The employee, an executive assistant

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to a high-level Coca-Cola executive at the company's Atlanta headquarters, provided co-conspirators with confidential information and a sample of a new Coca -Cola drink. One of the co-conspirators wrote to PepsiCo, claiming to be a high-level employee with Coca-Cola and asking for $10 000 for trade secrets and $75 000 for a new product sample. PepsiCo informed Coca-Cola, which contacted the FBI. An undercover agent paid $30 000 for the documents, marked "classified and confidential", and the sample. He promised the balance after the sample was tested. The agent offered $ 1. 5 million for other trade secrets and the suspects were arrested on the day that the exchange was to occur. It was dear that the information and sample came from the employee as video surveillance showed her at her desk going through multiple files and stuffi ng documents into her bags.'°' This s ituation involves a criminal conviction for conspiracy to steal and sell trade secrets. How does the civil law provide protection for trade secrets? What steps should compan ies like Coca~Cola take to protect trade secrets?

105 ·rorrner Coke Crnpbycc Gully 11'\ <:om.p11acy to ~I Mt S('I Coe;, C<:M ~cr~t !i Tl'teNev-1 Yotk Tmes 12 tC'!l'.>1uaiy 20071 Of'lll,l\C <http// \'NNI ny11mes.coml2007 /02102/00!. '"'P!i.s/wo1klt>u' :nc!.!.10211'1 <:Oi«?- 4451443 hlm1>

OBJECTIVES After studying this chapter. you should have an understanding of

• the sources of real property law

• what constitutes real property

• the types of interests in privately owned property and how ownership of real property can be divided

• the systems used in Canada to document ownership and other interests in real property

• the risks associated with purchasing and selling land and how they are managed in a purchase transaction

• the rights and duties of landlords and tenants

BUSINESS LAW IN PRACTICE

Ashley Bishop has operated a furniture store in Halifax, Nova Scotia, for a number of years. The store has been successfu l to the point where it has outgrown its current leased space. Ashley has recently discovered a newer strip mall for sale in what she considers to be an ideal location for her store. The strip mall was developed on lan d that was previously occupied by a gas station and grocery store. A busin ess colleague, Andrew Doncaster, is interested in joining Ashley in the strip-mall venture. They will incorporate Alpha Developments Lt d (Alpha) to purchase and operate the mall. Half of the space is currently occupied by a number of businesses leasing space from the current owner. The plan is for Ashley's store to occupy most of the vacant space and to find new tenants for the balance of the vacant space. The listing price for the mall is $2 million. Ashley and Andrew can raise $800 000 and plan to borrow the remainder. Before she and Andrew proceed fur ther, Ashley wants to know how she can escape from her lease with her current landlord. She also wants to understand the implications of buying the mall, obtaining the necessary financing, and dealing with current and future tenants.

1. What are the legal issues for Ashley in the planned purchase of the mall?

2 . What are the risks in borrowing 60% of the purchase price of the mall?

3. What does Ashley need to know about the rights and obligations of her current lease and leases for the mall?

Sources of Real Property Law The legal concept of real property' refers to land or r eal estate, including interests such as mineral rights and leases.' The rules governing real property have deep historical roots and have consti- tutional, statutory and common law features. For example, section 1 09 of the Constitution Act, 1867 vests in the provinces all public

1 S~ Chapter 17 2 See gener;Jty, Bruce H Z-rff, Prlnc;p.'es of Property L;1w, 6th ed !Toronto Ca1sv..et, 2014)

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lands and resources subject to "any Interest other than that of the Province in the same" and sections 92 and 92A give the provin ces law-making power rele- vant to t11e use of land within the province. As a result, provincial statutes deter- m ine the system of registering title to land and regulate the use and development, including resource development within the provinces.3 Real property is also impacted by various statutes such as those d esigned to protect the environment or restrict the uses to which land is put such as land planning and zoning laws. Finally, the common law also impacts real property rights in Canad a, particu- larly whe.re interests in real property are the subject of contracts, such as pur- chase agreements, and leases.

Private Ownership of Real Property When people have private ownership of real property, they own a d efined piece of land that includes not only the surfac e of the land but also ever ything above and below it - expressed in law as "the earth beneath and the ai r above." In practice, however, these broad ownership rights are limited by legal rules fa cil- itating air travel above the surfac e and m ining and oil d rilling below the surfac e, to name a few examples. The term "real estate" also in dud es structures on the land, such as fences and buildings, as well as anything attached to those struc- tures. Items so attached a re known as fixtures and include heating ducts, lights, and plumbing.

Types of Interests in Land The highest and roost comprehensive level of ownershi p o f land possible under our system oflaw is known asa fee simple but oilier forms of ownership are also possible such as Ii fe estates,• leasehold estates,' and cond omini urns,• for example. An owner in fee simple essentially owns ilie land (subject to the limits described below) and can dispose of it in any way she sees fit. Mineral rights- such as rights to oil, gas, or coal and other minerals- are another type of estate in real property and may be owned separately from ownership of the surface. An owner of mineral r ights normally has the right to m ine, use, or otherwise exploit all o f ilie minerals below ilie surface of the land .7

Division of O wnership

One piece ofland can be owned by several people at once. For instance, rather than incor porating a new entity to buy the mall, Ashley and Andrew could choose to buy the mall themselves and share ownership. As co-owners they would each have

3 Ane>e:eption to t his provi!"K:I& ~risolCttot\ ts l.'lrldS reS<arWd lor Indians· sees. 9 1(24) ol theConsmulK:inAct, J867, and ~!'Ids sut>jOCl to ab0rigina1 l it~.

