Solution Manual For Contemporary Canadian Business Law 12th Edition By John A Willes, John H Willes by StudyGuide

CHAPTER 1. THE LAW AND THE LEGAL SYSTEM Chapter Topics Learning the Law The Legal Environment of Business The Nature of Law Rights versus Privileges The Role of Law The Early Development of Law The Rise of the Courts and the Common Law The Sources and Components of Modern Canadian Law The Constitutional Foundations of Canadian Law The Canadian Charter of Rights and Freedoms Classification of Laws Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion

Chapter Objectives The rights and obligations of businesses and business persons stem from the law and our legal system. After study of this chapter, students should be able to: • Describe the sources, role and development of Canadian law. • Distinguish between statute and Common Law, and describe the significance of stare decisis. • Recognize matters of federal versus provincial jurisdiction. • Describe the fundamental rights and freedoms set out in the Charter of Rights and Freedoms.

CHAPTER COMMENTARY Chapter 1 is introductory in nature, and provides a general background concerning the nature of law, how laws developed, the general need for some rules to govern the behaviour of individuals, and the establishment of the various fundamental rights and duties of persons in society. In class discussion, special emphasis should be placed upon both the sources of law and the classification of laws in order that students may have a clear idea of what they are and where they may be found. Many students fail to realize that the Common Law represents a large body of law, and the scope and application of this source of law should be emphasized in class discussion of the chapter. The text description of the development of the law and the rise of the courts is intended to be read as a historical introduction to give students an appreciation of where our laws came from, and how they were developed. In the context of the courts and the law, the doctrine of stare decisis should be noted, and its purpose and application discussed with emphasis on the need for "predictability" in the application of the law to cases that come before the courts. It would be worthwhile to note as well that some judges of the Supreme Court of Canada have expressed the view that they, as judges of the highest court in the land, do not consider Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-2

themselves bound by the doctrine, but would only change a common law rule where it had become inappropriate in a modern social setting. Chapter 1 also provides a general outline of the nature of a constitution and its function in a democratic society. Reference is made to the "constitution" of the United Kingdom and the constitution of the United States as a basis for discussion of, and comparison with, the Canadian Constitution. The role of the courts as the chief interpreter of the constitution is also noted and should be emphasized in any class discussion of the enforcement of rights under the Charter. On this point, the doctrine of judicial review should be explained to illustrate how the rights of both governments and individuals set out in the constitution may be enforced. As an approach to teaching this part of the chapter, a systematic examination of the fundamental rights and freedoms may be made with the class requested to provide a fact situation related to a freedom or right, and then have the class speculate as to how the Charter might be interpreted by the court as it relates to the matter. With each fundamental right or freedom it is important to emphasize that the freedom or right must be viewed in the light of s.1 which makes the right "subject only to such reasonable limits prescribed by law as can be demonstrably justified in a free and democratic society," and not absolute. The "notwithstanding" clause (s. 33) which permits legislatures or parliament to override the Charter rights should be noted as well. On this point, reference may be made to the Court Decision in the Chapter (Ford v. Quebec (Attorney General), 1988 CanLII 19 (SCC)) which held Quebec's Bill 101 unconstitutional with respect to public signs. Students should note that the province of Quebec used s. 33 to override this decision of the Supreme Court of Canada and passed Bill 178 to require "French only" signs on all Quebec businesses. Students should also examine RJR-MacDonald Inc. and Imperial Tobacco Ltd. v. Canada, 1995 CanLII 64 (SCC) in the Chapter for an additional example of the views of the Supreme Court on the Government of Canada's attempts to virtually ban advertising on tobacco products. The organization of the Charter itself provides an orderly approach to discussion of the nature of the rights and freedoms granted under it, as well as the method of enforcement. With respect to the latter, it is readily apparent that most of the rights and freedoms are those which the framers of the constitution felt should be enshrined to protect them from encroachment or interference by governments. If government should do so, the individual has the right to bring the alleged infringement before the courts to have the interference ruled upon as to its validity. A final point to note and to emphasize in class is that the constitution includes more than the Charter of Rights and Freedoms. It also includes the original British North America Act of 1867 (as amended over the years) which establishes the structure of our government, and the legislative powers and jurisdiction of the provincial governments and Parliament. Consequently, it is a lengthy and complex document which sets out not only the rights and freedoms of the individual, but how Canada as a democratic society governs itself. On this point it should be emphasized that legislative bodies may not exceed the powers granted to them under the constitution, as the exercise of jurisdiction when none exists renders such an act ultra vires and a nullity.

Aboriginal and indigenous law concepts are introduced, and statute law is defined in the text, and the process associated with this type of law-making is described very briefly. Students should be informed that this process is legislative as distinct from judicial. The recording and organization of these statutes in the form of revised statutes of a province (or federal government) should also be discussed in order that students are made aware of where these laws may be found. Discussion may then lead into the topic of civil codes, and students may be asked to discuss the pros and cons of a Civil Code system vs. the Common Law/Equity system

From the point of view of learning about the law, the chapter contains a description of the various sources of the law, and the methods of classification. The importance of this part of the chapter should be underscored, as it provides the basis for an understanding of the particular rules and principles covered in the remainder of the text. It also represents an important first step in the examination of the law, in that it sets out the system for classification. It is essential that the difference between substantive law and procedural law be understood. As well, students should learn the various sub-classes of substantive law. In this regard, the nature of public law as a type of substantive law should be clearly understood. Public laws are laws which relate to the relationship between the individual and the government (or its agencies), and as such, are usually laws which are enforced by the Crown. They are generally prohibitive or regulatory in nature (e.g.: the criminal law, or provincial liquor control laws), and are enforced by the Crown if they are violated by an individual. They are quite different from private laws which normally establish the rights and duties of individuals in their dealings with each other, and which must be enforced by the party whose rights have been violated. The chapter outlines the sources of law, and provides a general explanation of the common law (including equity) as a source. The nature of this body of law should also be carefully examined, as the law described in a large part of the text is of this type. In particular, the Law of Tort in Chapters 4 - 6, the Law of Contract in Chapters 7 - 14, the Law of Agency in Chapter 15, the Law of Bailment in Chapter 20, and a number of other areas of the law are essentially part of the "Common Law". Chapter 1 also introduces the first of many legal terms and definitions which must not only be memorized, but understood. The various definitions of the term "law" along with definitions of "rights" and "privileges", "Common Law", "equity", the doctrine of stare decisis, "statute", and "civil code" are explained, and the material concerning these terms should be carefully reviewed, as the terms are frequently used throughout the balance of the text. The various terms used to describe the different classifications of the law should also be noted. The Review Questions at the end of the chapter should provide a sufficient test of student knowledge of the essential material and are reproduced with comments.

Review Questions 1. What impact does the Canadian Charter of Rights and Freedoms have on rights and freedoms not mentioned specifically in the Charter? Could these "other rights and freedoms" be curtailed or extinguished by governments? Answer: The Charter recognizes the existence of other rights and permits them to continue except where they conflict with Charter rights and freedoms. Rights outside the Charter do not have Charter protection, and may be abolished or encroached upon by governments.

2. What is the difference between a "right" and a "privilege"? Answer: A right is an act that may be done with impunity and with the support and recognition of the state. The state recognizes a right as something which neither it nor others may deny. A privilege is something which the state allows or permits under specific circumstances at the pleasure of the state.

3. Why are "rights" and "duties" often considered together when one thinks of laws? Answer: Because "rights" often permit a person to do something that interferes with others, laws generally include obligations or duties on the person possessing a right to exercise the right in a particular way to minimize interference with others. Laws may also include duties on those affected by the exercise of a right to permit the right to be exercised.

4. Could a society exist without laws? If not, why not? Answer: A complex society certainly could not exist without laws, as some means of regulating the activities of people would be necessary to maintain order. Even in a primitive society, rules regulating fairness in vengeance matters were necessary.

5. "Advanced civilizations are generally characterized by having a great many laws or statutes to control the activities of the citizenry." Comment on the validity of this statement. Answer: This is a valid observation. Advanced civilizations are characterized by persons engaged in activities which involve a great deal of social contact and interaction. Historically, they have also involved many people living in close proximity to each other (in cities). Each type of social interaction usually requires some legislative control, hence, the more interaction, the more laws that are required.

6. On what basis are Charter fundamental rights and freedoms open to restriction by Parliament or the provincial legislatures? Answer: Fundamental rights and freedoms may be restricted under s. 1 if the restriction can be shown to "be demonstrably justified in a free and democratic society." Rights and freedoms may be "temporarily" overridden by the "notwithstanding" clause (s. 33) as well.

7. Why is the doctrine of stare decisis an important part of the Common Law system? Answer: The doctrine of stare decisis is the theory of precedent. Judges are expected to apply previous decisions to similar cases which come before them in order to maintain a degree of consistency in the law. By following this doctrine, the law is not only consistent, but others can predict how the law may be applied in similar.

8. How does the Common Law differ from the principles of equity? From statute law? Answer: Common Law and equity have different roots. The common law was the product of the common law courts. The principles of equity were originally principles or rules which the King applied in settling disputes which did not fall within the jurisdiction of the common law courts. Later, the King's Court (Chancery) used the same and other principles in order to provide fair and just results. At present, the courts may apply both common law and equity, but where conflict exists, equity prevails. Equity

differs from statute law in the sense that statute laws are written or codified laws, whereas the principles of equity are found in the recorded judgments of the courts.

9. How does a legislature establish a new law? Explain the procedure. Answer: The usual process is as follows: a. A bill (essentially a proposed law) is presented to a legislative body (Parliament or provincial legislature). b. A motion is made (and passed) to have the bill 'read' a first time. c. The bill is then printed and circulated to the members to study. d. The bill is later brought forward for debate (second reading) in principle. e. If the bill passes the second reading stage, it is sent to a Committee for study and amendment on a clause by clause basis. f.

Once passed by the Committee, the bill is reported in final form by the Chair of the Committee for a third reading.

g. The bill is then debated for a final time by way of a motion to have the bill read a third time. h. If passed by a majority vote, the bill at the federal level goes to the Senate where a similar process is followed. i.

Once a bill has been passed by the House of Commons and Senate (or a provincial legislature) it goes to the Governor-General (or Lieutenant-Governor, if provincial) for royal assent.

The bill becomes a law on receipt of royal assent, and effective as a law when proclaimed in force.

10. Define substantive law, and explain how it differs from procedural law. Answer: Substantive law - law which sets out the rights and duties of individuals and corporations. Procedural law - law which set out the procedure whereby substantive laws are enforced.

11. Describe the difference between the Common Law and the Civil Code of the Province of Quebec. What are the relative merits of each system? Answer: Common Law consists of the recorded judgment of the courts. The civil code is a written body of law. Merits of civil code: laws are written down and may be consulted to determine what the law is. The law can be changed by statute amendment and kept up to date by the legislature if change is

warranted. Merits of Common Law: flexible, as judges may change it through interpretation, or by distinguishing the case at hand from the precedent. Adaptable to changing social attitudes.

12. "The supremacy of the state was reached when it managed to exercise a sufficient degree of control over the individual to compel him or her to use the state judicial system rather than vengeance to settle differences with others." Why was it necessary for the state to require this of the individual? Answer: When the state lacked the power to control its citizens, individuals used their own means to resolve disputes, as it was the only method whereby a person could obtain redress. Vengeance, however, often disrupted the entire community, and affected others not involved in the dispute. Once the state had the power to compel citizens to obey its decrees, it could substitute orderly procedures for settlement which caused less disruption to the community than vengeance.

13. How does a "regulation" made under a statute differ from other "laws"? Answer: A regulation under a statute is a rule that is made to enable an administrative tribunal to carry out duties assigned to it under a statute. Regulations govern the activities of administrative agencies or boards, and are often administered by them. Regulations are subordinate to statutes, but in application, have much the same effect on persons who engage in activities subject to the regulations.

14. Explain how the enforcement of a public law differs from the enforcement of rights under private law. Answer: Public laws are enforced by the Crown against the individual. Private law rights are enforced by individuals against other individuals.

15. The Canadian Charter of Rights and Freedoms has been described as being "supreme" law, or law which is "entrenched." Why, or in what sense is this the case? Answer: The Charter is "supreme law" in the sense that it overrides all other federal and provincial laws, and all such laws must not conflict with it, except as permitted. It is "entrenched" in the sense that it is difficult to change.

16. Explain the Common Law system, and how it relates to the function of the courts. Answer: The Common Law system is a system where the laws are not codified, but may be found in the recorded judgments of the courts. Courts maintain a degree of consistency in the law by following the doctrine of stare decisis (precedent).

17. Does the Canadian Charter of Rights and Freedoms permit the Supreme Court of Canada to override the will of Parliament or a provincial legislature? If so, in what way?

Answer: The Supreme Court of Canada, as chief interpreter of the legislation, may override the will of Parliament or a provincial legislature where the law violates the Charter. It may not override if the law is passed pursuant to the s. 33 "notwithstanding" clause.

18. If changing social attitudes or values dictate a change in the Canadian Charter of Rights and Freedoms, how would this be accomplished? Answer: The Charter of Rights and Freedoms may only be changed by agreement of Parliament and 2/3rds of the provinces, provided that the provinces represent at least 50% of the population of all of the provinces.

19. Why is the word "law" so difficult to define in a precise manner? Answer: Law is difficult to define because in practice it is applied indiscriminately to rights, privileges, rules, principles, and statements.

20. In what way does the Constitution Act, 1982 affect the legislative jurisdiction of the Parliament of Canada and the provincial legislatures? How are questions of jurisdiction decided? Answer: The Constitution Act, 1982 includes the British North America Act, 1867, as amended, which sets out the legislative powers of the provinces and the Parliament of Canada. If legislation passed by either a province or the federal government is alleged to have exceeded the legislative authority granted to it under the Constitution, the Supreme Court of Canada has the power to decide if the body has the authority to pass such legislation, and would decide if the law was ultra vires.

Mini-Case Problems 1. A freight train derailed, dumping dangerous chemicals into a small stream in British Columbia, causing significant environmental damage. What jurisdictional issues are raised by this scenario? Answer: The jurisdiction of the province to regulate environmental matters may collide with the federal government in regulation of railways (transportation).

jurisdiction of the

2. A coastal province passed a law prohibiting boats and ships from dumping waste along its shoreline. A ship‘s captain was later charged with commission of such an offence. What defence may exist to such a charge? Answer: The defence may be that the provincial law is ultra vires (beyond its jurisdiction), as shipping is a matter of federal jurisdiction.

regulation of

3. Simone believes that genetically-modified foods are extremely dangerous for people to consume. What paths can she take in fighting (legally) for her belief? Which one would be the most efficient? Why? Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-8

Answer: While it may be possible for Simone to sue manufacturers of genetically-modified foods for producing ―something dangerous‖ or seek injunctions against the sale of these goods (details in later chapters), it would be far more efficient for her to champion a legislative response, to see genetically modified foods regulated by government.

Case Problems for Discussion Case 1 Mary applied for a job at the Millstone Restaurant. She was told her uniform would be a white blouse and black skirt, with a hem three centimetres above the knee. She agreed, but when she started work, she realized that female staff was dressed accordingly, but the men wore white shirts and black pants. At a later date, Mary appeared at work also dressed in a white shirt and black pants. The manager of the restaurant told her she was ―out of uniform,‖ words were exchanged, and Mary was fired. Is there a Charter issue here? Discuss. Answer: While a differential in dress requirements may or may not be an example of unreasonableness, unequal treatment, discrimination, or harassment, the Charter addresses the individual and his or her treatment at the hands of government, not matters between private individuals. Mary will have to look toward aspects of common law (later chapters) or provincial labour or human rights legislation.

Case 2 FM 96 Tiger Radio wanted to set up a three-day live remote event in a provincial park for the Labour Day weekend. The provincial parks commission approved the plan, subject to a payment of $4,100, comprised of a park event permit ($1,000), a sanitation charge ($1,000), a broadcasting permit ($500), a beer/wine premises special occasion permit ($1,500), and a fire inspection fee for the beer/wine consumption premises ($100). How should FM 96 respond to the provincial commission? Answer: By requiring an application fee or fee for service, and issuing a permit to allow a particular activity, the provincial authority is setting conditions or ―regulating‖ that behavior. All of the activities in the park that are listed are matters that a province can regulate, except broadcasting. The regulation of broadcasting is a federal matter, and ultra vires of provincial jurisdiction. The province has no right to demand this payment, and its ―permit‖ is meaningless. Case 3 In the year 1619, Maxwell was drunk, lost control of his horse and killed a child. No legal action was taken by the Crown. In the year 1859, Edward purposely drove his master‘s wagon over a man in the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-9

street. He was executed for his crime. In the year 1959, Sharon was sober, lost control of her car and killed a child. She was given a suspended sentence and ordered to pay a $100 fine, and was sued by the child‘s parents for damages of $1000 in funeral costs. In the year 2019, Karl was drunk, lost control of his car and killed a child. He was given one year imprisonment, a $1000 fine, a lifetime driver‘s licence suspension and was sued for $2.5 million for emotional distress by the parents of the child. In what way is the principle of stare decisis at work here, if at all? Answer: The principle of stare decisis is at work, despite the fact that the penalty has evolved over time. Recalling that one of the strengths of the principle is that it can respond to the norms of a changing society, the fact remains that causing death is wrong, and will attract a socially appropriate penalty. Each epoch of our society has had different conceptions of capacity, incapacity, and degrees of responsibility and liability in the operation of a mode of transport.