4 Alifeest~1e eXls1s o()ty for t OOdura1o:\of1 00 nokier's we and t hen !e>rerts 10 tf'\e 0•1gi!\atov1n<:no1 iS oass~<J on

5 Le.asehOtd esta tes a1e discussed later 1n U\iS chapter 6 Aco~om ,nt;m tSa tY?'! of sha1ed ownersh1ptMt co:'kStstsof tutow~rsn10 inaunllof a pioperty ~tJChasa

SU·li'! w1th1n an apa1tmen1 btJ1td1ng) and atso sna1cd Ovlnersh10 ol common p1.::}pcrly lSUCh ~ Iha tobby, lurn<Y.:e, PoOl and ha.1\._,<'J}IS) w lhin t he p1operly. Specic)ti2ed teg1siati0!l &JSIS tn. e.x":l't p1ovinc~ to ensure 1ne p1o~r and lair management of the property by its ov1oers, ~e fore,ramp6e l~nrtOt')tfs CondOminlum Act, CCSM, c Cl70.

7 WMnCal').)dawas firs t sa1Ucd,Cro1!1n9ran1sof land to selltOrs {and dev~opers sucl\as ralw~s).usua'!y inctu.oed al ~rlace ano m1ne1al r'fJhlS. Hov~ver. beg nni"'tJ 1n lBBO, t'le Crov1!l bega!l separaling su1tc!!Ce l ilte f 1om miner ti: L fk! a!ld 1eseNi1l9 tor itself tf'\e CN1ne1sl\io ct 1ne mi00r;J.i rights. As a rcsuu .. most prov1oces, pa11x::u~1ty those sent.ed aller !8BO,O'wn\0Sl l'n1ne1atv.-e<'#.th lhataaov.'S l hem to tea~ o:tand gas o;JhlSand oon1rd tne mining a!'ld dev~opmer\l o r ou'\er res-::itHCes such as Potash. uran'um, aoo other v2k.lab4e m1001ats

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Fixtures

Tangible personal property that is attached to land. buildings. or other structures.

Fee simple

The legal interest 1n real property that is closest to full ownership.

Tenancy in common

Co-ownership whereby each owner of an und 1v1ded interest can dispose of that Interest.

Joint tenancy

Co-ownership whereby the survivor inherits the undivided interest of the deceased

Registry system

The system of land registration whereby the records are available to be examined and evaluated by interested parties.

an unruvided interest in the entire builrung. Each owns a portion of the whole, but their respective shares cannot be singled out or identified in any rustinct way.

Though Ashley and And rew are tlle owners of ilie real estate, tlley are called tenants in this context.• In the time learung up to purchase, Ashley and And rew can negotiate e ither tenancy in common or joint tenancy. If they choose to be tenants in common, iliey each have an undivid ed interest in the land, meaning iliey can d eal wiili ilieir own interest in any way iliey see fit and wiiliout having to consult ilie other co-owner.• In a related fashion, if one of the tenants in common rues, that tenant's undivided interest in the real estate forms part of his personal estate and goes to his heirs.

A joint tenancy is also a form of undivid ed co-ownership but is rustinguished by ilie right of sur vivorship. Should one of ilie joint tenants rue, his unruvided interest goes rurectly and automatically to ilie other joint tenants.10 The heirs o f the d eceased co-owner would have no claim on the land co-owned with ilie other. Boili forms of co -ownership require cooperation among ilie owners in order to use or sell ilie property. Wheilier held in joint tenancy or tenancy in common, at common law, co -owned property is subject to ilie do ctrine of "unity o f posses- sion", meaning iliat co-owners have equal r ights to use and enjoyment of the property, and dealings with the land req llire ilie consent of all and are bin rung on all. A joint tenant who unilaterally transfers his own interest d uring his lifetime will sever the tenancy and convert the joint tenancy to a tenancy i n common. Co-owners may partition the property by agreement or in the absence of agree- ment, by seeking court-ordered partition.

Registration of Interests in Land Each province has a registration system in place to enable anyone contemplating the acquisition of an interest in land to investigate the state of its ownership, and to d etermine whether ilie land is subject to ce rtain interests such as easements or mortgages, for exan1ple. Because the provinces have constitutional juris ruction over property r ights, the systems of registration vary from province to province, though historically there were only two general types: the land titles system and the registry system.u With the exception of Newfoundland and Labrad or, Prince Edward Island, and Quebec, all provinces and territories in Canad a e iilier use the land titles system or are in the process of converting from a registry system to a land titles system. 12

A Registry System The registry system provides the fa cilities for recorrung documents and main- taining ilie registrations. The public has a ccess to ilie records and can exanline or search the reco rds to evaluate the state o f ownership of a particular p iece ofland . This process is known as "searching the title" or investigating ilie "chain o f tide." Whenever a property is transferred or mortgaged, for example, a lawyer (or title

8 In 010inaiy usage, a t~Mnl -;_ienE!r<ity r<.'!l(?rs to SOm.'!One ••1!')0 ~as.es s~~ ralher ti\aan ov1ns it outright, oo ... -eve1. the teg~ use of the v•Ord ·1eMnr i$ mucll broader and inct!;dos somco!'\€ \VOO has tJrrf kind or nght or 111te in tana.

9 The parties ~n. of course.. en1er into a contract v1he1eby tooy ag1ec;'! 001 to deal ,..,•th t1W? i1 res~tive interests lr~ety but to 0Ue1ttK!othara1igh1 of first refusal:, lor ex:unp«e

JO Ma!'fy domestc coup«e; (At1fl 01oper1y as JO int ta nan LS because of this rig hi 01 su1V.vorship 11 Cottst1:ur1an Act, 1867, s 92{13) ·p1o~rly aoo c!vl r1gn1s in too pio\l\oce · 12 Nm ... Srunsv1ck,, NO\a sco1·a al\1 On~r-:> art'! in the p1ocess or convctt:ng from a re<)ISlry system 10 a taoo

rn;es sys1em.

511 NEL

searcher) must seard1 for and examine the h istorical documents in o rder to con- firm the ownership of the land, its location, and whether there are any claims against it. This must be done to assure the purchaser (or other interested party such as a bank) that the seller owns the land in q uestion and that there are no conflicting claims to all or part o f the land. If the investigation reveals that title is not "clear", then the parties will try to correct this situation. For example, if Alpha has negotiated to purchase the strip mall but a search reveals that there is an unregistered title document (known as a d eed) in the chain, it may be possible to register the missing d eed and perfect the registe.red record- that is, cure the d efect in the current owner's registration. If the defect cannot be cured, Alpha may still d ecide to proceed with the deal but extract a price concession from the vend or. For example, if the search reveals a small encroachment on the property by an adjoin ing owner, Alpha may d ecide to proceed with the transaction at a reduced purchase price. If the defect is fun damental, the d eal may collapse.

The adm inistrators of a registry system take no responsibility for the validity o f the documents tl1at are filed and express no opin ion on tile state o f the title ofa particular piece of property. Lawyers retained by the buyer of property are respon- sible for tlle search and the evaluation of the results. If title problems emerge later, those who searched the ti tie bear the potential liability.

The Land Titles System The adm inistrators in a land titles system assume a much more active role tl1an in a registry system in that they evaluate each document presented for registra- tion and maintain a record of the documents relating to each piece of property. They are also responsible for the accuracy of the information they provide, and they maintain an insurance fund to compensate those who suffer loss because of their errors. Transactions in a land titles system are less time consuming and costly because a person wishing to know the state o f the title to a piece of land need only consult the certific ate of title and is not ordinarily required to d o a hi storical search. The certific ate contains a legal d escription of the property and identifies the nature of and owners of the various interests in the land. Because the certific ate itself is authoritative proof of title, there is less potential for com- peting claims. This enhanced certainty and reliability has caused several provinces that used the registry system- such as Ontario , New Brunswick, and Nova Scotia- to move toward the land titles system.

The sequence of registration is crucial to both systems. If there are conflicting claims to the same piece of land , the person who registered his interest first has priority, regardless of which transaction was completed fi rst. So long as the one who registers first is not engaged in frau d, has no knowledge of the earlier trans- action, and has paid valuable consideration for the land in question, that person's interest in and claim to the land is fully protected. The party who registers second has no claim to the land but may have actions against those who assisted in the fai led transaction or who made representations concerning the status of title.

Purchasing Land Buying land isa buyer-beware situation, expressed in law as caveat emptor.I'' It is up to the buyer to investigate and evaluate the property in both financial and legal terms. The risks when purchasing land are significant and require careful management.

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Land titles system

The system of Ian d registration whereby the administrators guarantee the ti tie to Ian d

Title search lnvest1 gat1on of the registered ownership of land in a registry system.

Title insurance

Insurance that covers title-rel ated issues such as fraudulent transfers and mortgages. liens. boundary encroachmems. issues related to government regulation, zoning problems. survey defects. and registration issues.

Managing Risk A potential purchaser's investigation of a property will begin with a search and evaluation of interests fi led against the property at the land registry or land titles system. Trus tit le search will allow the prospective purchaser to confirm the ownership of the property and will also put the purchaser on notice o f certain legal interests others have registered against the property, such as whether the land is subject to a mortgage or a long-term lease agreement. Normally, the rights asscr ciated with registered inte.rests are prioritized in the order they were registered, and the adm.irustrators of the land titles system accept responsibility fo r inaccu- racies in recording interests in land. The r ights of a new purchaser will normally be subject to any previously registered interests against the title.