CHAPTER 2. THE JUDICIAL SYSTEM AND ALTERNATIVE DISPUTE RESOLUTION Chapter Topics Introduction Development of the Law Courts The Structure of the Judicial System The Judicial System in Action Administrative Tribunals Alternative Dispute Resolution (ADR) The Legal Profession The Role of the Legal Profession Summary Key Terms Review Questions Mini-Case Problems Chapter Objectives Knowing where and how to enforce rights and obligations is a key business survival skill. After study of this chapter, students should be able to: • Describe the development, content and structure of the judicial system. • Explain the sequence of steps in court procedure, particularly civil court procedure. • Identify how and why alternative dispute resolution may be the best option for the settlement of business disputes. • Explain the role of barristers and solicitors, the range of services provided by the legal profession, and the concept and limitations of court costs.

CHAPTER COMMENTARY Chapter 2 represents a continuation of the material contained in the previous chapter, but focuses upon the administration of the law. The text material includes the structure of the courts in Canada, and as a class exercise, it might be useful to carry simple criminal and civil actions (based upon easily understood incidents) through the various steps and appeals to their final resolution at the highest appeal levels. In this fashion, the text material may be re-enforced, and the various limitations on appeal, etc., noted in the process. The distinction between criminal and civil proceedings should be emphasized, as experience has indicated that students frequently fail to realize that an incident which gives rise to both civil and criminal proceedings (such as a "criminal negligence" incident) would follow two separate legal paths, one dealing with the criminal act, and the second, dealing with the civil aspect. Some time should be given to the procedure by which judgments of lower courts may be appealed. The conditions under which a judgment may be appealed should be stressed (error of law, rejection of important evidence in reaching a decision, etc.) and the appeal routes examined for both civil and criminal cases. These are depicted on the charts which follow.

Since alternate dispute resolution (ADR) is considered by many business firms as a more efficient system of resolving disputes, the topic should be opened for class discussion as an alternative to the court system. Discussion should note the particular advantages of ADR over the court system (speed of resolution, lower costs, etc.) but it should also be noted that certain kinds of disputes still lend themselves to court resolution.

Review Questions 1. Why is arbitration sometimes a more attractive means of settling contract disputes between business persons? Answer: Arbitration is a confidential process as well as a relatively low cost and efficient process for resolving disputes. Often business people do not wish to destroy a business relationship if a dispute arises, and arbitration will often allow them to obtain an answer or solution to their problem that will allow them to continue to do business with each other.

2. Discuss the importance of an independent judiciary. Answer: Important because: (a)

not open to manipulation by political action.

(b)

free to resolve differences between individuals without fear of the consequences.

(c)

able to determine differences between governments without concern that the powers of the court will be attacked.

(d)

permanent body to administer the law is vital in order to maintain continuity and confidence in the system.

(e)

"independence" generally equated to "fairness".

3. If a provincial government should pass a law which prohibits any person from expressing any criticism of any elected government official on penalty of imprisonment, how might the law itself be challenged? Answer: A person accused may ask the court to review the law in the light of the Charter of Rights and Freedoms or the jurisdiction of the province to make such a law. The court will then determine if the law is enforceable.

4. Explain the differences between a Small Claims Court and a Magistrate's Court. Answer: A Small Claims Court deals with civil disputes between individuals where the monetary amount is small (limit varies from province to province, $3,000 - $10,000, and in some, up to $25,000). Magistrate's Court is a court which enforces by-laws, provincial statutes and the Criminal Code (except for the more serious offences). It does not deal with civil disputes.

5. On what basis is it possible to justify the right of the court to declare unconstitutional legislation enacted by a legislature? Answer: The right may be justified because the court represents an independent, permanent body that is made up of persons with the expertise to interpret the constitution and to oversee its application. No political body is able to do so in an unbiased or fair manner. 6. How does a criminal case differ from a civil action? Answer: Criminal: -

Crown brings the charge against the accused. A two-step process in many cases: (1) preliminary hearing, (2) full hearing.

Crown obliged to prove the particular offence was committed by the accused, and that the offence is one which is set out in the criminal code.

Crown must prove act, identity, and intent to commit the offence (subject to certain exceptions).

must prove its case beyond any reasonable doubt in order to obtain a conviction.

Civil: -

the party who alleges a violation of his or her rights brings the action.

onus of proof of facts alleged rests on the plaintiff.

case is outlined through "pleadings".

plaintiff not subject to the higher standard of proof of criminal courts.

7. In criminal proceedings, what obligation rests on the Crown in order to obtain a conviction? Answer: Crown must normally prove beyond any reasonable doubt that the accused committed the particular offence, intended to commit it, and was the person who committed it.

8. What is the purpose of "pleadings" in a civil case? Answer: The purpose of pleadings in a civil action is to set out the facts of the case and the issues in dispute in sufficient detail to enable each party to know the matters in dispute and prepare their respective cases for the trial. They avoid surprise at trial, and minimize the time required by the courts to dispose of the case.

9. How does "direct" evidence differ from "opinion" evidence? How do these types of evidence differ from "hearsay" evidence? Answer: "Direct" evidence is given by ordinary witnesses who testify as to what they heard, saw, or did. "Opinion" evidence is evidence given by experts who have special knowledge about the subject matter of the evidence, and who express an opinion about the matter based upon their specialized knowledge or expertise. Hearsay evidence is neither direct nor expert evidence, but evidence given by a third party who was informed by someone else (usually a person who would normally be an ordinary witness) of the facts. Hearsay evidence is usually not admissible in a court of law.

10. Describe the role performed by legal counsel in the administration of justice. Answer: Legal Counsel are learned in the law and advise others of their legal rights and duties. They also carry out on behalf of their clients the job of processing an action through the courts or negotiating legal matters on their behalf.

11. Distinguish between a "barrister" and a "solicitor". Answer: A barrister is a lawyer who handles litigation matters on behalf of clients. A ―court-room‖ lawyer. A solicitor advises clients of their legal rights and duties, and normally prepares contracts, deeds, wills, and other legal documents for clients.

12. On what basis might an appeal be allowed from a judgment of a court of original jurisdiction? Answer: An appeal may be allowed where the judge improperly applied the law, (improperly instructed the jury as to the law) or made an error in rendering a decision.

13. Where a judgment is reviewed by a Court of Appeal, what type of decision might the court make? Answer: A Court of Appeal may: (1) reverse the decision, if the trial judge erred. (2) affirm the decision of the trial judge, or (3) send the matter back to the lower court for a new trial.

14. What is a court of original jurisdiction? How does it differ from a court of appeal?

Answer: A court of original jurisdiction (sometimes referred to a court of first instance) is a court where a case is heard for the first time. A court of appeal is a court which reviews the decision of the court of original jurisdiction to make certain that the judgment was fairly and properly made.

15. How does arbitration differ from a court action? Answer: Arbitration is conducted much like a court action, but in a much less formal setting. While the rules of evidence and procedure are usually followed, the process generally does not require pleadings or discovery. The parties are usually responsible for the selection of the arbitrator, and the arbitrator‘s fees. The hearing does not involve ‗court costs‘.

16. Explain the nature of mediation, and how it is used in the resolution of disputes. Answer: Mediation is an attempt to resolve a dispute between parties prior to formal court or arbitration proceedings by a third party through a discussion process. A mediator has no authority to impose a dispute by suggesting ways in which the parties may reach agreement on a solution to their problem.

17. "In a free and democratic society, the courts perform the important role of guardians of the rights and freedoms of the individual. While important, this is far from being the only part they play in society." How do the courts perform this important role? What other functions do they have in society? Answer: Courts guard the rights and freedoms of the individual by acting as the medium through which rights and duties are determined and enforced. They also act as a "check" on government action which might improperly encroach on the rights and freedoms of individuals protected by the Charter. Finally, they preserve peace and order by providing an obligatory process for dispute resolution (replacing vengeance).

Mini-Case Problems 1. Michael, an otherwise well-behaved boy of 11, fell in with Gavin, 13, a repeat offender as a delinquent. The boys were arrested by police while spray painting a school and breaking into a portable outside classroom. Under the provisions of the Youth Criminal Justice Act, there was no public disclosure of their names, and the Youth Court proceedings were sealed from public scrutiny now and future. Are the provisions of the law appropriate for both boys? Whether yes or no, explain why. Answer: The fact situation calls for a reasoned opinion, rather than a yes or no answer. In most instances students will provide an answer that in some measure provides a reflection of their personal values, as well as their perception of the criminal justice system.

2. Anne is unsuccessful in her suit at trial and on appeal to the provincial appeal court. If she wishes to proceed, where must she go, and what burden will she face before her case will be heard again? What factors may prevent her case from being heard again? Answer: The only remaining route of appeal for Anne is to the Supreme Court of Canada, however this appeal is not a matter of right. She faces the burden of being successful in seeking ―leave to appeal‖ before she can have her case presented. The Supreme Court of Canada could give leave to hear any case it wishes, however it is doubtful that it will do so unless it is in the public interest, and/or commonly, any of the following: errors at appeal are evident such that a denial of fundamental justice would otherwise take place, a significant Charter or other constitutional determination is at stake, or the lower ruling employs outdated Common Law in need of reform.

3. Carlson invented a new valve for natural gas pipelines, and sold his drawings to Pipeco, a manufacturer of such items. A dispute arose before production began, and both parties immediately agreed to ADR. What would lie behind this mutual aversion to court proceedings? Answer: The most likely reasons behind the selection of ADR in this case are (in order of importance): (a) Secrecy – the invention is new, which may have great value from a competitive standpoint. (b) Speed – production is likely set up already and any delay is expensive. (c) Cost – a cheaper proceeding producing a better result is in the interest of both parties.

Case Problems for Discussion Case 1 A backhoe owned by Digger Ltd. was involved in the trenching for a water pipeline located along a city sidewalk. In moving a bucketful of rock into a waiting truck, the backhoe operator accidentally struck and cut an overhead power line. The cut power line fell to the sidewalk, injuring and electrocuting a pedestrian who had been observing the trenching. The pedestrian required extensive hospitalization and reconstructive surgery, and later commenced legal proceedings against Digger for the injuries suffered, including six month‘s lost wages while hospitalized. Outline the various steps the parties to the action would take to bring the case to trial, and briefly describe the trial process. Answer: The case is quite straightforward, and students should not be thrown off by the causal chain of backhoe, power line and passer-by. Although students have not yet been exposed to the principles of negligence law, most will recognize the duty, breach, damage elements of this incident and as something more than a simple and blameless accident. As to the substance of the question, the stages by which the case will be Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-16

brought to trial, and the trial process itself, are described the sections entitled ―Civil Courts‖ and ―Civil Court Procedure‖. Case 2 As the Head of Information Systems at Equity Brokerage, you maintain the computer systems which support all aspects of stock trading accounts at Equity, including access for trading purposes. Your firm is being sued by a customer who alleges trading irregularities occurred on her account. When you testify at trial as to the identity of the person who conducted the transactions and the actions that affected the status of the account, what kind of witness are you, and what kind of evidence are you providing?

Answer: Despite having some particular expertise, the witness would be considered to be only an ―ordinary witness‖. As an employee of the defendant firm, the witness lacks the independence of opinion that is usually one of the hallmarks of most ―expert witnesses‖. As the witness has direct knowledge of the events (regarding the computer system itself), the witness is giving ―direct‖ evidence rather than ―hearsay‖. Case 3 Farhan is personally injured and his home is badly burned by a toaster oven that, on first use, burst into flame. With Farhan successful in an action for damages, what factors should a judge take into consideration in determining the issue of costs? Answer: The issue of an award of costs is covered in the section entitled ―Court Costs‖. The judge would take into account the behaviour of the parties, especially the defendant, in forcing the case to a judicial hearing. While there may be genuine issues for trial, including the amount of damages claimed, the judge will be concerned as to whether the defendant manufacturer was simply attempting to stall or bankrupt Farhan, thus perverting justice rather than seeking it. Such efforts will be penalized in costs, in addition to disposing the court toward generosity in the award in the first place.

CHAPTER CHARTS

Table 2–1 Trial Level Jurisdiction Alberta British Columbia Manitoba New Brunswick Newfoundland & Labrador Northwest Territories Nova Scotia Nunavut Ontario Prince Edward Island Quebec Saskatchewan Yukon Territory Appeal Level Alberta British Columbia Manitoba

Designation of Court Court of Queen’s Bench of Alberta Supreme Court of British Columbia Court of Queen’s Bench of Manitoba Court of Queen’s Bench of New Brunswick Supreme Court of Newfoundland & Labrador (Trial Division) Supreme Court of the Northwest Territories Supreme Court of Nova Scotia Nunavut Court of Justice Superior Court of Justice Supreme Court of Prince Edward Island Superior Court of Quebec Court of Queen’s Bench for Saskatchewan Supreme Court of Yukon Designation of Court Court of Appeal of Alberta British Columbia Court of Appeal Manitoba Court of Appeal Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-19

New Brunswick Newfoundland & Labrador Northwest Territories Nova Scotia Nunavut Ontario Prince Edward Island Quebec Saskatchewan Yukon Territory

Court of Appeal of New Brunswick Supreme Court of Newfoundland & Labrador (Court of Appeal) Court of Appeal for the Northwest Territories Court of Appeal for Nova Scotia Nunavut Court of Appeal Court of Appeal for Ontario Court of Appeal of Prince Edward Island Court of Appeal of Quebec Court of Appeal for Saskatchewan Court of Appeal of Yukon CHAPTER 3. BUSINESS REGULATION

Chapter Topics Introduction Government Regulation of Business The Hearing Process Broad-Policy Administrative Law The Appeal Process for Administrative Decisions Summary Key Terms Review Questions Mini-Case Problems Chapter Objectives Regulation can have more immediate impact on how we do business than either legislation or case law. After study of this chapter, students should be able to: • Describe the effect of regulation and distinguish it from legislation. • Identify and describe the activities of administrative tribunals. • Recognize matters of federal versus provincial jurisdiction. • Describe the elements of natural justice. YOUR BUSINESS AT RISK Many businesses are tempted to gloss over or ignore seemingly burdensome administrative rules and procedures. However, government regulation and administrative tribunals have more power than most business persons realize. Failing to comply with administrative law provisions can result in immediate and drastic consequences for businesses and their owners.

CHAPTER COMMENTARY Chapter 3 examines the regulatory process that governments use to control business activities. It differs from what students may view as a legal process in the sense that most of the ‗law‘ or the rules are made by bureaucrats and enforced by them. Students should be made aware that administrative agencies and commissions play a significant role in the business scene as they represent the means by which the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-20

government seeks to protect public health and safety, ensure fair competition in the marketplace, and generally protect the consumer from unfair business practices. The regulation of the professions also ensures that a level of competence is established and maintained through a licensing process. Discussion of administrative agencies or commissions should also emphasize the fact that the usual methods of regulating business and the professions is through a registration or licensing system. The registration or license is the means by which control is maintained, since in most cases the failure of a business or professional person to comply with the rules or requirements set down for the business or profession could mean the loss of the registration or license to carry on the business or practice the profession. Students should also be made aware that the termination of a registration or the lifting of a license to practice a profession or carry on a business must be in accordance with the rules of natural justice, and a hearing process, and perhaps an appeal process must be made available to the affected party to ensure fairness in the decision. Students should also be made aware that administrative tribunals set down rules and procedures to carry out the policy objective of the government, and that these ‗rules‘ are usually set out in regulations made under the particular statute. These regulations have much the same effect as statutes, but are subordinate legislation in the sense that they do not follow the enactment process for ordinary legislation.

Review Questions 1. What are the rules of natural justice, and how do they apply to a board that acts quasi-judicially? Answer: The rules of natural justice require the board or agency to give the affected persons notice of the charges made against them, and to provide them with the opportunity to prepare and present their side of the issue to the decision-makers. This usually takes the form of a hearing where evidence and argument may be presented before the decision-makers.