In registry systems, lawyers have responsibility for evaluating the reliability of the title of the property their clients are buying. Lawyers search the title and give an opin ion on its validity to clients, with this search normally going back40years to ensure clear title. Lawyers have professional liability insurance to cover negli- gence in providing trus advice on title to property and the cost of this insurance is reflected in the fees charged to clients in property transactions.

Title insurance is also an important factor in real estate transactions. Title insurance is a type of coverage for buyers and lend ers that covers title-related issues (sud1 as fraud ulent transfers and mortgages, liens, bound ary encroach- ments, issues related to government regulation, zorung problems, survey defects, and registration issues) but does not protect an insured from known d efects with the property.

The use of title insurance diverts some of the responsibility, work, and related fees from lawyers.14 However, when clients choose to use title insurance along with a lawyer, part of the lawyer's duty is to explain the impact o f the title insurance po licy.15 Ti tie insurance pro vi des compensation if a problem is discovered later.

While it is cr itical to conduct a search o f the relevant land registration system before purchasing, there may be many oilier r isks associated with ilie purchase of the property, including restrictions impacting the use of ilie property tl1at will not be disclosed by trus search and wruch will require careful investigation by the prospective purchaser. Some of these potential concerns includ e:

environmental regulations that affect the use of land by limi ting or prorubiting ilie discharge of harmfu l substances and may even req uire owners to dean up environmental contamination caused by previous owners.

municipal government authority to control land use furough planning schemes and zorung regulations, making it necessary to ensure that the property can be used in fue manner intend ed by the purchaser. For example, if an area of a town is zoned for residential use, it is normally not available for commercial development.

murucipal governments may have claims for unpaid taxes that can be enforceable against the property even after it is sold to a new owner, and therefore appropriate searches should be conducted of murucipal record s.

14 Tna te~t cnolessoo 1esis1cd the ad\.€nt 0 1 tit!e il\St.lrance. For £x.lrnpte,. Iha N e-w Bn;rlSv1ick. bar tHlruccesslutty attempted to 1equ,1ea tar.-1yer to be invdva1 1n mo1l9~e refir'l<'H~ing ~e CriS1t!')Sc"m11.2. "La,.,. Society Ru~ 11\Wh'i Ou<i! 10 l:np1opa1 Ptirpcs-e·· The L~..yets Week.y t29 rv\ly 2009) 1.

15 SGe Raymond Lec&a11, l tte IM.J1ance Does N.">l Re~~ legal &.porttSt'f Thet~·~s W&eko/ I? Octobe• 20UJ 9

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family law may designate property as matrimonial- to be shared by both spouses- d espite ownershlp registered in the name o f one spouse. Both spouses must agree to the disposition of such property.

some jurisdictions impose special taxes on foreign purchasers or restrict foreign ownership o f land , particularly agricultural land. 16

in some jurisdictions, squatters may have rights if their occupation continues for a lengthy period of time.17

bankruptcy legislation and personal property legislation may result in other claims against the property or fixtures.

Other limits on ownership result from contracts mad e by p rior landowners and may be binding on subsequent owners. For example, a prior landowner may have:

granted a lease that may not appear on title but which may have to be honoured by the new owner.

granted an adjoining land owner the right to use a portion of the land for a particular purpose. For instance, a land owner may give a neighbour the right to dr ive across his land to access her own, or give a cell phone company the right to erect a tower. In law, this is known as an easement and the new owner may be obliged to continue this arrangement.18

granted an oil, gas, or mineral lease to occupy a portion of the land , a ccess that portion, and remove materials. 19

mad e the land subject to a restrictive co venant- a legally enforceable restriction or prohibition. For example, titles within a housing development may contain covenants that prohibit or restrict certain activities (such as cutting trees or erecting storage sheds) for the purpose of preserving the character of the development and thereby enhancing its value.

Prospective purchasers can help m itigate some o f these risks, such as:

by hir ing professionals such as real estate agents, lawyers, environmental auditors, appraisers, and surveyors to investigate the property for potential issues.

by making the offer to purchase conditional on such things as a successful rezoning application or a satisfactory environmental audit of the property. 20

by asking the seller to give contractual assurances, for example that all leases have been disclosed.

Obligations of Sellers As outlined above, the principle of caveat emptor (let the buyer beware) applies generally to real estate purchases, meaning that it is the responsibility of the buyer to discover defects in the property. However, the seller must not mislead the buyer, must be honest when answering q uestions about the condition of the

16 See, lor gx.arnoCe-.AJixuia·.~ f ateign OwnetShlP of Lhnd f?egulmions. AB Rey 160/1979. British Cotumbe Ms entK:1ed a 15% 1ra'lSla1 tax on fo1eign persons and en1itk:?:s 1ha1 ~.m::hase resdenliat property io 1neG1Mte1 Vancouve1 !G'.!gioMt OtStrltt.

11 Nova Sect!.'.) and O!Jebec conLinue to 1eco9ni2e sucll ll9h1s 18 Soo CMptar 17 19 The \ow1 governing ol gt1s, ar'ld m;nerai riQIUS s com~x. ror exam Mt!. inA~oer1.11 and B1ilisn C~mbia, 100

government ov1ns most of ll'>ese rights and ne9~101as Lile k:~es 20 ror dlScussO!l of cond1tio!\S ::necede1u aoo co0011i0na1 agr(lemi!nts, Si!e CMpte1 1

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Easement

The right to use the land of another for a particular purpose only.

Restrictive covenant

A restriction on the use of land as specified in the title document

property, and has a positive d uty to rusclose s ignific ant latent defects (not easily visible) that are known to the seller, especially if the d efects cause the proper ty to be d angerous or uninhabitable. Misrepresentations of sellers may consist of oral or written false statements, but may also take the fo rm of active attempts to rud e d efects in the proper ty being sold. However, the buyer must show that the mis- representation is material- that is, that it was an important factor in the de cision to buy.21 Examples of latent d efects that might be material in the context of a residential sale mjght include that the seller refi nished the basement and in the process covered a large crack in the found ation, that the property has a h istory of sewer blockages, 22 or that an addition was completed without appropriate permi ts.23 An important d evelopment in residential real estate transactions is the use of a property condition disclosure statement, whlch requires the seller to provid e detailed information on many aspects of the property. This statement can be incorporated into the agreement of purchase and sale and thereby eliminate much of the uncertainty surrounrung potential d efects. However, there remains some obligation of the buyer to verify the statements made. In the commercial context, factors such as revenue potential, uses permitted by zoning regulations, perm ission to subruvide, and ad eq uacy of water supply may be material to the purchaser's decision to buy and may req uire careful investigation.

Prospective purchasers can help mitigate these r isks by:

asking specific questions about the property, such as about the condition o f structural and mechanical features, water seepage, and notices from local or municipal authorities. If the seller answers such questions, they must be answered honestly.

incorporating into the contract assurances about the structure or features o f the property that are of importance to the purchaser.

hlring engineers and building inspectors to report on the structural integrity of the building and whether it is in compliance with builrung cod e.

hiring surveyors to d etermine the physical boundaries of the property.

placing conditions on the offer to purchase, such as a satisfactory inspection report from a builrung inspector or environmental auditor, for example.

Ashley and And rew have already identified the property that Alpha will buy, but Alpha should have its legal advisor involved from the outset to identify, among other matters, the contractual significance o f communication an d d ocuments used by Alpha and the current owner. The technical nature of real estate transac- tions makes the use of professional advice a practical necessity.

Financing the Purchase of Real Estate Real estate is very expensive and, unless the purchaser has considerable financial resources, it will usually be necessary to borrow fund s in order to facil itate the purchase o f the property. In ord er to ensure it is not obligated to purchase the property without having the funds to do so, the purchaser may make the o ffer

21 See Lu IS Mlta!\ '"SCC Oarilies Rea! ~stAle OiScbsure S1a:'tdards·. The L.<rY.yets Weekly 11 Juty 201.1) 13 comment:"°~ on Shatbern l-I0.1ditig Inc v V;,ncot.M?t AJrporl Centre. 2011 SCC 23.

22 SGe f.lcl<enzte v Struth, 2016 ABClB ll4 23 Set'.'. for ex.lmp!e,. C<'!tne,;r.hardt v &t>.-c. 2016 ONSC 4707.

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to pu rchase conditional upon securing financing for the purd1ase. The purchaser will then approach potential lenders- typically banks or other financial institu- tions, but possibly private lenders- and, assuming a good working relationship with the lender and the purmaser is creditworthy, a mortgage contract will be negotiated between the purchaser and lender that will establish such matters as the rate of interest and a repayment sched ule. If the purchaser is unable to find a willing lender, then provided he has made good-faith efforts, he can ter minate the agreementwith the vend or because the condition of being able to secure financing has not been fu lfilled.

A mortgage transaction has two aspects. First, a mortgage is a contract fo r the extension of credit and is a debt owed by the purmaser to its bank. The borrower is known as the mortgagor and the lender is known as the mortgagee. The lender advances the principal sum to the borrower, who promises to repay the principal plus interest over the specified period. Second ly, the lender will take a security interest in the property itself. To attain this secur ity protection, the bank must register the mor tgage document, thereby giving notice to all subsequent creditors o f the purchaser- as well as anyone considering purchasing the property from purchaser- that the bank has first claim against the land . Registration gives the bank secured status, whlm will protect its claim against the land even if the bor- rower becomes bankrupt. If the purmaser is a corporate borrower, the lender may also require additional security such as personal guarantees, an assignment of rents, or a general security agreement.24

Any claims already registered against the land have priority over the new mort- gage an d will affect the bank's decision to grant the loan. The bank's mortgage d oes not forbid the purchaser from attempting to borrow more money in the future using this land as security, but those subsequent lenders will be aware that the alread y registered mortgage forms a prior claim. Each subsequent mortgage against the same land involves signific antly g reater risk for its lend er.

Under the land titles system, registration of the mortgage creates a legal charge on the land. The registered mortgage amounts to a claim- or lien- on the land until repayment is complete. In provinces under the registry system, in contrast, the mortgage actually transfers ownershlp of the land to the lender for the dura- tion of the lending period. The bank becomes the legal owner, but the purmaser remains the equitable owner and has the r ight to have legal ownership restored to it upon repayment. Thls mea ns that the purchaser has the equity of redemption- the right to have legal ownershlp restored to it upon repayment.