2. Explain how an administrative law differs from other laws. Answer: An administrative law establishes broad policy objectives then delegates the enforcement to an administrative body to carry out the policy objectives. An ordinary statute will normally state the policy objective(s) and require compliance under penalty for failure to comply. In the case of an ordinary statute, the courts are used to obtain compliance.

3. Explain how governments regulate the professions. What type of body is usually created for this purpose? Answer: Governments usually regulate the professions by establishing a non-government body of the profession to set standards for entry into the profession and the maintenance of the standards by its members. To protect the public, the professional association is usually granted the right to license practitioners of the particular profession and to revoke the license of those that fail to maintain the standards of the profession.

4. What administrative controls are used to control or regulate business activities that offer services to Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-21

the public? Answer: The usual control method is by registration or license to carry on the particular business activity, and to prohibit anyone from conducting the activity unless registered or licensed. 5. Outline the process that an administrative body must follow if it wishes to revoke an individual‘s license? Answer: An administrative body must usually establish a procedure whereby a hearing is held to enable the affected party to appear and to defend against the complaint before a final decision is made. In some cases an appeal may be made to an independent tribunal where a revocation of a license takes place.

6. What is an administrative law? Answer: An administrative law is a law that not only establishes the broad policy objectives of the government but establishes an agency, board, or commission to carry out the policy objectives, and includes the rules or procedures that the agency, board or commission may make to ensure that the policy objectives are met.

7. Under what circumstances may a decision of a board or commission be appealed to the courts? Answer: As a general rule, an appeal may only be made to the courts where the administrative body has acted quasi-judicially, and either failed to follow the rules of natural justice, or made a decision that is patently unreasonable, or where the decision-maker was biased.

Mini-Case Problems

1. Norman seeks a licence to operate a taxi in a major city and applies in writing to the City Taxi Commission. Two days later, he receives a letter in reply: ―Dear Norman: Upon careful review of your application, your request for a licence is denied. Signed: Chair of Taxi Commission." Advise Norman of his rights. Answer: Although it may be difficult, Norman may feel that that the extremely rapid response to his application suggests that it was not reviewed at all, despite the reply stating that a careful review had been performed. While some municipalities may allow an appeal to the municipal council itself, it is likely no appeal route exists, and his only recourse would be an application for judicial review before a court. He would allege that such cursory treatment of his taxi application amounted to a denial of natural justice. 2. Janine is a herbalist, preparing certain natural tonics she believes to be ―beneficial to the human Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-22

spirit.‖ Her activities are located in a province which does not regulate such matters. Carla is similarly occupied, as a registered herbalist, in a province which does regulate the trade. Aside from federal regulation of drugs, in what way would these two persons be differently affected if one of their preparations turns out to have adverse effects? Answer: Janine will be liable to answer to the standard of common law liability only. Carla will have the same responsibility, but other standards to meet as well. At minimum she must meet the standards set by her provincial regulators, as well as those of any professional body in which she is a member. The profession may be self-regulating (presently, herbalist are not), which replaces the provincial regulatory standards.

3. A provincial Liquor Control Agency discovers that a licensee tavern has sold liquor to minors on two occasions and orders suspension of the tavern‘s licence for a period of seven days. A month later, a different tavern is found in violation on essentially identical facts, and the Agency suspends its licence for a period of fourteen days. Is there a ground for appeal of the harsher suspension? Answer: There is probably no ground for appeal of the harsher suspension. The principle of stare decisis does not apply in any strict manner to administrative tribunals, and even so, at issue is the penalty, not whether the violation was committed. Assuming there is no denial of natural justice in the handling of the case at hearing, no real basis for appeal will exist.

Case Problems for Discussion Case 1 A restaurant licensed to sell liquor served several bottles of wine to a couple who had visited the restaurant for dinner. Both of the patrons had after dinner drinks, and when they were ready to leave, the restaurant owner offered to send them home in a taxi, since they were, in his opinion, unfit to drive. The patrons accepted the offer, and took a taxi home. Upon reaching home, they decided to return to the restaurant and pick up their car. They called another taxi and were taken to the restaurant parking lot. They picked up the car, and on their way home, the driver lost control of the car, and crashed through the side of a wood-frame house, killing one occupant and injuring another. Investigating police charged the driver with criminal negligence causing death (among other charges), and the provincial liquor authority revoked the licence of the restaurant. Discuss the issues raised in this case. What recourse might the restaurant have to restore its licence? Answer: The case does not suggest that a hearing preceded the revocation of the restaurant‘s liquor licence. Such an administrative act without a hearing would amount to a denial of natural justice. Had a hearing been held, the restaurant would have shown that the clients had been delivered home by the restaurant, surely answering all of its responsibilities (and more) under the regulations that govern it. The restaurant‘s recourse would be an application to a court for judicial review of the tribunal decision.

Case 2 A radio station employed a program host that repeatedly made disparaging and often sexist remarks about Canadian celebrities to the point where complaints to the Broadcast Regulator resulted in a cancellation of the station‘s license to broadcast. The station objected to the Regulator‘s decision on the basis that it had violated the station‘s right to freedom of speech and expression. Discuss the issues in this case. Would your answer be any different if the station had been located offshore on a ship beyond the 12 mile limit? Using the Internet from an offshore location?

Answer: Students may or may not realize that a licence to broadcast is a privilege, and thus subject to conditions or particular standards of conduct. Breach of those conditions and standards and conditions may result in loss of the licence. Whether students are aware of this or not, students should grasp that Charter rights are subject to limits demonstrably justified in a free and democratic society, and as such, freedom of expression and freedom of speech do not mean freedom of defamation, freedom of oppression and freedom of opprobrium. (see: Genex Communication v. C.R.T.C. 2005 FCA 283, leave to appeal to SCC denied. Regarding foreign ship and Internet broadcasts, these are physically beyond the reach of the Canadian regulator. Without having a Canadian licence to lose in the first place, nor a Canadian presence, very little leverage can be brought to bear against broadcasters located outside Canada in cases of offensive content.

CHAPTER 4. INTENTIONAL TORTS Chapter Topics Tort Law Defined The Development of Tort Law Intentional Interference with the Person Intentional Interference with Land and Chattels Business-Related Torts and Crimes Summary Key Terms Review Questions Mini-Case Problems Chapter Objectives After study of this chapter, students should be able to: • Identify intentional interference with a person that constitutes a tort. • Explain the concept of vicarious liability. • Explain how land and chattels may be the subject of intentional torts. • Recognize business-related intentional torts and those that are crimes. YOUR BUSINESS AT RISK Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-24

This chapter is about civil wrongs: people and events that cause injury, and the rights of injured parties. You and your business are capable of causing serious injury or you or your business may be injured by others. When this happens, it is vital to know what sort of injury is recognized by the law. You must know where responsibility for that injury begins and ends, and what kind of compensation is available.

CHAPTER COMMENTARY Chapter 4 introduces the first area of the law of torts and some of the more important (and common) acts of intentional interference with persons or property. Since tort law represents one of the oldest areas of the law, its development is one of the best examples of laws which were established in response to the needs of society. Most of these principles were formulated long ago, and have been refined over the years as society changed. The basic intentional torts and the principles associated with them are examined in the first part of this chapter, and the concepts applied to business-related activities are found in the last part of the chapter. Note that the business-related torts set out are those where the intention to injure competitors is an essential component of the tort itself. Chapter 4 also examines a number of the more common torts that involve intentional interference with the rights, property, or person of another. These various torts rank among the oldest and, in many cases, constitute crimes under the Criminal Code. For the purpose of re-enforcement, it might be a useful exercise to note once again that torts (and in particular the torts covered in this chapter) may be subject to both civil and criminal proceedings if they constitute crimes as well as civil wrongs. Many of the torts described in this chapter in some instances have an a defence which may constitute Many of the torts described in this chapter in some instances have an a defence which may constitute justification for the act, and may wholly or partially absolve the actor from liability. These should be discussed, along with their limits. Ex: assault/battery and the act of self-defence. Similarly, the tort of defamation, and the defence of privilege should be examined. Most of the torts described in the chapter are generally well-known to students, and class discussion should perhaps be used to explore the various defences in detail, as well as the issue of damages or compensation for the party injured by the wrongful act. Unlike the torts covered in the next chapter, those described in Chapter 4 are not directly concerned with the concept of foreseeability, etc., but more with the question of intent to injure. Because these torts tend to be deliberate acts, this aspect of the various torts should be emphasized. Care should be taken, however, to note the exceptions such as battery situations, where the 'touching' is without consent, but where the intention is not to injure. For example, a medical practitioner performs a surgical procedure without the patient's consent. The medical practitioner may have had the best of intentions, and performed the operation to improve the patient's health, but in doing so without consent would have committed a battery. The chapter also introduces a number of new legal terms that you will find described in the ext material: assault, battery, false imprisonment, defamation, slander, libel, trespass, conversion, and punitive damages. Definitions of these terms should be committed to memory and understood thoroughly by the students. In addition to the text description, the Glossary at the back of the text might be consulted for brief definitions of the various terms. While the particular torts described in this chapter tend to be among the oldest, the very oldest are perhaps the torts of assault and battery. It is important to note with these particular torts that the assault is the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-25

threat of violence, and the battery is the touching of the victim without consent. The quote from the case of MacDonald v. Hees examines the act of assault, along with a few comments on how it is established in a tort action. Another very old tort, the tort of false imprisonment, is also described in the chapter, and it may come as a surprise to students that actual physical seizure or restraint is not always necessary to constitute this tort. As the text indicates, the mere threat of pursuit and the embarrassment of seizure if the person should attempt to leave the premises is sufficient in certain circumstances. The law as it relates to defamation (libel or slander) and the defences to defamation are set out in of the text. While the tort is quite straight-forward, the defences often create some difficulty. The truth of the statement, qualified privilege, absolute privilege, and public interest are four defences outlined in the text. Persons speaking in Parliament or in court have absolute privilege in so far as statements they make are concerned, and the statements do not constitute torts, even though the statements may seriously injure the reputation of others. Qualified privilege, on the other hand, may be somewhat more difficult to understand, because the law does permit persons under limited circumstances to make statements which they honestly believe to be true at a point in time, and which later may prove to be false. The letter of reference mentioned in the text is a good example of the type of situation where a qualified privilege may arise, as the law must "balance" two interests: the protection of the individual's reputation on the one hand, with the bona-fide interest of the person who receives the communication on the other. In addition to questions of privilege, are matters of public interest. The Supreme Court of Canada has ruled that responsible communication with attempts to verify sources may be raised as a defence in matters that may be otherwise damage a person‘s reputation, but for some urgency of public interest. Interference with land and chattels represent the torts of trespass to land and conversion. The quote from Wiretap Reference, 1984 CanLII 31 (SCC), presents the position the courts take towards property and the owner's right to exclude others. The judge in the case outlines the nature of trespass, and indicates that a person who trespasses need not cause damage to the property to be liable at law for the act. Business-related torts and crimes tend to be those torts designed to injure competitors by slandering their goods or their business name. Students should be reminded that the reputation of a business and the reputation of a product are important 'assets' of a business and entitled to protection under tort law. The protection of a reputation of business (or product) is possible by way of an action for slander of goods or slander of title, but it should also be noted that untrue statements about the reputation of a business person would be actionable as defamation. Breach of confidence is a tort often related to improper disclosures of business or trade secrets. Where unlawful acts of one person consequentially interfere with the economic relations between another person and a third party, this has been ruled as a tort by the Supreme Court of Canada. The interference itself may be an independent crime, but its effect is a tort. Certain business-related activities are actual 'crimes'.. Note that some of these activities are covered in greater detail in other chapters of the text. For example, conspiracies to fix prices, etc., are covered in Chapter 32 which deals with the Competition Act. Instructors teaching a one-term course may wish to expand upon the material in Chapter 4 by reference to the material in Chapter 32 if they do not intend to include the latter Chapter in their course material.

The Court Decisions in this chapter illustrate two of the more common intentional torts, and two of the defences. In the case of Bruce v. Dyer, the Judge explains the law of assault and the right of self-defence. In your discussion take note that the right of self-defence arises when the defendant has reasonable grounds for believing that he or she is about to be attacked and cannot safely avoid the attack. It should also be noted that the use of force in self defence, as the Judge indicates, must only be the amount of force necessary to stop the assault (i.e. it cannot be excessive).

Review Questions 1. Distinguish between the civil and criminal aspects of intentional torts such as assault and battery, or false imprisonment. Answer: The civil aspects involve compensation for the injury suffered and perhaps punitive damages to deter the wrongdoer from repeating the act. Criminal aspects concern only punishment by the state for the breach of the peace.

2. How does an "assault" differ from a "battery"? Must both have a violent element to them? Answer: Assault represents a threat of violence. Battery involves the touching or striking of another. Battery need not have a violent element, as it is the touching of another without his/her consent. E.g.: a surgeon performing unauthorized surgery on a patient may constitute a battery.

3. Under what circumstances might a person accused of assault and battery raise self-defence as justification? Answer: Self-defence may be raised as a defence where a person had a genuine fear of injury to their person as a result of a threat of violence (assault) and acted to prevent the battery. See Bruce v. Dyer for example.

4. Explain the circumstances under which the tort of false imprisonment might arise. Answer: Any unauthorized restriction on the freedom of an individual may constitute false imprisonment. This may include a case where a shop-keeper apprehends a person stealing merchandise from a shop, and requires the person to remain until the police arrive.

5. Distinguish between slander and libel. Why is libel generally considered to be more serious in the eyes of the law? Answer: Both constitute defamation. Slander is spoken defamation. Libel would be written defamatory statements. Libel is the more serious as it is recorded, and others may read it over the years. Slander may soon be forgotten.

6. Define qualified and absolute privilege, and explain the circumstances where each might be claimed. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-27

Answer: Absolute privilege - statements made in Parliament, before legislative Commissions, in court, coroner's inquests, or in certain quasi-judicial proceedings. Places where it is in the public interest to permit absolute freedom of comment. Qualified privilege - statements made in good faith and without malicious intent where, on balance, it is in the interest of the public to have the statements made on the basis of honest belief in their truth, e.g.: letters of reference.

7. How does the tort of trespass to land arise? Must damage occur for the tort to be actionable? Answer: Trespass to land arises where a person enters on the land of another without authority or permission to do so. No damage need occur for a trespass action to stand.

8. Explain the difference between the conversion and theft of goods. Answer: Conversion is the willful refusal to deliver up goods to the rightful owner where the goods came into the hands of the person either by lawful means (permission of the owner) or by unlawful means. Theft is the unlawful taking of goods.

9. Explain slander of title. How does this differ from ordinary tort law related to defamation? Answer: Slander of title arises where a person makes an untrue statement about the right of another person to the ownership of goods.

10. Explain the rationale behind the law that condemns as a tort any third-party interference with the performance of contracts made between other persons. Answer: The purpose of the law is to support the rights of the parties under a contract, and to discourage any third party from interfering with the performance of contractual duties. 11. Define: ―passing off‖, ―plagiarism‖, ―slander of goods‖. Answer: Passing off:

Selling goods represented as being the goods of another well known reputable maker or seller.

Plagiarism:

The theft of the design, etc. of goods of another and presenting them to the market as if they were the goods of that maker, such as using another seller's trade name or mark.

Slander of goods:

A statement that alleges that the goods of a competitor are defective, shoddy or injurious to the buyer's health or safety.

12. Give an example of "involuntary entry on the lands of another." Answer: An involuntary entry on the lands of another might occur where a person is pushed off a road or sidewalk onto the lands of a property-owner, or where an aircraft experiences engine problems and makes a 'forced landing' in an open field of a property owner.

13. Does false imprisonment always have a criminal aspect to it? Explain. Answer: False imprisonment need not have a criminal aspect to it if it is done with the honest belief that the person detained has committed a crime. This belief, however, may not permit the person to avoid the tort consequences of the act. 14. To what extent, if any, is a publisher libel for the publication of a slanderous statement made by a person other than the publisher? Answer: Slander is the verbal publication of a defamatory statement. Libel is the written publication of a defamatory statement. A person who publishes a defamatory statement made by another knowing it to be untrue (such as in the case of a newspaper or magazine) would also be subject to a defamation action for publishing the untrue defamatory statement.

Mini-Case Problems

1. A lawyer who was also a professional boxer was traveling by train from Winnipeg to Regina. He was sitting next to a woman who, during the course of a conversation, said: ―Professional boxers should be charged with assault and battery each time they engage in a prize fight.‖ As a lawyer, how should he respond to her statement? Answer: With professional boxing, blows are struck with the tacit approval of the other fighter. Each voluntarily assumes the risk of injury provided that the rules of the sport are followed. There is no assault preceding a blow as both parties make no threats to injure the other. Volenti non fit injuria.

2. The house in which X resided was located on a busy street. From time to time, vandals had broken into his garage and stolen tools and equipment he had stored there. One evening, just at dusk, he saw someone enter his garage. He quickly rushed out to the garage, closed the door, locked it, then called the police. When the police arrived, X discovered that he had locked the municipal building inspector in the garage. Discuss the legal position of X and the building inspector. Answer: X, based upon past experience, had an honest belief that the person was a thief or trespasser. The building inspector, while perhaps entitled at law to enter on the property and inspect it, by his actions of not informing the property owner of his intention, gave X the impression that he was a thief. X's honest belief that he had

caught a thief may be an excuse. X's failure to determine the identity and reasons for the inspector's entry on the premises, however, may render him liable for the tort.

3. At a packed public meeting of town council, an irate taxpayer named Kilmer questioned the council repeatedly, at length and in detail, about a proposed new sewer system. Exasperated with Kilmer‘s domination of the questioner‘s microphone (but despite the audience‘s apparent contentment to let Kilmer ask questions), one of the councillors blurted: ―Kilmer, you‘re an idiot. In fact, you come from a long line of idiots. Can‘t you see we don‘t have all the sewer answers yet? It‘s just the early stage of the planning process for this.‖ Embarrassed, Kilmer left the room. If Kilmer approached you for advice, what would you offer? Answer: Kilmer may file suit for defamation, specifically, slander as the spoken form of defamation. The public meeting extends the damage, rather than protecting the speaker, for it is neither Parliament nor a quasijudicial proceeding, which would give rise to absolute privilege. If qualified privilege is advanced as a defence, it is unlikely to succeed, for the statements suggest a lack of good faith, and perhaps even malicious intent. One possible defence may be truth of the statements, but even in the face of medical proof, the use of slang and manner of delivery suggest the statements were made with the intent of humiliation.

4. You have decided to open a new nightclub in a university town and have decided to hire part-time employees as ―security staff‖ for the dance hours of 7 p.m. – 1 a.m. Write a set of notes regarding the policies you want your security staff to observe and the legal liability that may result if they fail to adhere to those policies. Answer: Students should cover the essential elements of assault, battery, self-defence and false imprisonment. As a matter of bonus, students may recognize that the employer will be vicariously liable for the torts of the employees committed in the course of their employment.

5. Joe hits Bob. Discuss the legal issues raised as a result. Answer: Students should identify and discuss the situations of battery (Joe is a mugger), consent (Joe and Bob are prize fighters), and self-defence (Bob has already hit Joe).

6. The Millport Trucking Company was under contract to Budget Foods Inc., a major grocery chain, for the delivery of fresh dairy products and eggs to its supermarkets in western Canada. A competing grocery retailer, FreshFood Stores Ltd., began posting comments and reviews on Budget Foods‘ website stating that its dairy products were overpriced and of poor quality. It blamed the quality problems at Budget on its unreliable transportation suppliers such as Millport Trucking, claiming its fleet of refrigerated trucks were always breaking down and aging the products. FreshFood‘s reviews further warned customers of the health dangers of consuming dairy products purchased at Budget Foods. Does Budget Foods have any recourse in this situation? Answer: Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-30

This situation raises several intentional torts. Defamation is at the heart of this situation and may be actionable by both Budget Foods and Millport Trucking using different arguments. FreshFoods posted libelous internet reviews that were intended to damage the reputation of Budget and to discourage customers from shopping there. Budget may also make claims stemming from intentional interference with economic relations, slander of goods and injurious falsehood. FreshFood‘s defamatory statements and actions targeted Budget‘s business enterprise as a whole by attacking the quality of its dairy goods and implying that customers may become ill if they consumed products purchased from Budget. Moreover, Millport may be discouraged from dealing with Budget in the future as a result of alleged unsolicited and unproven statements from FreshFoods. Millport Trucking‘s own reputation may have been harmed as a supplier to the grocery industry and it may also claim damages. FreshFoods may attempt to defend any of these actions by claiming its statements are true. It will have to satisfactorily prove its claims on the balance of probabilities.

Case Problems for Discussion Case 1 Lukas owned a small factory of long-standing reputation, and bid successfully on a contract from Atlas Aircraft. The aerospace manufacturer‘s contract was for Lukas to supply custom-made hydraulic cylinders for landing-gear assemblies. To execute the job, Lukas required a heavy metal milling machine capable of handling large pieces with high degrees of precision. He had heard of the impressive capability of the Stormsen 1500 mill and placed an order for one, which in time was delivered and installed. Over a period of months, Lukas found the machine was constantly working out of adjustment, causing much of its output to fail quality control. Six times, Lukas caught as many as 2 faults in a job lot of 20 cylinders, and on one early occasion Atlas Aircraft returned a cylinder as substandard. After consulting all the Stormsen manuals, looking for an adjustment solution, Lukas called in the area distributor for consultation. No long term solution to the wandering adjustment seemed apparent, and Lukas began placing calls to the Stormsen Company itself. In the meantime more cylinders had been rejected by Atlas, whose chief engineer (a personal friend of Lukas) wrote Lukas a letter wondering why ―suddenly [it] was receiving crap.‖ Lukas‘ calls to Stormsen were fielded by an engineer/manager, Lewis Cranston, but Lukas remained far from satisfied. Within another month, Lukas visited a tradeshow where Stormsen machines were displayed, and in the display area was Cranston. The two, meeting for the first time, exchanged words before the shouting began. In the end, they had drawn quite a crowd of factory owners and two writers from a trade journal. The exchange ended with Lukas brandishing the Atlas letter before the onlookers, shouting ―The 1500 produces crap, Atlas calls the 1500 crap, and I call the 1500 crap!‖ Discuss the tort issues that may arise from this situation. Answer: As the culminating events of this slander of goods case take place in a public place, there is little in the way of defence, except truth. Unfortunately (for both parties – Lukas and Stormsen) the word ―crap‖ is a somewhat vague adjective to describe a hydraulic cylinder. What is not vague however, is that it calls into question the quality of the cylinder, and this then is a matter of fact, and in turn, truth. A ten percent failure rate (2 of 20) may in fact be ―crap‖ for an industry demanding high performance standards, and truth will be an absolute defence. Students may wish to consider the position of Atlas, who started the ball rolling with a private letter, now being brandished and recited in a public place. The Atlas intent may not have been to slander, and they could in turn sue Lukas for causing the damages with public disclosure if Atlas were found liable, but again, truth of the statement may come to the rescue of Atlas. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-31

Case 2 The plaintiff, a nurse, was injured in a motor-vehicle accident and was taken to a local hospital. She was examined by the defendant, who could find no physical injury other than a few minor bruises. She was discharged from the hospital the next day when she admitted that she ―felt fine.‖ Within 24 hours after her release, she returned to the hospital. She complained to the defendant of painful headaches and remained in hospital for a month. During her second stay in hospital she was examined by three neurosurgeons who could find nothing wrong with her. On her release from the hospital, she instituted legal proceedings against the parties responsible for her automobile accident, and her solicitor requested a medical opinion from the defendant to support her case. In response to the solicitor‘s request, the defendant wrote two letters that were uncomplimentary and suggested that the plaintiff had not suffered any real physical injury. In addition, the defendant had indicated on the plaintiff‘s medical records that the plaintiff was suffering from hypochondriasis. After her discovery of the uncomplimentary letters and medical reports, the plaintiff brought an action against the defendant for libel. Examine the arguments that might be raised in this case and identify the defences (if any) to the plaintiff‘s claim. Render a decision. Answer: The facts of this case provide a basis for the discussion of the ingredients of a libel or slander action. Class discussion should establish the grounds for such an action, and whether the written statements were malicious. The defences noted in class discussion should perhaps deal with qualified privilege, the presumption of good faith (where the plaintiff bears the burden to rebut by way of proof of malice), absolute privilege, and the circumstances under which each might be raised. In the case of Foran v. Richman, 1975 CanLII 760 (ON CA) (on essentially the same facts) the court held that the circumstances were such that the defence of absolute privilege would apply, and the plaintiff's action was dismissed. The case of Pleau v. Simpson's-Sears Ltd., 1977 CanLII 1325 (ON CA) also provides a useful discussion of the law on the question of qualified privilege.

Case 3 Gretel was shopping at a large shopping centre and, while walking through the crowded mall area, she saw a youth pushing his way through the crowd in what appeared to be an attempt to escape from a man in a dark-blue uniform, who was following him. At that time, Gretel was standing near the exit from the building. When the youth finally broke through the crowd and attempted to leave the building, she stepped in front of him to block his path. The youth collided with Gretel, and the two parties fell to the floor. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-32

Gretel seized the fallen youth by the arm as he attempted to stand up and tried to pull him back down to the floor. The youth then struck Gretel a blow on the side of the head with his fist, causing her to lose consciousness. The youth, as it turned out, was hurrying through the crowd in an attempt to catch a bus, and the older man, who was following him through the crowd, was his father. The youth‘s father was employed as a security guard at the shopping centre and was leaving work for the day. Explain this incident in terms of tort law and tort liability. Answer: This case may be used to distinguish an assault and battery situation from false imprisonment. Was her act one of disabling the youth in order that he might be apprehended, or was it an attempt to prevent him from leaving the premises? To interfere with a person's freedom to go wherever he pleases (in this case exit the building) would represent a violation of his rights, and represent a false imprisonment, although her actions could also constitute an assault on the youth. Class discussion should identify the elements associated with both torts in terms of duty not to injure, and the question of "justification" in the case of false imprisonment. A question to ask here is whether the youth was justified in striking Gretel when she seized the youth by the arm. Was his action self-defence? If so, did he use more force than necessary? Based upon Bruce v. Dyer in the Judicial Decision, the youth may have been entitled to strike back, since he had no knowledge of why Gretel acted in the manner she did, and had no other means of escaping from her. With respect to her own injuries, Gretel would not likely recover damages from the youth, since it was she who deliberately stepped into his path.

Case 4 A university operated a tavern on its premises for the benefit of its students. One student, who attended the tavern with some friends for the purpose of celebrating the end of the fall semester, became quite drunk. The tavern bartenders realized that the student was drunk around 11:00 p.m. and refused to serve him any additional alcoholic beverages. They also asked him to leave the premises. The student, however, remained and drank two additional beers that were purchased for him by his friends. Some time later, around 12 a.m., one of the bartenders noticed the student drinking and instructed the tavern bouncer to ask the student to leave. The bouncer did so, but the student refused, and the bouncer took the student by the arm and escorted him to the door. Along the hallway to the door the student was abusive and resisted leaving, but the bouncer managed to eject him from the building. A few minutes later, the student returned to the tavern and slipped by the doorman for the alleged purpose of obtaining an explanation as to why he had been ejected. About eight feet from the door, he was apprehended by the bouncer and once again expelled from the tavern, but not without some resistance in the form of pushing and shoving and abusive language on the part of the student. In the course of ejection, the student fell against the door and smashed a glass pane in the door, which caused severe lacerations to his hand. The injury to the student‘s hand required medical treatment and took several months to heal. The student brought an action against the university and the bouncer, claiming damages and claiming Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-33

as well that the injury he received caused him to fail his mathematics course in the semester that followed the accident. Discuss the issues raised in this case and the various arguments that each party might raise. Render a decision. Answer: The case deals with the rights of an occupier of property to eject a person from property, and the application of force in the exercise of rights. Questions that might be raised in connection with these issues are: What is the status of the drunken student once he was requested to leave the premises in the first instance? Did the 'bouncer' commit a tort by taking the student by the arm and ejecting him from the premises? Did the student commit a trespass by returning for an explanation? Did the bouncer's actions on the second occasion constitute a tort? Was the University and the bouncer responsible for the student's failure of the mathematics course the next semester? Students should note that the drunken student had entered on the premises lawfully, since he was of lawful age and a student at the University. The bartenders were entitled to ask the student to leave when he became drunk. When he refused to leave, he became a trespasser, and the occupiers (the bartenders and bouncer) were entitled to take reasonable steps to remove him from the premises. However, when the student refused to leave, the police should perhaps have been called to deal with the student, as any excess force on the part of the bouncer might be considered an assault and battery. As a general rule, a person may eject a trespasser from property if the trespasser refuses to leave after being told to do so, and the person in possession (owner or tenant) may use whatever force is necessary to eject the trespasser. The student would probably be unsuccessful in his action against the university and the bouncer. The injury to the student's hand was a result of the student's resistance to ejection rather than a deliberate act on the part of the bouncer to injure the student. Case 5 The Silver Sports and Recreation League was a women‘s hockey league that operated under Canadian Amateur Hockey Association rules. Under the rules, no bodily contact was permitted by the players. During the course of a semi-final playoff game between the Silver Lake Lions and the Calabogie Cats in the Silver Lake Municipal Arena, April, the star centre of the Silver Lake Lions, was attempting to regain control of the puck in her own end of the ice when Carol, a defence player of the Calabogie Cats, collided with her from behind, driving her into the boards. As a result of the collision, April suffered a serious injury to her neck and spine. Immediately after the collision, the referee, who had witnessed the collision, stopped the game and awarded a ―match penalty‖ against Carol on the basis that she had deliberately attempted to injure April. According to the referee, Carol and April were both skating towards the puck, with April ahead of Carol. Upon reaching the puck, April stopped abruptly. Carol, in the process of stopping, raised her hockey stick to a horizontal position in front of her body just before she collided with April from behind. The blow from the horizontally held hockey stick prevented Carol‘s body from striking April, but the impact of the hockey stick propelled April into the boards. The linesman, who also witnessed the incident, reported that from his point of view, Carol had pushed April from behind either to move her away from the puck or to avoid a more violent collision. The impact, however, in his opinion, only caused April to lose her balance and it was her loss of balance that resulted in her fall against the boards. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-34

April subsequently instituted legal proceedings against Carol for her injuries. Discuss the various legal arguments that each party might raise, and render, with reasons, a decision. Answer: The Silver Lake Sports case examines the tort of assault and battery and the defence of consent. April would probably allege that she was injured as a result of Bertha's deliberate act (battery?). Bertha might raise the defence of implied consent by April, by engaging in a game where some contact could be expected. Students might be asked to consider whether a person engaging in a game that involves some bodily contact (even if accidental) has assumed the risk of possible injury, or consented to the contact. Students might then be asked to determine the 'limits' of the consent. Would it extend to deliberate contact? If so, how would this be determined? Does the application of Amateur Hockey Association rule of no bodily contact negate consent entirely or would it only be interpreted to exclude deliberate contact? The facts of the case are based upon the case of Regina v. Leclerc (1991) 4 O.R. (3d) 788, where the Court of Appeal considered the facts in a criminal law context. The court, however, stated that if a player participates in a sport such as hockey the player must accept the risk that some bodily contact may occur, because it is incidental to the game. The contact may result in some injury, and if not deliberate will fall within the implied consent. However, deliberate acts that injure would be outside the orbit of immunity, and would attract liability.

Case 6 Jonas purchased a picnic basket at a hardware store in a nearby shopping mall. The basket was not wrapped by the sales clerk at the conclusion of the transaction. Jonas carried his new basket with him to a supermarket located in the same mall, where he intended to purchase a quantity of grapefruit. At the produce counter he could not find grapefruit on display, and asked the clerk if the store had any in stock. The clerk offered to check in the storage room for him. While he waited for the clerk to return, Jonas picked a quantity of grapes from a display case and ate them. A few moments later, the clerk returned to inform him that all the grapefruit had been sold. As Jonas left the store, he was seized by the store owner and requested to return to the owner‘s office. Jonas obediently followed him back inside the store. Once inside the owner‘s office, the owner accused Jonas of theft; then, without further explanation, telephoned the police. When the police officer arrived, the store owner informed him that Jonas was a thief and that he had apprehended him just outside the store. Jonas admitted eating the grapes, then to his surprise, he discovered that the owner had apprehended him because he (the owner) thought Jonas had stolen the picnic basket. Both the supermarket and the hardware store sold similar baskets; even on close examination, the products appeared identical. With the aid of the sales clerk at the hardware store, Jonas was able to convince the police officer that he had purchased the basket which he had in his possession. He later decided to bring an action against the owner of the supermarket for false imprisonment. Discuss the issues raised in this case and determine the respective arguments of the parties.