Terms of the Mortgage The focus of the mortgage is on preserving the value of the land in question. This protection is achleved by preventing the borrower from d oing anything with tl1e land that would lower its value, and by giving the lender maximum flexibility in d ealing with the borrower. For example, if the mort- gagor does not adeq uately insure the property, the mortgagee (the bank) has the r ight to secure proper insurance and hold the borrower responsible for the cost. Because the risk of fraud has become a major concern, lend ers have d eveloped practices to verify the identity of borrowers and to ensure that the necessary d ocumentation is authentic. Provincial law societies also have regulations to guide lawyers in new client identificati on and verification.

24 An ag1~emt'!nt that <)t!O\Ys ~ \ende1 to cote.ct renLs a!'Y.I Olher income 9en.eralOO from I~ i:nopcnty 1n Iha event of default ol a IT'IOrtgage 01 oti'loa1 \oan. Ge"K'!ral secu1 ty a;ireemenis are OiSCus~d 1n Chapl<!r 26.

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Mortgage

A loan for real property that is secured by an interest 1n the property

Mortgagor

The party who borrows the money and signs the mortgage promising to repay the loan.

Mortgagee

The party who lends the money and receives the signed mortgage as security for repayment.

Equity of redemption

The right to regain legal title to mortgaged land upon repayment of the debt.

A lender will not grant a loan unless it is confident of the borrower's ability to repay. As a precaution, however, the amount of the loan is likely to be less than the current value of the land, for two reasons. First, tl1e mortgage is a long-term arrangement, so the bank will consider that market conditions might diminish the value of the security. Second, if the borrower defaults and the bank must use the security to recover its money, it is unlikely that the land will produce its full market value in a q uick sale. A serious drop in the market could result in negative eq uity for the owner- that is, the an1ount owed on the mortgage could be more than the value of the property. This traditional approach was significantly altered in recent years (mainly in the United States) with the growth of subprime mort- gages, which were granted to consumer borrowers with limited ability to pay and on the assumption of a continually rising real estate market. Borrowers were often enticed with low interest rates at the beginning of the mortgage term. As property values declined, the default rate became alarming, which contributed to wide- spread disaster in the financial sector. In an effort to prevent a similar situation from occurring in Canada, the government introd uced a series of changes designed to tighten Canada's mortgage regulations. Since 2008, these changes include increasing minimum down payments, shortening allowable amortization periods, tightening rules for home equity fi nanced lines of credit , and requiring purchasers to pass a fi nancial stress test.25

Scotia Mortgage Corporation v Gutierrez, 2012 ABQB 683

THE BUSINESS CONTEXT: As with most jurisdic- tions, the Canadian real estate market has gone through cycles of boom and bust. Inevitably, when the market takes a downturn, unscrupu- lous individ uals find ways to capitalize on the plight of desperate homeowners who find them- selves unable to meet their mortgage payments. In Alberta, a phenomenon known as the "dollar dealer" appeared on the scene in the busts of the early 1970s and again in the early 1 980s. The dollar dealer would offer to purchase a beleaguered homeowner's property for a dollar, assuring them they would be free of their obli- gations under the mortgage. The dollar dealer would then rent out the home and collect the rents, all while allowing the mortgage to fall further into default. Foreclosure proceedings, meanwhile, would take a considerable amount

of time, and by the time of tlleir conclusion, the dollar dealer had made a tidy profit. In response to the problem, the Alberta government changed tlle Law of Property Act to provide lenders with a speedier foreclosure process. After the financial crisis in 2008, a new version of tlle dollar dealer emerged.

FACTUAL BACKGROUND: In 2010, Sagrario and Roberto Gutierrez granted the Scotia Mortgage Corporation a mortgage on tlleir Calgary home, where they lived with their children . The mort- gage was a "high ratio" mortgage, meaning tllat it was granted without a down payment (0% down payment mortgages were possible until September 2012) or the down payment was very small relative to the value of the property. One of the features of a high ratio mortgage is that in the event of default and foreclosure, the borrower can be sued personally i n the event tlle proceeds from the sale of the property are

25 As 0 1 Ja"Mtlary l 2018, t M 1(!qum.~mt?n1 or passing a rnanci.)t sl!ess test Ms ooen ext~nd(!d lo inctJde h0mabtlye1s Set?ki!lQ uoi~ur~d mortgag es; se~ Arm1M Liga-ya, ·N~v .. f.-l:')rtg<119e St1css Tes! Ru~s Have S:>uov.-ers rlocki ng to Alte1Mt1VG l enders·. CBC News IS rebruary 2018J, ool>ne <http //v111r<11t:.OC.t:.a/rEws/ bt.sinesstmo1 l9age-s11~s·te-u J .4519972>.