Render a decision. Answer: This case concerns the question of false imprisonment and the theft of goods, although the detention of Jonas was not for the theft of the goods actually taken (the grapes), but for what appeared to be the theft of the shopping basket. Clearly the owner was in error by apprehending Jonas and requesting him to return to the store while he telephoned the police without first determining how Jonas acquired the shopping basket. However, in assessing the owner's actions, the matter of Jonas's taking of the grapes should be discussed. Some of the questions that might be raised could include the following: What are the elements of a false imprisonment? Was Jonas really detained against his will? Is this a case of false imprisonment, or did Jonas consent to the detention in the belief that he was guilty of the theft of the grapes, and must give himself up to the police officer? Was the store owner absolved from liability for false imprisonment when Jonas confessed to the theft of the grapes? What was the position of the police officer in the case? Did the shop owner have reasonable grounds for the detention of Jonas, and could he prove "justification"? In reaching a decision in this case, two cases might be referred to: Cannon v. Hudson's Bay Co., [1939] 4 D.L.R. 465 in which the court held that an employee who was detained without consent, searched, and found innocent of theft, was entitled to damages for false imprisonment, and LeBrun v. High Low Foods Ltd., (1968 CanLII 609 (BC SC)), 69 D.L.R. (2d) 433, in which the court held that the manager of a store who did not have reasonable grounds for his belief that a customer has stolen goods was liable for false imprisonment when he detained the customer until a police officer arrived to search the customer's vehicle. Case 7 Justin and Therese met during his business studies and her electrical engineering studies. They lived together and eventually both worked for Cosmic Star, a company producing Global Positioning System navigation receivers. Justin worked in the marketing department and Therese worked in the design department. With considerable in-house research, Therese developed an algorithm that reduced fuzziness in the GPS signal, making the receiver ten times more sensitive and accurate. It was a fundamentally simple equation, and with considerable pride she had explained it to Justin more than once. Not all that long later, Justin left Cosmic Star to work for its competitor, NavDirect Industries. About a year behind Cosmic Star and six months after Justin joined the company, NavDirect began producing a GPS that contained an algorithm remarkably similar to the Cosmic Star model. Some months later, NavDirect was prospering while Cosmic Star began showing signs of financial problems, and Therese joined Justin at NavDirect. Her departure soon caused Cosmic Star to look closely at the technology in NavDirect products. Upon finding the algorithm that Therese developed, Cosmic Star headed to its lawyers for assistance. Discuss the advice Cosmic Star would likely receive. What advice would you give to each of Justin, Therese, and NavDirect? Answer: In advising the individual parties, students should recognize the essential elements of trespass to goods (conversion) and the tort of breach of confidence. While students have not yet been exposed to the elements of contract, they should sense that there may be requirements of non-disclosure and confidentiality that may be part of the contract of employment. Students should not fail to realize that while the torts may be personal, as NavDirect is employing Therese and Justin, NavDirect may bear responsibility for their torts (if any). Cosmic Star faces the lways-present issues of proof, that in fact NavDirect gained its advantages through the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-36

torts of Justin and Therese. An issue of timing also affects what tort is provable on whom, for if Therese‘s early disclosure was to Justin as a fellow Cosmic employee, and later offered nothing to NavDirect, then Justin should be the focus of liability.

Case 8 Nico owned a strip mall development along a busy suburban city avenue. One of his tenants operated a small shop selling new and used sewing machines. Over a period of six months, it was apparent to Nico that his tenant was in trouble. Originally, the rent was paid in full and on time. Then the tenant paid in full but late; then it was on time but short; then finally short and late, then for two months nothing at all was paid. Realizing that this would only go from bad to worse, Nico called a locksmith who drilled out and replaced the door lock. Nico moved the inventory of twenty sewing machines into the back storage room, clearing away the stock from the shelves visible from the front window. He placed a ―For rent‖ sign in the window, set the alarm, and left. When he returned the next morning, he found the door lock smashed, the alarm disarmed, and the inventory gone. Discuss the rights, responsibilities, and defences the parties may raise in this situation.

Answer: Again, there may be elements of contract which students may wish to speculate on, however, strictly in terms of tort, the issues are conversion of goods (which may fail as the landlord had colour of right to seize the goods for unpaid rent), trespass, and willful damage. The tenant may allege trespass in contravention of his lease, however, the lease would likely contain a clause allowing re-entry upon failure in payment of rent. As the alarm was turned off, it appears the tenant was the person who broke in later, and thus would be liable for the damage caused, as whatever lease rights he or she had, they did not include a right to damage. Whether the tenant‘s actions are actually trespass is debatable, depending on whether he or she is actually still the beneficiary of a commercial lease with unpaid rent. Students should be reminded that the rights and remedies available in commercial tenancies fail to give tenants the protection available under residential tenancy law.

CHAPTER CHART

CHAPTER 5. NEGLIGENCE AND UNINTENTIONAL TORTS Chapter Topics Negligence Occupier‘s Liability Manufacturer's Liability General Tort Defences Tort Remedies Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Chapter Objectives After study of this chapter, students should be able to: • Explain the chief elements of negligence: duty, breach, damage and causation. • Explain the relevance of foreseeability and the ―Reasonable Person.‖ • Explain the concepts of strict and vicarious liability. • Describe instances of tort liability arising from product defects. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-38

• Describe the chief defences and remedies in unintentional tort cases.

YOUR BUSINESS AT RISK Negligent acts and accidents happen. Businesses must be aware of when, how, and to what degree they will be responsible for unintentional or careless acts, and to the extent that they may recover for careless acts done to them. A single liability suit for an accident that could have been avoided can run to millions of dollars and may bankrupt the dreams of the owner or investors.

CHAPTER COMMENTARY Torts associated with unintentional interference with persons or property are generally associated with careless acts or a failure to act, and the concepts of duty not to injure, foreseeability, and standard of care should be considered in their application to these types of torts. It is important to note that the concept of strict liability has remained over the years as an important determinant of liability in cases where persons keep in their possession something capable of causing injury if it should escape. This must usually be something which is not normally confined, or something which, if confined in a particular way, creates or has the potential of causing injury if it escapes. Examples would be the confinement of a dangerous wild animal, or the storage of a large quantity of water in a reservoir. The courts generally consider both of these activities to be inherently dangerous, and if the animal or water should escape, the likelihood of injury to a neighbour is very great. Judges generally assume that the person who engages in this type of activity is aware of the dangers involved, and of the potential for harm. As a consequence, they are usually held responsible for any damage caused if escape occurs, regardless of the precautions taken to prevent the escape. Students should be made aware that liability in these instances would likely be determined on the basis of strict liability. Apart from cases where strict liability might be imposed, tort liability is generally concerned with the right of a person to live without interference or injury to their person or property by others. Tort law, consequently, imposes a duty on persons not to injure others, or their property. This concept of a duty not to injure forms the basis of a great many kinds of torts: negligence, nuisance, defamation, etc., as well as most crimes of violence. It is important for students to realize that the duty is not absolute, otherwise it would represent a strict liability situation. In most cases, the duty will be subject to a standard of care, or the concept of foreseeability. On these points, as the text indicates, the standard of care is usually the standard of the ―reasonable person‖, and the conduct of the person is compared to that standard. In a similar fashion, the question of foreseeability is usually framed by the words ―would a reasonable person under similar circumstances have foreseen the possibility of injury?‖ The chapter also provides a brief outline of a number of other tort concepts. These are the concepts of circumstantial evidence and res ipsa loquitur (―the thing speaks for itself‖) as well as volenti non fit injuria (voluntary assumption of risk). The former of these is used to shift the onus to the person causing the loss to show no negligence in cases where it is impossible for the injured party to know exactly how the injury came about, such as in an aircraft accident. The latter concept is used as a defence when a claim for injury is made.

The doctrine of foreseeability, the standard of the ―reasonable person,‖ and their application to the question of liability should be re-enforced by way of examples, such the narrative of the roofer, shingles and the rainy-day accident raised in the text. A series of incidents similar to the above, or the case problems may be used to discuss and illustrate the various concepts covered in the chapter. Note that in some provinces (such as Ontario) virtual strict liability may be imposed by statute upon dog owners for injuries caused by their dogs (subject to certain exceptions). The Common Law standard is consequently replaced by a higher standard in these instances. See: for example: Dog Owner’s Liability Act, R.S.O. 1990, c. D-16. This statute, to some extent extends the principle of Rylands and Fletcher to dogs in so far as their danger to the public is concerned. Another useful approach might be to describe an incident, then have the class examine the incident by raising the questions: Does the defendant owe a duty to the plaintiff? What is the duty owed? What standard or care must be maintained? Did the defendant breach the duty, such that ―but for‖ the defendant‘s actions the injury or damage not have occurred? Did the plaintiff suffer an actionable loss as a result? In any class discussion, the standard of care, foreseeability of injury, and the reasonableness of the actions of the defendant should be underscored as the important determinants of liability in order to avoid giving the impression that once a duty is owed, any injury which follows is actionable. The case of Burrough v. Town of Kapuskasing, 1987 CanLII 4236 (ON SC) may be used to illustrate occupier‘s liability and the defence of volenti non fit injuria (voluntary assumption of risk). The case is useful for class discussion purposes because the Judge not only discusses the defence in detail, but also examines occupier‘s liability by reference to the duty of an occupier of land to invitees. The Judge does this by reference to cases on this topic. (See for example, case reference to Such v. Dominion Stores Ltd. where the general rule concerning occupier‘s liability as stated in Indermaur v. Dames is considered). With regard to occupier‘s liability, a number of provinces have passed legislation to eliminate the distinction between licensees and invitees, and to establish a statutory standard of care for occupiers. British Columbia, Alberta, and Ontario are provinces that have taken this approach. It might also be worth noting that the liability of occupiers of land, which in the past has been subject to some codification in the form of petty trespass acts and other similar legislation, has been the subject of more extensive codification in some provinces in recent years. This has tended to delineate the rights and duties of landowners and other occupiers of land. See for example, Ontario, the Occupiers’ Liability Act, R.S.O. 1990, c.0-2. Product liability is a growing area of tort law as products become more complex. It is essentially an ordinary negligence action, where the manufacturer may be held liable if the consumer is injured by a product that was negligently made, or where the user was not warned of the dangers associated with the use of the product. The case of M’Alister (or Donoghue) v. Stevenson which is described briefly in the text, and in the Court Decisions outlines this liability, and the standard of care required of manufactures of products. The More v. Bauer Nike Hockey case goes on to illustrate the ―but for‖ test in action. The plaintiff has the burden to show that ―but for‖ the negligent act or omission of the defendant, the injury would not have occurred. Even so, the standard required is not perfection, nor is the defendant an insurer from harm; in this case it is to provide a reasonable level of safety for rear impacts. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-40

Classroom review of the chapter should also include a review of the defences which might be raised to a claim in tort. Instructors should note, however, the limitations on waiver as a defence, since the circumstances under which torts arise may have a significant impact on the concept as a defence. Tort remedies are outlined in the text as they apply to unintentional torts. The topic of remedies is covered elsewhere in the text as well with respect to other legal relationships. Some instructors advise students at this stage that other remedies (such as injunctions) will be encountered later on in the text, and the remedies used in tort actions, such as money damages will also be dealt with as they apply to other types of injuries.

Review Questions 1. Distinguish between a moral obligation not to injure and a duty not to injure. Why is this distinction important? Answer: A moral duty is established by individuals. A legal duty is established by the state. The former is subjective, based upon the person‘s view of right and wrong; the latter is a clear standard which must be met to avoid liability for tort.

2. Why do the courts impose strict liability for damage in certain instances? Answer: Strict liability is generally imposed today where a person maintains an animal or thing which is potentially dangerous if not confined. Since these things are known to be dangerous, the person keeps them at his or her peril.

3. Explain the concept of duty of care as it relates to liability in a tort action. Answer: Duty of care is based upon the premise that a person should not do anything to injure his or her neighbour – hence the duty not to injure becomes an essential factor in establishing tort liability. Note that some individuals may have the right to injure or take the property of others. See text for examples. 4. Why are the concepts of duty of care and ―the reasonable person‖ important in a case where negligence is alleged? Answer: Duty of care is used to establish the relationship between the parties. A plaintiff must first show a duty not to injure exists, then establish the standard of care attached to the duty (the ―reasonable person‖). Finally, the plaintiff must satisfy the court that the defendant‘s conduct or actions fell short of the standard.

5. Explain the concept or doctrine of proximate cause in tort law. Answer: Proximate cause links the defendant‘s actions with the plaintiff‘s injury. The relationship must be direct and without any intervening events that would break the links in the chain of events. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-41

6. How are the concepts of the reasonable man and foreseeability related? Answer: The ―reasonable man‖ and foreseeability are related in the sense that the standard for the latter is based upon whether a ―reasonable man‖ in similar circumstances would have foreseen the consequences of the act. Tort liability is determined using this standard of foreseeability – it is not based upon whether the tortfeasor had foreseen the likelihood of injury.

7. Identify and explain the essential ingredients of unintentional tort liability. Answer: First, a duty of care must be owed to the party injured. Second, it is necessary to determine if a breach of the duty occurred. This is done by determining the standard of care imposed – the test being the conduct of a reasonable person in the circumstances. ―Would a reasonable person have foreseen the likelihood of injury or damage to the party? Would a reasonable person have acted in a different manner? Where the defendant fails to maintain the standard of the ―reasonable person‖, liability would likely follow.

8. Does strict liability apply to manufacturers of goods where the goods are defective and cause injury or damage? Answer: No, although a very high duty or standard of care in manufacture is sometimes imposed at common law in Canada, depending upon the product. In some U.S. states, strict liability is imposed upon manufacturers of certain products.

9. What is the duty of care of an occupier of land to a trespasser? Answer: The duty of care to a trespasser is normally a duty not to deliberately injure or set traps to injure the trespasser. Note, however, the special position of children.

10. In some cases, the courts consider the public interest as an important aspect of a nuisance action. Why is this so? Give an example. Answer: In some cases the prohibition of a nuisance to protect one affected individual may have an impact upon the public generally, which could be far more serious, and the courts must consider both interests. For example, a ship-building firm makes a great deal of noise riveting sheets of steel on the hull of a ship. This noise disturbs residents who live nearby. To stop the noise, however, would cause the firm to cease operations and cause others to be unemployed. The courts must balance these two conflicting interests.

11. Is nuisance simply another name for negligence? If not, why not? Answer: Nuisance differs from negligence in that the nuisance is generally an on-going and deliberate act that interferes (sometimes unintentionally) with a person‘s enjoyment of their property. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-42

Negligence usually involves an unintentional injury or interference with a person or their property, and may have nothing to do with the enjoyment of property. 12. Define: ―res ipsa loquitur‖. Answer: ―The thing speaks for itself‖ is a legal principle which shifts the burden of proof from the plaintiff to the defendant in a tort action. If the plaintiff can show that the injury was caused solely by that which was in the exclusive care and control of the defendant, and the plaintiff had no way of knowing how the injury was caused, the burden of proving no negligence is then on the defendant. The Supreme Court of Canada has now terminated the principle as a separate rule, but it lives on in circumstantial evidence presented against a defendant, for which the defendant must offer some explanation with evidence to the contrary.

13. Why was it necessary for the Common Law provinces to introduce contributory negligence legislation? Answer: Contributory negligence legislation was necessary to fairly apportion liability in cases where it was difficult to determine which party had the last opportunity to avoid the accident or injury.

14. Is the defence of volenti non fit injuria, in effect, the defence of waiver? Answer: Voluntary assumption of the risk is similar to waiver in the sense that a proper waiver will excuse the defendant from liability, as will a successful volenti non fit injuria defence claim. 15. Identify some situations in which an individual employee would not be protected by the “vicarious liability‖ concept resulting in personal liability to that employee. Answer: We have seen precedents in recent years, including from the Supreme Court of Canada, indicating that an employee will be named personally in a negligence suit when it can be reasonably expected that the employee personally owes a duty of care to his or her employer‘s customers. Examples of this are likely to include employees who directly interact with or provide direct service to customers. These could be employees in the hospitality industry and other service businesses. It may be reasonably foreseeable that the individual employee‘s actions toward the customer are the cause of the injury and the mere fact of employment should not protect him or her from liability under the vicarious liability principle. Contrast this to a production line worker who negligently assembles a product that ultimately harms a customer. In this case, the employee‘s actions do result in harm but the causation links are less clear than a server who pours hot coffee in a customer‘s lap. In the production worker‘s case, the employer would assume vicarious liability for the negligence of its employees as they do not directly intersect with customers. Although the employee‘s actions harmed a customer, the foreseeability is much lower and causation is several steps removed.

Mini-Case Problems 1. X, a trained and licensed plumber, carelessly installed a steam heater in Y‘s restaurant, and, as a result, Y was seriously burned when a heater pipe exploded. Z, a qualified medical practitioner who Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-43

treated Y at the hospital, prescribed an improper medication as treatment for the burn, which aggravated the injury. This obliged Y to undergo an expensive skin-graft operation to correct the condition. Discuss the responsibility of X and Z to Y. Answer: X was negligent in the installation of the heater, and at law would be liable for the injury to Y when the pipe exploded. This would include the damages for pain and suffering caused by the burn, and the lost wages, etc. plus the expected cost of medical treatment for the burn had the treatment been properly given. Z would be liable for the improper treatment, pain and suffering plus the costs associated with the expensive skin graft operation. Note that X would not be responsible for any of the damages which resulted from Z‘s negligence.

2. At dusk one evening, as X was hauling a load of rock in his truck, he saw a large piece of rock fall from the truck onto the traveled portion of the roadway. X continued on his way without stopping. Y, who was traveling in her automobile along the same road some time later, collided with the rock and damaged her automobile. Discuss the liability of X. Answer: X‘s liability would be determined by comparing his conduct to that of the ―reasonable man.‖ He owed a duty not to injure others using the road after dark. If a reasonable man would have foreseen the likelihood of someone else colliding with the rock in the dark and suffer an injury, then a reasonable man would have stopped and removed the rock from the road. X‘s conduct fell short of this, and X may therefore be liable for the injury to Y. Contributory negligence may apply here.

3. Would your decision in Question 2 be any different if: (a) X was unaware that the piece of rock had fallen from his truck? (b) Y was traveling along the road at a high rate of speed? (c) Y noticed the rock in her driving lane and swerved to the other side of the road to avoid it, thereby colliding with Z, who was traveling in the opposite direction? Answer: (1) If the truck was loaded and operated in the manner in which a reasonable man would load and operate, then probably no liability would rest on X‘s part. (2) If Y was traveling at a high rate of speed, he would also be negligent and partly at fault for his own injuries. (3) Y has a duty not to injure Z. A reasonable man would probably swerve to the shoulder of the road to avoid the rock. Y may be liable for Z‘s injuries by his actions. X may have some liability as well, however, since he may have contributed to the accident by his negligence.

4. Roger, a delivery driver with Golden Bakery, is driving a company van across town when he hits a pedestrian who stepped from the curb in order to cross the street. Describe how Golden Bakery might respond to a claim of vicarious liability. Answer: Roger may not be driving the van in the course of his employment, and thus vicarious liability will not apply. The pedestrian may be crossing the street illegally, either against a light or mid-street, and thus be liable for contributory negligence.

5. A factory stood near a self-storage facility, separated by a gravel parking lot owned entirely by the factory. In the summer of one year, the factory paved its parking lot. Late the following spring, heavy rains which formerly soaked into the gravel ran directly from the parking lot into the self-storage facility, causing hundreds of thousands of dollars in damage to goods of the unit tenants. Discuss the tort issues raised as result. Answer: The damages are not an Act of God, despite being caused by rain. The tort is negligence which has created a legal nuisance on the neighbouring property. A duty existed not to allow the escape of the nuisance, that duty has been breached in the occasion, and the occasion has caused damages to the neighbour. The occasion and damages are in fact quite foreseeable by the reasonable person, for which reason surveyors and engineers are a necessary part of commercial construction work, particularly for drainage in paving work. Damages awarded will be compensatory. An injunction against a repeat of the discharge of water is possible, though unlikely, as remedial work will preferably (and probably) be subject to a municipal property work-order.

6. Iron Engineering was engaged to design a bridge to be built by Gorge Construction. Upon internal review, one of Iron‘s design team caught a fatal error in the design, and drafted a plan amendment accordingly. The engineer placed the amended plan as ―version 2.0‖ in a second file, in front of the first in the file cabinet, as was the practice. A young file clerk, trying to be helpful, reorganized the cabinet, reversing the file order. Gorge Construction ultimately received version 1.0 of the plan and built the bridge, which collapsed soon after completion. Discuss the tort issues raised as a result.

Answer: Gorge Construction will be named in the resulting liability action, however, it should be able avoid liability as it was reliant on the work of the Iron Engineering experts in drafting the plans for the bridge. Iron Engineering has essentially no defence to a classic case of negligence, as control and release of revised plans are critical aspects to ensure public safety in resulting construction projects. Students should treat the standard aspects of duty, breach, damage and foreseeability.

Case Problems for Discussion Case 1 Angus, a bicycle courier, picked up an envelope at a law office. It was addressed to ―City Works, Office 1212, For attention of: Janet Bari, Re: #2650/06.‖ Angus put the letter in his bag, making it the sixth identical letter that he received for the same address while doing his afternoon rounds. He dropped the letters off at City Hall before the office closed, and headed home. The next morning he realized that one of the letters was still in his bag, stuck inside a fold in the nylon lining. Angus returned to City Hall, but delivery of the letter was refused. The reference 2650/06 was a call for bids on city construction work, and the competition for lowest bid closed when City Hall closed the day before. Identify the legal issues raised between Angus, the law office, and the presumably irate client on whose behalf the law firm had created the bid, and render a decision. Would it matter if the bid, in any event, would not have been the lowest? Answer: The issue of whether the bid would or would not have won is a matter that speaks to the extent of the damage, not whether negligence existed. Negligence exists where the standard elements of duty, breach, damage and foreseeability are present. The largest question is whether a duty existed for ―same-day‖ delivery. While this may be an assumed expectation in using a bicycle courier in a big city, it may not be a duty unless it is specifically treated in the terms of the service. If a duty exists, it was breached, for it was delivered out of time. Assuming that some damage has resulted, even if nominal, the question remains whether significant damages were foreseeable by the parties. Certainly the sender could see the consequences of failure of timely delivery. If these were not communicated to the courier Angus, how could Angus be aware of the liability he was undertaking. In short, the case would fall down to contributory negligence by the sender for not advising the courier of the significance of failure to deliver on time. In regard to the client, it will seek redress of its losses (if any) from the law firm.

Case 2 Basil, aged 14, lived in a large metropolitan city, but spent his summer vacations with his parents at a cottage in a remote wilderness area of the province. On his 14th birthday, his father presented him with a pellet rifle and provided him with instruction on the safe handling of the weapon. The father specified that the gun was only to be used at the cottage. Basil used the pellet rifle to rid the cottage of area rodents during his vacation. On their return to the city, Basil‘s father stored the weapon and the supply of pellets in his workshop closet. He warned Basil that he must not touch the rifle until the next summer, but did not lock the cabinet in which the weapon was stored. One day, when Basil was entertaining a few friends at his home, he mentioned his summer hunting activities. At the urging of his friends, he brought out the pellet gun for examination. Basil demonstrated the ease with which the magazine could be filled, and how the weapon operated. He then emptied the magazine and allowed his friends to handle it. The gun was returned to him and, as he was replacing it in the cabinet, the weapon discharged. He was unaware that a pellet had remained in the weapon, and that he had accidentally charged the gun when he handled it. The pellet struck one of his friends in the eye, and an action was brought against Basil and his parents for negligence. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-46

Discuss the liability (if any) of Basil and his parents, and the defences (if any) that might be raised. Render a decision. Answer: This case is based in part on the facts in the case of Floyd et al. v. Bowers et al. (1978, 89 D.L.R. (3d) 559; affirmed, (1979) 27 O.R. (2d) 487. Class discussion of the case should deal not only with the question of liability of the youth Basil (see case # 1 for the standard applied) but also the question of liability of Basil‘s parents for their failure to instruct him in the safe handling of a potentially dangerous instrument, and their failure to safely store the weapon and/or its pellets. The limits of parental liability should be discussed: What would a ―reasonable parent‖ have done under similar circumstances? Was the accident foreseeable? Suppose the gun had been locked in the cabinet, but Basil had found the key and unlocked it. Would this fact have any effect on parental liability? In the case before the courts, the court held that the failure to control access to the gun represented negligence on the part of the parent in view of the fact that the gun was a dangerous weapon. Both the parents and child were held liable for the injury.

Case 3 Khalid lived in a residential area some distance from where he worked. One morning, he found himself late for work because his alarm clock had failed to wake him at the usual time. In his rush to leave his home, Khalid backed his automobile out of his garage after only a cursory backward glance to make certain the way was clear. He did not see a small child riding a tricycle along the sidewalk behind his car, and the two came into collision. The child was knocked from the tricycle by the impact and was injured. The child‘s mother, at the front door of her home (some 70 metres away), heard the child scream and saw the car back over the tricycle. She ran to the scene of the accident, picked up the child, and carried him home. Khalid called an ambulance, and the child was taken to the hospital and treated for a crushed leg. The mother brought a legal action against Khalid for damages resulting from the shock of seeing her child struck by Khalid‘s car. An action was also brought on behalf of the child for the injuries suffered. Discuss the validity of the claims in this case, and identify the issues and points of law that are raised by the actions of Khalid. How would you decide the case? Answer: This case involves two different claims for damages against Khalid: (1) A claim in negligence for the injuries suffered by the child. (2) A claim by the child‘s mother for the nervous shock suffered as a result of Smith‘s actions. Class discussion should be directed in such a way that the two claims are discussed separately to avoid confusing the two. This case provides an opportunity to once again re-enforce the concepts of foreseeability, duty of care, and the standard to be applied. Some of the points that should be raised include: Should Khalid have foreseen the likelihood of a small child being on the sidewalk? Was he aware of the existence of small children in the neighbourhood? Was a backward glance sufficient, or should Khalid have continued to watch Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-47

the road behind to make certain that the way remained clear? Would a ―reasonable person‖ have acted differently? What obligations (if any) rest upon the child? Upon the parent who allowed the child to play in the street unattended? With respect to the mother‘s claim for damages for nervous shock the question of foreseeability on the part of the driver should again be raised. In the case of King v. Phillips, [1953] 1 All E.R. 617, the test applied was: Did the driver owe a duty of care to the child‘s mother, and could he reasonably have foreseen the possible damage to her? In that case, the court dismissed the plaintiff‘s claim. In a Canadian case (Marshall v. Lionel Enterprises Inc. (1971), 25 D.L.R. (3d) 141) the test for liability was also expressed to be foreseeability of nervous shock being caused to the plaintiff. The development of the law relating to nervous shock is discussed at length in the case. See also: Fenn v. City of Peterborough et al. (1976), 14 O.R. (2d) 137.

Case 4 Thompson operated an ice-cream truck owned by Smith Foods Ltd. During the summer months Thompson travelled throughout the residential areas of a large city selling ice-cream products. Thompson‘s principal customers were children, and Thompson would drive along the streets ringing a series of bells attached to his truck to signal his arrival in the area. Alberta, a five-year-old child, and her brother were regular customers of Thompson. On the day in question the two children heard the bells that signaled the approach of Thompson‘s ice-cream truck. Martha, Alberta‘s mother, was talking to her husband on the telephone at the moment that the ice-cream truck arrived. In response to the cries of her two small children for money to buy ice-cream, she gave them enough money to buy an ice-cream bar each. The children ran across the street to where the truck was parked, and each ordered a different ice-cream product. Thompson served Alberta first, and then turned to serve her brother. At that instant, Alberta ran into the street, with the intention of returning home, and was struck by a car driven by Donaldson. Alberta was seriously injured as a result of the accident and an action for damages was brought against Thompson, the operator of the ice-cream truck, Smith Foods Ltd., the owner of the truck, and Donaldson, the owner and driver of the automobile. Discuss the basis of the action on Alberta‘s behalf against the owners and drivers of the vehicles, and determine the basis of the liability of each party under the law of torts. Render a decision.

Answer: This case is based upon the facts set out in the case of Arnold et al. v. Teno et al. (1978), 83 D.L.R. (3d) 609. The case is a complex one in the sense that it involves many actors. The child was injured by darting from behind the truck in front of a passing car. The negligence of the driver in causing the injury becomes an issue for discussion. Duty of care, foreseeability, the ―reasonable person‖, etc., should be discussed. It also raises the question of duty of care to the child, foreseeability of the accident, and the liability of the driver of the ice cream truck (and the driver‘s employer). By enticing the child across the street to buy ice cream, does the driver have a responsibility to see the child safely back across the road? The duty of a parent to protect the child from injury is also a matter for discussion. Was the child‘s mother negligent by allowing the child to cross the street alone? Even if the parents were not defendants, any negligence on their part could reduce the damages which the child might receive. The court (on the facts) found the owner and driver Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-48

of the automobile negligent, and the owner and driver of the ice cream truck liable as well. With respect to the latter, the two were held liable for a 50% contribution to the damages awarded for their failure to protect the child from injury once it had crossed the road.

Case 5 Marie-Claude operated a bowling alley in a commercial area that was adjacent to a residential area. Many small children used the parking lot near the bowling alley as a playground, and Marie-Claude was constantly ordering the children off the premises for fear that they might be injured by motor vehicles. One young boy, about six years old, was a particular nuisance in that he would climb onto the flat roof of the bowling alley by way of a fence at the back of the building. Marie-Claude ordered the child off the roof on several occasions, but to no avail. The child continued to climb on the roof at every opportunity in spite of Marie-Claude‘s instructions to the contrary. On one occasion, when Marie-Claude was away from the premises, the child climbed to the roof and, while running about, tripped and fell to the ground. The fall seriously injured the child, and an action was brought on his behalf against Marie-Claude. Discuss the liability of Marie-Claude and her defences, if any. Render a decision. Answer: This case concerns the liability of an occupier of land to trespassers, and may also be used to discuss the question of ―attractive nuisances‖. The law is basically clear with respect to trespassers, and in general, the occupier has only a duty not to deliberately trap or injure the trespasser. Discussion of the case should explore the limits of this duty, and perhaps also deal with the premises as an ―attractive nuisance.‖ Does the roof of the bowling alley, accessible by way of the fence, constitute an attractive nuisance? What responsibility does Marie-Claude have to make the roof inaccessible to a small child? In a fact situation similar to this case, where a child gained access to the roof by way of a fire escape, and later fell and was injured, the court held that the landowner was not liable for the injuries sustained by the child. See: Sfyras v.Kotsis et al. (1975), 10 O.R. (2d) 27.

Case 6 On a clear September day, Mario walked across a parking lot adjacent to his home to buy a newspaper at a convenience store in a shopping plaza. He purchased the newspaper and left the store, but before he had walked more than a couple of feet, his foot struck a raised portion of a sidewalk slab, and he fell heavily to the concrete. Mario was unable to work for a month as a result of his injuries, and he brought an action for damages against the tenant who operated the convenience store and the owner of the shopping plaza. When the case came to trial, the evidence established that the maintenance of the sidewalk outside the store was the sole responsibility of the owner of the shopping plaza, but the owner had not inspected the sidewalk for some months. The sidewalk, while not in disrepair, had been slightly heaved by the previous Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-49

spring frost. It presented an uneven surface upon which the patrons of the plaza were forced to walk. Many of the concrete slabs were raised from 1/2 to 1 1/4 centimetres, but some protruded above abutting slabs by as much as 4 centimetres. The slab that caused Mario‘s fall protruded by approximately 3 centimetres. The tenant who occupied the milk store was aware of a ―certain unevenness of the slabs,‖ but did not realize that it was hazardous. Discuss the liability (if any) of the defendant and render, with reasons, a decision. Answer: This case raises the question of liability of a landowner or occupier where the landowner or occupier fails to keep premises open to the public in a state of good repair. It also raises the question of the duty on the individual to keep a proper look-out for dangers that are open to view, and to avoid them. A third aspect is the matter of responsibility for maintenance – and warning of the danger. This concerns the duty of the landowner and the adjacent shop-keeper (who was aware of the uneven sidewalk slab) to allow a danger to exist. In class discussion, the type of person entering on the property should be determined (trespasser? Licensee? Invitee? Contractual entrant?). The duty of care and the person to whom it is owed should also be established. The following questions should also be considered: Is there a duty to warn of the danger? A duty to repair? Does the person entering on the property have an obligation to keep a sharp look-out for obvious dangers? Is a raised concrete sidewalk slab an obvious danger? Was the fact that many of the slabs were raised and uneven a clear warning of the danger? Would a ―reasonable man‖ have foreseen the danger and either repaired the sidewalk or warned the user? The onus is generally on the landowner or occupier to warn persons who enter on their premises of apparent dangers where the person enters on the premises for the benefit of the landowner or occupier. In this case there is a duty on the landowner to maintain the sidewalk in safe condition, and bearing in mind the length of time which the property remained in a dangerous condition, the landowner may be negligent for failing to repair, or at least to warn persons of the danger. The tenant of the shop, if the plaza was large and contained a number of shops, would probably only be liable for injury caused within the confines of his shop, but where access can only be gained to a shop by way of the sidewalk outside the door, a duty exists to ensure a safe entrance to the premises for patrons of the shop, or for an appropriate warning to customers of the danger. For an example of a similar case see: Snitzer v. Becker Milk Co. Ltd. et al. (1977), 15 O.R. (2d) 345, and also Fraser v. Ronsten Developments Ltd. (1969), 4 D.L.R. (3d) 475.