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insufficient to cover the outstanding debt. Unfortunately, Sagrario Gutierrez became ill and was no longer able to work and, as a result of losing her income, the Gutierrezes could no longer afford to pay their $1511 monthly mortgage and tax payments. With no other financial resources and wanting to stay in their home, they transferred their title to a numbered company owned by Derek Johnson, receiving nothing in return. The arrangement- which, as the court noted, made no sense-was that they could remain on the property as renters, paying $1400 per month, and that Johnson's company would make up the difference plus pay the property taxes, and then after two years of losing money, would transfer the property back to the defendants. Of course, the num- bered company did not make the mortgage pay- ments. In the foreclosure proceedings, Johnson appeared in court and argued that his company would not pay up the arrears until he had "ver- i fied the mor tgage", a position that the court noted was particularly absurd in Alberta's land titles system which guarantees the accuracy o f registrations on certificates of title.

TH1LEGALQUESTION: Shouldthecourtgrantthe lender's request for an order to sell the property?

kESOLOTION: The court found that Johnson's intent was to delay the foreclosure so that Johnson's company could continue to collect rent from the Gutierrezes. The court noted the analogy to the dollar dealers of the 1970s and 1980s, observing that the new incarnation introd uced a new twist:

The new scoundre l while collecting rent. would appear in court and make o utlandish

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statements to obfuscate and delay the pro- ceedings. The scoundrel oblained a substantial cash flow from numerous desperate home- owners. While the homeowner was able to

~ f. remain in the residence. the mortgage debts 5 a nd legal costs increased substantially because ~ of the activity of the scoundrel. Eventually the ~.~. mortgage company would obtain title to the

property and. in many cases. obtain a defi- ~ ciency judgment against the homeowner. '? The court noted that the company owned by f Johnson had entered into similar arrangements

with other unwary and desperate homeowners:

In many of these forecl05Ures. the mortgage company would also obtain judgment against the numbered Alberta corporatJon. It is clear that Mr. Johnson is a scoundrel for holding out hope to desperate homeowners in order to enrich himself. (The numbered company] has in many cases been added as a defendant a nd several judgments (have] been obtained against (itl. A search at the Personal Property Registry reveals that eight judgments have been assigned by the mortgage company to Canada Mortgage and Housing Corpora- tion in the total amount of $624655. Another insurer. Genworth Financial Mortgage Insur- ance Company. has six judgments assigned to it in the total amount of $729920. Two other lenders have judgments against (the num- bered company( totalling $157083.

When Mr. Johnson adllises the court that he has years of experience in the Calgary real estate market and that the Court has not kept up with and does not understand the current real estate practices. he makes a vexatious a rgument. My grandfather's generatio n would describe him as a snake oil salesman. There is no meri t to any of his arguments. His appear- ances cause unnecessary costs and delay. He shows a lack of understanding of basic real estate and mortgage practice and procedures. His arguments have been rejected repeatedly by both Masters and Justices on appeal

Unfortunately, with few other options, the court granted the bank's order for the sale of the home and found the G utierrezes were liable to make up the deficiency.

CRITICAL ANALYSIS . The affidavit o f default confirmed that the outstanding balance on the Gutierrez mortgage was $372 097.70 yet the appraj sed value of the home was o n ly ______ .--

$360000. Why are hlgh ratio mortgages con- sidered r isky for both purchasers and lenders? As of February 201 6, purchasers must come up with a m inimum down payment of at least 5% for purchases less than $500000 and 1 0% for amounts over $500 000 and up to $1 million. Is this enough, or do you think that Canada's laws respect ing hlgh ratio mortgages should

be changed fu rther? Do you think the law does enough to protect desperate and unwary home- owner s from unscrupulous dealers like the numbered company in this case?

Sources: Scoua Mottg.>ge Ccupoltltton v Cuoerrez, 2012 ABOB 683; Mik.e ro1iou, "Odla1 Oe~er Scam Resurl~cing in C<'i9a1y', Ca!g;:,ry f.le~ Estate l?ev;e-1 U9 November 2012), onl1~ <hllpsl/ ca\gary1e~state1EN¥2\•1.comf/s=dclar+de.oSer.'>

The mortgage document is normally prepared by the lender. Though each bank has its own standard form of mortgage, all of them include the following as basic terms:

amount of the loan (known as the principal).

interest rate.

date of renegotiation of the interest rate.

period of repayment over whlch the loan is amortized.

sched ule of payments.

provision for payment of property taxes.

provision for full insurance coverage on the property, with the proceeds to be paid directly to the lender.

borrower's obligation to keep the property in a good state of repair and refrain from any activity that would decrease its value.

complete legal description of the land.

provision for early repayment (possibly with penalty).

acceleration clause, whlch provides that on defa ult of payment by the borrower, the whole amount of the loan becomes due.

remedies of the lender o n default.

discharge (release) of the mortgage at the end of the term when the full loan is repaid.

Of particular interest are the clauses dealing with taxes and insurance. The bank needs to be sure the taxes are paid because the appropriate municipal or provincial authorities have the right to sell the property to recover any unpaid taxes levied against the property. The land would then be owned by the purchaser at the tax sale and would not be available to the bank. The bank's interest in insurance is twofold . Fi rst, the bank needs full coverage on the proper ty so that if a fi re occurs, the proceeds from the insurance will essentially replace the portion of the security destroyed by the fire. Second, the bank needs direct access to those insurance proceeds and therefore the mortgage will contain a term assigning the insurance proceeds to the lender.