Case 7 Kamikazi Ski Lodge Limited operated a ski resort in a mountainous area. While the company offered a number of runs suitable for skiers of all levels of competence, it maintained one particularly fast and adventurous run on a slope that required a relatively high degree of proficiency to successfully ski its course. In its advertising brochure, the company warned potential patrons of the lodge that they should not attempt the run unless they had considerable experience. The company also required all guests to sign a guest registration form at the time of check-in at the lodge. The form provided as follows: ―Guests assume all risks associated with their use of the owner/operator‘s lodge and facilities. The owner/operator, its employees, and agents shall not be liable for any loss or injury incurred by any guest, however caused. Registration as a guest shall constitute a waiver of all claims that the guest may have against the owner/operator or its employees for any injury or loss suffered while on the premises.‖

Each year the lodge held a special challenge competition on its most difficult slope that required the contestants to travel down the slope in large rubber inner tubes rather than on skis. The competition was appropriately described as the ―$500 Kamikazi Challenge Race,‖ and was open to all contestants on the payment of a $15 race-registration fee. Contestants were also required to sign an entry form at the time of payment, which provided: ―Contestant recognizes that the Kamikazi Challenge is a dangerous undertaking that could result in injury. The contestant assumes all risk and responsibility for any or all injuries suffered while engaged in the competition.‖ Two days before the competition, Crocker, a novice skier who was a guest at the lodge, paid his entry fee and signed the entry form without bothering to read it. He had been drinking prior to the point in time that he entered the contest, but did not appear to be drunk or unaware of his actions. Later that day, the contestants (including Crocker) were shown a videotape of the previous year‘s race. The tape described the race and provided footage of incidents that involved contestants being thrown from their inner tubes, as well as those who managed to remain in their inner tubes to the end of the race. On the day of the contest, Crocker appeared at the starting point for the race in an obviously drunken state. His speech was slurred, and he had difficulty standing on the slope. Nevertheless, he managed to obtain his inner tube from the lodge employees in charge of the race and prepared for the start of the race. At the starting gun, he threw himself into the inner tube and managed thereafter to more or less successfully navigate the slope. He placed among the five finalists, suffering only a cut above one eye when he was thrown from his inner tube on one occasion. Before the final run, he took a large drink of brandy that had been offered to him by a spectator. The race operator noticed Crocker drinking brandy, and asked him if he was in any condition to compete in the final race. Crocker replied that he was, and the final race began. Partway down the slope, Crocker failed to negotiate a sharp turn, and was thrown from his inner tube and into a rock gully. His injuries rendered him a quadriplegic, and he brought an action against the resort for damages. Discuss the liability of the lodge, and speculate, with reasons, as to how the case might be resolved. Answer: This case raises the issue of duty of care on the part of a ski lodge to protect its guests from injury. It also raises the issue of volenti non fit injuria, and the use of a waiver. Discussion of the case might begin with a general examination of the duty of the ski lodge operator towards its guests. From here, the specific nature of the activities carried on might be considered. Are these activities hazardous in themselves? What is the general obligation of the lodge operator towards guests that engage in ski activity? Would ordinary skiing be a situation where volenti non fit injuria would apply? Would the waiver signed by the guests protect the operator under normal circumstances? Once the general liability and duty of the lodge operator are determined, students might be asked to consider the nature of the liability of the operator for the race activity. Would the entry form protect the operator? Is this another volenti situation covered by the entry form? Crocker did not read the form when he signed it. Does this matter? What responsibility did the lodge employees have to protect Crocker when they discovered that he was in a drunken state? Did they have a duty to protect him? In the case upon which this fact situation was based, the court held that the operator had a duty to protect Crocker from injury by preventing him from engaging in the race while intoxicated to the point where he was unable to recognize the risks involved. The court held the ski lodge operator liable for his

injuries as the employees ought to have foreseen the likelihood that Crocker would be injured if he participated while in a drunken state.

Case 8 Kevin and a companion spent most of a Saturday afternoon and evening drinking alcoholic beverages at Kevin‘s home. Around 10:00 p.m., they decided to visit a local tavern, where they had arranged to meet some friends. The two drove in Kevin‘s automobile to the tavern, which was located on a highway some five kilometres away. Kevin was obviously quite drunk when he arrived at the tavern, and for the next two hours he continued to drink beer. At closing time, the bartender informed the group (who were all quite drunk by then) that they must leave the premises. Kevin and his companion did so, and drove from the tavern parking lot, with Kevin behind the wheel and his companion attempting to direct him into the traffic. When the way appeared to be clear for Kevin to enter his traffic lane, his friend said: ―Okay! Clear to go!‖ Kevin accelerated into the traffic, but was unable to control the automobile, and it careened across the centre line of the highway and into the path of an oncoming vehicle. The collision destroyed the two automobiles, killed the driver of the other vehicle, and permanently crippled both Kevin‘s friend and the passenger in the other automobile. The estimated loss suffered by those injured in the accident was $1,900,000. Apart from some cuts, bruises, and a broken arm, Kevin suffered no serious effects from the accident. Blood tests taken shortly after the accident indicated that Kevin‘s blood-alcohol level was almost three times the legal limit. Advise the parties of their rights in this case and indicate how the liability, if any, would be determined. Answer: The basic facts of the case are those in an unreported Ontario Court of Appeal decision in which the court held the intoxicated driver 85% responsible and the tavern 15% responsible for the damages suffered by the occupants of the other vehicle. The liability of the tavern was reduced from a 50% liability determined by the trial judge. Issues to be raised in this case would include the liability of the tavern, and the extent to which liability should be imposed on it for serving its patrons intoxicants. Students should note that taverns may attract liability in those instances where they continue to serve alcoholic beverages to obviously inebriated persons who later may be involved in highway traffic accidents. Students should also discuss the position of the passenger in Kevin‘s automobile. Did he voluntarily assume the risk of injury by entering a vehicle driven by a person who was clearly intoxicated? Could he make this type of decision, given his own drunken state? Does legislation in the province preclude a gratuitous passenger from recovering damages? How would provincial ‗no fault‘ insurance (if any) apply?

Case 9 Sayeeda operated a small food stand at an open-air market where farmers in close proximity to one another had set up makeshift stalls or tables to display their produce. To protect themselves from the hot sun, most had erected canvas or cloth canopies over their tables. The stand operated by Sayeeda was located in the midst of the covered stalls.

For the purpose of cooking a particular delicacy that she sold, Sayeeda had placed a tiny propanefuelled stove on her tabletop and used it to boil a pot of oil. While she was serving a customer, a youth about 16 years old turned up the flame on the burner, and the oil immediately caught fire. In a frantic attempt to put out the fire, Sayeeda seized the flaming pot and flung it from her food stand. The youth was splashed with flaming oil and was seriously burned when his clothes caught fire. The pot of burning oil landed in a nearby farmer‘s stall and set fire to the canopy that he had placed over it. The farmer kicked the flaming pot out of his stall and into a neighbouring stall, where it set fire to a quantity of paper that was used for food packaging. Before the fire was finally extinguished, three stalls had been destroyed, and both the youth and Sayeeda hospitalized with serious burns. Discuss the rights and liabilities of the parties involved in this incident. Answer: This case represents a useful vehicle for the discussion of foreseeability, duty of care, and ―the reasonable person‖. Some of the questions that should be asked might include the following: To whom was a duty not to injure owed? Was there a breach of duty? Should Sayeeda have foreseen the possibility of someone tampering with or upsetting her stove when she placed it upon the table in a position where it could be reached by passers-by? Should the youth have foreseen the danger associated with his act of turning up the heat on the stove? Did Sayeeda act as a reasonable man under the circumstances? What standard should apply? Is the maintenance of an open fire under such conditions a situation where strict liability should apply? Did Sayeeda owe a duty not to injure the youth or the farmer in the next stall? Should the farmer have foreseen the consequences of his act when he kicked the burning pot from his stall? What standard should apply to the farmer who was totally surprised by the event? On this point it should be noted that where a person is expected to act in totally unexpected circumstances, that the choice of the wrong course of action, even if it results in injury, may not result in liability for that person. (See for example: Hogan et al. v. McEwan et al. (1975), 64 D.L.R. (3d) 37). It should also be noted that in fixing a standard for children (is a 16 year old youth a child?) the courts usually consider the child‘s age, alertness, level of intelligence, experience, and general knowledge. (See: Heisler v. Mooke [1972] 2 O.R. 446.)

Case 10 Zhao and Henry set out for a day of fun at ―Fearsome,‖ a white-water rafting attraction. They both signed a waiver stating they ―release the operator and its employees from all liability however caused.‖ Halfway through the course, their raft (piloted by one of the attraction staff) flipped over, an event considered as all part of the ―extreme‖ factor. Both Zhao and Henry were wearing life-jackets. Henry was thrown to one side from the raft, and broke his hip in collision with a submerged rock. Zhao was initially unhurt, and both men were carried on the current to the lagoon at the end of the course. A Fearsome boat was waiting for them, and its crew used a hooked pole to snare the loops of their lifejackets. In thrusting forward with the pole, the crewman seriously sliced Zhao‘s hand. Henry spent three months in a cast before he could work again, and Zhao missed six weeks of work. Discuss the issues arising from this that will affect a legal action brought by Henry and Zhao against Fearsome, and render a decision. Answer: Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-53

This case requires students to consider the issue of duty of care upon the attraction operator to protect its participants from injury. Students will need to assess the degree to which volenti non fit injuria applies, and the effectiveness of a waiver. Discussion of the case might begin with a general examination of the duty of the attraction operator, and the way it executed its duty in two parts: during the ride, and the recovery operation. It may well be that there is no liability for elements that were beyond the control of the operator during the ride, but liability for the additional damages caused in the botched recovery attempt that sliced Zhao‘s hand. The injuries on the river are in the contemplation of the parties, and thus within the scope of the waiver, but these latter injuries in recovery may not be, and the operator may be liable accordingly.

Case 11 Sandra purchased a timer for her living-room lamp, so that it would come on in the evening while she was out working night-shifts. One afternoon Sandra carried out her energy conservation routine of shutting off lights and appliances, except for the living room lamp in the northwest corner. She set the lamp timer and left for work. She returned home after midnight to find the fire department packing away its hoses, and her home gutted by fire. The fire marshal told her the fire was electrical in origin, and that its spread located the origin along the north wall of the living room. Describe the case in tort that Sandra is now facing in order to receive compensation for her losses. Answer: Sandra is facing the launch of a product liability suit against the manufacturer of the lamp. The specific aspects of this tort are covered in the text section on manufacturer‘s liability, most centrally that she need not have direct contractual relations with the manufacturer in order to sue, and that she need not involve the retailer if there is little advantage in doing so. Her central argument will be that the lamp was unfit for the use intended, and that the lamp is the cause of her damages on the basis of res ipsa loquitor.

Case 12 A 45-year-old patient was under doctor‘s care for the past twenty years for chronic arthritis, trying many different drugs without success. A new drug appeared, having been certified by Health Canada and the doctor explained that like all the rest, the drug would have a range of side effects, among which was possible depression. The patient took the drug, and within a week suffered a mood swing and Id suicide. Concerned by this news and two other cases, Health Canada suspended the drug from Canada, pending further review. The family of the deceased sued the pharmaceutical maker and Health Canada. Aside from issues of the doctor‘s possible professional liability, discuss the issues of manufacturer‘s liability and negligence raised in this scenario. Answer: The question requires discussion of manufacturer‘s liability and negligence, but also some assumptions on drug testing and an opinion on the role of government in ensuring drug safety. In principle, there can be no expectation that all ―certified‖ drugs will be safe for all persons. Ignoring the difficulties in suing the Crown, the best that likely can be expected here, regarding Health Canada, is a review or Royal Commission into its policies and practices, and perhaps government compensation thereafter. With respect to the manufacturer, the question is the adequacy of its testing, and the extent and tenor of its side-effect warnings. If neither was extensive, the possibility of a successful suit in negligence grows. The testing presumably was sufficient for Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-54

Health Canada, which should be a defence in itself, so focus will fall upon the warnings. Were they clear? Did they suggest how serious the side-effects may be? Were doctors warned against prescription for patients of a certain predisposition? Without significant evidence against the manufacturer, this would be a difficult case to mount in Canada, despite being much more common in the USA.

CHAPTER CHARTS

CHAPTER 6. SPECIAL TORT LIABILITIES OF BUSINESS PROFESSIONALS Chapter Topics The Professional Professional Standards and Professional Associations The Professional–Client Relationship Accountants Lawyers Engineers Architects Semi- Professionals and Other Skilled Persons Summary Key Terms Review Questions Mini-Case Problems

Chapter Objectives After study of this chapter, students should be able to: • Describe how and why the liability of professionals differs from the norm. • Explain the nature and responsibilities of a fiduciary relationship. • Explain the significance of informed consent. • Describe the key aspects of professional liability in specific cases. YOUR BUSINESS AT RISK Professionals are not only held to a higher standard of care, but they tend to be even more financially desirable targets of litigation. Professionals must understand the scope of their additional responsibility and consider how they will conduct their professional practice to reduce their risks. Wise professionals will obviously consider the advice of insurance professionals as part of their risk reduction strategy. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-56

CHAPTER COMMENTARY A professional is a person who possesses special knowledge or who exercises special skills not possessed by the ordinary individual. Students should be made aware of how professional status is established (training, education, standards of performance, professional association with powers to enforce standards, etc.) and the responsibilities that this status places on the professional under tort law. The text outlines these responsibilities for many of the older, established professions, but students should also be aware that many new professions are also emerging, and are recognized at law. The duty of care of professionals and their responsibility to their clients may be of particular personal importance to students who intend to enter a profession at some point in time after graduation. This chapter attempts to provide a broad view of the legal obligations of professionals, and how professional tort liability may arise. Some time should be devoted to a discussion of how a professional standard is established, as well as the importance of a professional standard and its relationship to what constitutes performance of professional duties. The fiduciary duty of certain professionals should also be discussed. In the case of a professional person performing a service, (e.g. a medical practitioner) the standard is normally that of an ordinary skilled member of the profession, and if the work is done in accordance with that standard, there is usually no liability in the case of injury. Case comment on Kangas v. Parker and Asquith is an excerpt from the judgment in which the standard of skill of a surgeon is examined, and illustrates how liability is determined. The important point to note here is that the duty is not absolute. If the professional exercises the degree of skill of the average member of the profession that is all that can reasonably be required of the person, assuming that the profession has established a reasonable standard. It is only when the performance is below the standard that liability normally will arise. Some class discussion time should also be devoted to professional negligence in the form of negligent misstatements and negligent misrepresentation by accountants, lawyers, etc., and the extent of their liability. The court Decision of Hercules Managements Ltd. v. Ernest and Young deals with this issue. Students should also be made aware of the fact that semi professionals and persons with special skill may also have tort liability for their actions, if their services are performed negligently. See for example, the text reference to insurance agents. Classroom review of the chapter might be expanded to discuss the limitations on liability that professionals may include in their contracts, such as in the case of an accountant or auditor‘s reliance on client financial data in the preparation of their reports. Informed consent in the case of certain professions should be noted where risks are associated with a proposed course of action. Some class time should also be used to discuss the extended liability of some professionals to persons outside the contract (e.g.: Architects and Accountants).

Review Questions 1. Does a professional person have any responsibility to a person other than the one who engaged the professional services? Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-57

Answer: Some professional persons such as accountants may have a responsibility to third parties if they could reasonably have expected the third parties to rely on their professional work (such as financial statements, etc.) to make decisions concerning the professional person‘s client. Architects and engineers may also have a safety responsibility to users of property they design.

2. How is the standard of care determined for most professionals? Answer: The standard of care of most professionals is based upon the skill standards set down by their professional organizations for the performance of professional services. 3. Define ―negligent misrepresentation‖. Answer: Negligent misrepresentation may be defined as negligent misstatements made by a professional to his or her client.

4. Explain the role of a professional organization and the issue of professional responsibility to clients. Answer: Professional organizations usually establish standards that the member must meet in the performance of services to clients, and may discipline/expel members who fail to meet the standards.

5. How would the duty of care be determined for persons who are not members of a professional association, but who hold themselves out as persons in possession of special expertise? Use an insurance agent as an example. Answer: In the case of non- professionals, the general standard of others in the business may be used as a determinant of the ‗standard‘ of service to be provided, and a failure to meet the ‗standard‘ would constitute negligence. 6. What is the ‗threefold test‘ and how is it applied in cases of negligent misrepresentation? In what way has the Supreme Court of Canada changed the application of this test?

Answer: The three fold test is described as being: (1) Whether harm was foreseeable. (2) Whether there was a relationship of sufficient proximity. (3) In terms of public policy, it would be just and reasonable to impose the duty on the party making the statement. See: Hercules Managements Ltd. case for Supreme Court comments.

7. In what way or ways would a professional engineer have a responsibility to third parties? Answer: In designing a structure, the engineer would be obliged to consider the safety of the persons using the structure, and he/she would be liable for injury if he/she was negligent in this regard.