Life of a Mortgage If the mortgage transaction proceeds as intended by both the borrower and the lender, the borrower will repay the loan as the mortgage requires and the lender's claim or charge against the land will cease. However,

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since a mortgage is a long-term arrangement, many events can occur that result in some change to the liability, such as the following:

The borrower may choose to pay off the mortgage before it is due. The mortgagee will likely anticipate this possibility in the mortgage document and require the payment of a "penalty" or extra charge.

The borrower may need to renegotiate the mortgage for further financing. If the value of the land is well above the amount of the outstanding loan, the land could be used as security for an additional amount.

The borrower may d ecide to sell all of the land. This requires that the borrower pay out the mortgage fully or negotiate with the buyer to take over or "assume" the mortgage if the terms are attractive. For example, if the borrower's mortgage has a lower interest rate than the current market rate, the lower rate could be used as a selling point. This "assumption" requires the agreement of the bank and likely entruls a significant risk for the seller. When a mortgage is assumed, the original borrower remruns liable for payment in the event the new buyer defaults under the terms of the mortgage.26

Mortgagee's Remedies Occasionally a borrower is unable to fulfi ll its payment obligations und er a mortgage. This is the situation that the bank most fears and that the mortgage is primarily d esigned to address in terms of remedies. A lender may give the borrower some leeway in payment, especially if the bank is hopeful that the borrower's financial situation may recover. If this fail s, the bank will proceed to exercise its legal remedies pursuant to the mortgage and applicable legislation. The rights of the lender and the procedures to be followed vary from province to province,27 but all involve a combination of four remedies- suing the borrower, taking possession of the land, selling the land or having it sold, and foreclosure.

Foreclosure refers to tl1e lender's right to terminate the borrower's interest in the property to allow the lender to realize the value of the land by selling it directly pursuant to a power of sale or through a court-supervised sale. In some jurisdic- tions, the bank's recourse will be restricted to the land and the bank will not be able to pursue the borrower directly unless it is a !Ugh ratio mortgage. 28 Most provinces permit the lender to proceed against the borrower for tl1e shortfa ll- known as the deficiency- between the outstanding amount and the proceeds from sale of the property.

At any point before the foreclosure process is complete, ownership of the land can be regruned if the borrower is able to repay the loan (assuming o f course that another source of financing becomes available). If the borrower cannot repay the loan, it loses the land and may be left owing a substantial d ebt. If there is more than one mortgage registered against the land, the remedies of the var- ious mortgagees are more complicated. Each mortgagee's r ights and remedies

26 Howeve1, see c,:add C&ier/JJ Assurance Co v J,/1bon1 !2004), 2 41 DLR t4t h) 128 {()N CA) w~1e l he origu.m mor19a;iorswe1e nol hekl respof\Sib4e aft~r they had sotd 1~1requ11yol redempl!onaOO 11\e mor19a;ie hOO ooen renewoo w thout OOlid! 10 u~m.

27 S~ by Iha cou11 1s p1era1r(!d 1nA!ber1a. $~k.atchev1a11, and pa1tof Man11oba,and iS the only1em~dy in Nova Sroti.1 Otherwise, saie a!ld loredosu1e by t~ mo1t9agee is .:ibv..ed

28 In Alben.a, S~sk.atchev1a!\ and Bri11shCotumb~ the mortgagee cannot ;):'!1.SOM!ly S1Je tOOlviduat bOrrovRrS aoo can sue onty coroora tlOns 1~1 hAve \Ya;v~d the11 Sl<ll...: 101y prolcCllOn. See. 101 ~m~.g, lhe law of P1opetry Act, RSA 2000,c L•7. s 4"1

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Foreclosure

The mortgagee's remedy to terminate the mortgagor"s interest in the land.

Deficiency

The shortfa ll between the outstanding mortgage ba la nee and the proceeds from sale of the land.

are determmed in strict order of registration of the mortgages with mortgagees beyond the first less likely to recover than those that registered ahead of them.

The Sale of Land Transaction There are three stages in the transaction that will result in the transfer of land: the agreement of purchase and sale, the investigation, and the dosing.

Agreement of Purchase and Sale and Investigation Of prime importance is the agreement of purchase and sale between Alpha and the seller. Though the content of this agreement is entirely as negotiated between the parties, normal elements would include provision for Alpha to conduct a full investigation of the property and the opportunity to bring matters of concern to the seller. This agreement can also be mad e conditional, for example, "subject to a satisfactory engineer's report" or "subject to financing." If Alpha makes good - faith efforts to secure financing but is unable to find a willing lende r, it canter- minate the agreement with the vend or because the condition o f being able to secure financing has not been fulfilled." As discussed previously, the prospective purchaser will want to conduct a search of the relevant land registration system before purchasing, and investigate other risks associated with the purchase of the property including restrictions impacting the use of the property that will not be disclosed by this search. In a commercial real estate transaction, it may be worth- while to carry out some due diligence processes before entering into negotiations, such as confirming whether the property is subject to encumbrances such as restrictive