8. What are the courts reluctant to make auditors responsible to every person who obtained a copy of a financial statement negligently prepared by the accountant? What limits do the courts apply to an accountant‘s responsibility? Answer: See text discussion of this topic.

9. Outline the responsibility of a surgeon to a patient. Is it limited only to the actual performance of the medical procedure? Answer: The responsibility of the surgeon to the patient is to perform the medical procedure in accordance with the standard prescribed by the professional association. The surgeon must also explain to the patient the need for the operation, and the risks associated with it in order to obtain informed consent from the patient.

10. Outline the steps that an emerging profession must take in order to establish a recognized professional status. Answer: A ‗profession‘ would require a professional association to establish skill and education standards, and to have the power at law to ensure that members maintain the standard. It must also have the legal authority to impose the penalty of expulsion from the profession of a member who does not maintain the standards. 11.Explain ―fiduciary duty‖. Answer: A fiduciary duty arises in a relationship of trust where the professional has a duty to place the client‘s interest above his or her own.

12. Should professional associations be responsible for the negligent acts of its members? What should be the limits of its responsibility to the public-at-large? Answer: This question should raise a discussion of the limits of responsibility for an association with respect to maintenance of professional standards of its members – training, discipline of members, etc.

Mini-Case Problems

1. A lawyer negligently prepared a deed of land for a client who was selling his property, and in doing so described the wrong parcel of land in the deed. The lawyer acting for the purchaser failed to notice the error, and registered the deed. The purchaser of the land later discovered that her deed was for the wrong parcel of land. Discuss the responsibility of the lawyers. Answer: In this case, both lawyers were negligent. However, the lawyer who accepted the deed on behalf of the purchaser would probably be liable for all of the costs incurred to obtain a correct deed for the property purchased.

2. An engineer designed an outdoor elevated patio that was expected to accommodate conference meetings of up to 100 persons. The engineer considered the load bearing structure on the basis of the weight of 200 persons as a safety factor. When the structure was completed, the owner decided to use the patio for a rock concert, and sold 400 tickets. In actual fact over 400 patrons attended, and packed the patio for a ‗standing room only‘ concert. The enthusiastic crowd at one point began jumping to the music, and the additional load pressure caused the structure to collapse, injuring many of the patrons How would liability be determined in this case? Answer: The issue to discuss here is the obligation on the part of the engineer to design a safe structure as an elevated outdoor patio. The expectation was that it would be used by up to 100 persons. The engineer used a capacity of 200 as his safety factor. Was this reasonable? Should he have foreseen that 400 people might crowd on the patio? The engineer in his defence might rely on the fact that the structural failure was due to the added pressure of the crowd jumping on the patio, and that under normal circumstances the structure would have supported as much as 400 persons without failing. It was probably unreasonable to expect the engineer to foresee the event that was held and to have built accordingly.

Case Problems for Discussion Case 1 Central Land Development Ltd. sold three commercial building lots to Commercial Builders Ltd. for the sum of $400,000. As a part of the purchase price, Perros and Masson, the two principal shareholders of Commercial Builders Ltd., and the corporation gave Central Land Development Ltd. a mortgage for $250,000. The balance of the $400,000 selling price, in the amount of $150,000 was paid at the time of the purchase. A year and six months later, Commercial Builders Ltd., and its two shareholders wished to pay off the mortgage, and requested Central Land Development Ltd. to provide them with a pay-out amount. Central Land Development Ltd. requested its accountant, Hamilton, to calculate the balance owing on the mortgage. Hamilton calculated the balance owing to be $172,459. Commercial Builders Ltd. paid the amount and received a discharge of the mortgage. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-60

Several months later, Central Land Development Ltd. discovered that the amount calculated by Hamilton was in error, and the correct balance was in fact $202,459. Central Land Development requested payment from Commercial Builders Ltd. of the $30,000 difference, but Commercial Builders Ltd. refused to pay the amount. Discuss the issues raised in this case, and the arguments that might be raised by each of the parties. Answer: This case is based upon the case of Prevost-Masson v. General Trust of Canada, [2001 SCC 87] 3 S.C.R. 882 (CanLII).. Students should identify the negligence of the accountant as the source of the problem when he calculated the pay-out amount in error. However, was there a duty on the other party to verify the pay-out amount? Was it aware of the error (in its favour) when it paid the $172,459? Did it have an obligation to inform Central Land Development Ltd. of the error? In the above noted case, the accountant was held liable for professional negligence, and obliged to pay Central Land Development Ltd. the amount of the loss. Case 2 Road Builders Ltd. was the successful bidder for a contract with a provincial government to construct a 23 km. highway by-pass of a large city. As a part of its preparation for the contract bid, Road Builders Ltd. engaged the services of Highway Engineering Corporation Ltd. to prepare engineering design and specifications for the construction project. This was done, and Road Builders Ltd. submitted the engineering design and specifications as a part of its bid for the contract. The bid was successful, and the engineering design was incorporated in the contract by the government. During construction of the roadway, errors were discovered in the design, and Road Builders Ltd. was obliged to correct the design errors at considerable expense. As a result, Road Builders Ltd. suffered a loss on the construction project, and demanded compensation for the loss from Highway Engineering Corporation Ltd. Highway Engineering Corporation Ltd. refused to pay for the loss on the basis that it was not involved in the construction, and also that the province had accepted the design by including it in the contract. Discuss the arguments of Highway Engineering Corporation Ltd., and the arguments that Road Builders Ltd. might raise if it took legal action against the engineering firm for its loss. Render a decision. Answer: Students should discuss the matter of acceptance of the engineering design and specifications by the parties to the contract. Once the contract was accepted by the Province, did the duty of Highway Engineering Corporation Ltd. end? It was not involved in supervision of the road building. Did this matter? Could the parties change the specifications without the consent of the engineering firm? In the case of Edgeworth Construction Ltd. v. N.D. Lea & Associates Ltd. 1993 CanLII 67 (SCC), the engineering firm was held liable Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-61

for the errors in design, but the individual engineers that placed their professional seal on the drawings were not liable. Applying this case to the facts in Case 2, Highway Engineering Corporation Ltd. would be liable for the loss incurred by Road Builders Ltd. Case 3 Alex carried on a relatively successful business as a manufacturer of a cleaning product that was well received by the users. After several years of slow but steady growth in sales, his accountant suggested that he expand the business by the incorporation of a company. This would permit the sale of shares to acquire the capital necessary for a new plant and equipment. A company was eventually incorporated, but instead of selling shares to acquire the necessary capital to expand the business, Alex decided to arrange a $200,000 loan from his banker. To do so, however, Alex needed the accountant to prepare financial statements for the company to deliver to the bank. Preparing the financial statements, the accountant failed to notice that the existing land and plant building were not acquired by the corporation, but retained by Alex, and simply leased to the company on an annual basis. The accountant had included the land and building (which had a value of $250,000) as an asset of the corporation on the financial statements, without checking with Alex to determine if the property had been transferred. When the error was discovered later during negotiations with the bank, the bank insisted that Alex guarantee the loan as a principal debtor, and use the land and building as additional security for the loan. A few weeks later, Alex decided that it would be necessary to acquire additional capital to complete the expansion program. He contacted a private investor with a view to selling her a block of shares in the corporation. The investor was interested in the financial status of the corporation, and Alex informed her that the corporation had borrowed $200,000 from the bank for the purpose of expanding the business. He also suggested that the investor contact either his accountant or the bank for information on the corporation‘s assets and financial position. The investor contacted the bank and requested copies of the financial statements that the accountant had prepared. A bank employee, who was unaware that the statements were in error, gave them to the investor without comment. On the strength of the financial statements, the investor invested $50,000 in shares of the corporation. Some months later, she discovered that the corporation did not own the land or buildings, and that the financial statements were in error. Advise the investor of her legal position, and her rights (if any) against Alex, the accountant, and the bank. Answer: This case deals with the responsibility of a professional and a banking institution to a third party. The accountant was clearly negligent when he failed to notice that the building was not acquired by the corporation when it bought the business from Alex. The error was discovered when the bank advanced funds, and the bank acquired additional security to secure its loan to the corporation. However, did the bank owe a duty to the investor to inform him of the error on the financial statements before releasing them? Was the accountant liable to the investor on the negligently prepared statements? Professional accountants may be liable when they have produced inaccurate financial statements that result in a loss for third parties that they (the accountants) could reasonably have foreseen would be using them to make investment decisions concerning their client. Should a "reasonable accountant" have foreseen the use of financial statements in the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-62

instant case? The statements were prepared at Alex's request for the bank, but the accountant should have foreseen the possibility that they might be used by other investors as well, and corrected the errors contained in them when discovered. By leaving the misleading statements in the hands of the bank, he should have foreseen the possibility of others using them when they contained a known error. The bank was also negligent in this instance by providing the investor with the misleading financial statements, although it is important to note that the investor in the case requested financial information from the bank, and the financial statements were given as a part of this opinion. (The facts of the case in the text are not entirely clear on this point, and may give the impression that the bank employee simply delivered up the statements, and said nothing about the corporation's financial position. The question remains much the same, however: did the bank have a duty to warn the investor that the information in the statements was incorrect when it knew the use which the investor intended to make of the information?). For cases, see: Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465; Goad v. Canadian Imperial Bank of Commerce 1968 CanLII 321 (ON SC). In the case of Haig v. Bamford 1976 CanLII 6 (SCC), the accountant was held liable for his negligence in the preparation of financial statements which he ought to have foreseen might be used by other investors. Case 4 Community Sportsplex Ltd. purchased a block of land from a small municipality for the development of a sports facility consisting of an outdoor sports field, and an indoor arena with a standard ice surface with a seating capacity for 3,000 spectators. The municipality had zoned the area for ‗recreational use‘ and prohibited the construction of residential housing on the land. This was so because a part of the land had been a former landfill site, and the surface soil subject to some settling as the garbage buried below gradually decomposed. Community Sportsplex Ltd. was unaware of the former use, but nevertheless, engaged the services of Geo Engineering Corporation Ltd., a soil testing business, to determine the suitability of the surface and subsurface to support the proposed arena building. The proposed location of the building was at the edge of the landfill area, and soil testing indicated that the land was suitable for the construction of the building. Shortly after the soil had been tested, the architect that designed the arena building in consultation with Community Sportsplex Ltd. decided to move the location of the proposed building some 10 metres closer to the playing field. As a result, the new location placed one wall of the proposed building on the landfill area. A contract for construction of the building was given to a contractor who proceeded to excavate for the footings of the building. In the area over the former landfill the contractor discovered the poor soil conditions, and extensive work was required to stabilize the ground for the building footings. The contractor determined that this added cost was approximately $50,000. Community Sportsplex Ltd. refused to pay the additional cost. Discuss the rights of the parties and the possible outcome, if the dispute should be taken to court for a decision. Answer: This case raises a number of issues for class discussion. The municipality, while not a party to the construction of the arena sold the land to the company knowing the purpose of the purchase. Did it have an obligation to warn the company of the landfill? Did the soil testing corporation have an obligation to Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-63

determine the former use of the property? Did the architect have a similar obligation? The architect relocated the position of the building to an area which had not been soil tested for construction, and was presumably aware of this fact. This failure may render the architect liable for the loss. Geo Engineering Corporation Ltd. would have no liability as it was not negligent – it tested only the area where it was required to test the ground.

CHAPTER 7. AN INTRODUCTION TO CONTRACTS Chapter Topics

Introduction Historical Development of the Law of Contract The Elements of a Valid Contract The Intention to Create a Legal Relationship Offer and Acceptance Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Chapter Objectives After study of this chapter, students should be able to: • Describe and explain the first three elements of a valid contract: intention, offer, and acceptance.

YOUR BUSINESS AT RISK Almost all of your business activity will be governed by contracts, and you must learn how to create contracts correctly. If a contract is not created correctly, it does not come into existence, and this is a dangerous circumstance for your business. If the other party to your transaction abandons the deal or falls short in performance, you will have incurred time and expense for nothing. You will be left with little or no means to enforce your ―rights,‖ as no contract ever existed. CHAPTER COMMENTARY Chapter 7 introduces the law of contract, and represents the first of a series of chapters concerning one of the most important areas of the common law from the standpoint of business persons. A good grounding in the basic concepts related to the law of contract is therefore essential for all students. The chapter traces the historical development of the law, then presents the first of the essential elements of a binding agreement: the intention to create a legal relationship. While this is a relatively simple element for the student to grasp, its importance should not be ignored, and perhaps a few fact situations should be discussed to distinguish situations where the intention is considered present (such as an agreement between strangers in a business setting) from those where it is not (e.g: a family agreement of a casual nature). The test applied in these cases is generally that of the reasonable person, and whether such a person would regard the agreement as binding. The chapter also introduces the elements of offer and acceptance. Offers should be distinguished from mere invitations to do business, and the distinction between an offer and an advertisement to sell goods should perhaps be pointed out by way of example. A certain amount of drill concerning the rules for both offer and acceptance is often useful to firmly fix the requirements for each in the minds of the students. A similar effort should be made to highlight the rules for lapse and revocation. These topics are described in the text, but it should be emphasized that the acceptance must be unconditional, and communicated to the offeror before lapse or revocation takes place, if the acceptance is to be

valid. The case excerpt from Dickinson v. Dodds provides a general discussion of offer, acceptance, and the effect of notice of revocation before acceptance is made. The Court Decisions in Chapter 7 provide a number of useful illustrations of offer and acceptance. The first decision, Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd. distinguishes between an offer and an invitation to do business. In that case the issue concerned the point in time when the contract was made. The court hearing the case decided that in a self-serve setting it was when the customer reached the check-out counter and placed the goods on the counter that the customer was, in essence, saying: "I offer to purchase these goods from you", and if the shop-keeper accepted the offer, the contract was then made. The Carlill v. Carbolic Smoke Ball Co. may be contrasted with the Boots Cash Chemists case, as it distinguishes an invitation to do business (the usual nature of an advertisement of goods) with an offer to the public-at-large. In the Carlill case, the advertiser, by the wording of the advertisement, was clear in his intention to be bound by the terms of the advertisement, and the court concluded that the advertisement constituted a valid offer to the public which could be accepted by the purchase by the use of the product. The decision in the case is important, not only because it establishes the rule that an advertisement may be an offer if it is intended to be such by its expressed words, but also because it stands for the rule that acceptance need not be communicated if the offeror makes it clear in the offer that acceptance can be made by the performance of an act in accordance with the terms of the offer. If the case problems for discussion are used to illustrate these various concepts, Discussion Case 7 provides a useful vehicle for the discussion of the rules for offers, acceptance, lapse, and revocation. The issue of offer and acceptance using electronic means is treated, as well as the important question of location of the transaction, and the effect of the ‗click‘ as acceptance. These topics are worth some class time, given student familiarity with on-line purchasing of products. The cases of Braintech v. Kosticik and Rudder v. Microsoft Corp. set out in the text might also be discussed in this regard as well. CONTRACT CASE PROBLEMS: A SUGGESTED APPROACH Chapter 7 introduces the law of contract and the first elements of a valid contract. The case problems provide an opportunity to analyze the dealings between the parties in each situation, and to determine if the parties have established an enforceable agreement. An approach that may be suggested to students for these cases might be to examine the facts of the case, first to determine if the parties intended to create a legal relationship, then to identify the offer (or offers, as the case may be). Once the offer has been identified, the next step should be to look for an unconditional acceptance of the offer. If an acceptance can be found, check the conditions under which it was made to ensure that it was made in accordance with the terms of the offer, and before lapse or revocation occurred. By following this approach, students are less likely to overlook something in the case which would affect the creation of the agreement, or allow one party to avoid it. In the chapters which follow, additional essential elements will be added to the three elements examined in this chapter. The advantage of this approach to case analysis is that the examination may be expanded in a methodical way to cover each new element as it is added to the "list".

Review Question 1.

Describe the burden placed upon an offeror by the courts where the offeror alleges that indirect notice of revocation was received by the offeree. Answer: The offeror must satisfy the court that the reliability of the source of the knowledge was such that a reasonable person would accept the information as definite evidence that the offeror had withdrawn the offer.

Why is an intention to create a legal relationship an important element of a valid contract? Answer: Intention distinguishes those situations where enforceable rights are created from those where the parties do not intend to be legally bound by their promises.

Explain why communication of an offer must take place before an offer may be accepted. Why is this important? Answer: Communication must take place first because a party should not be bound by a offer of which he or she is not aware. In addition, a party must be fully aware of the terms of the offer before acceptance may be made.

Describe the ―rules‖ for acceptance, and explain why such ―rules‖ are necessary. Answer: Acceptance must be unconditional - because it must be in accordance with the terms of the offer. Acceptance must be communicated in accordance with the terms of the offer because the offeror determines how acceptance should be made. See also rules for time and mode of acceptance in text.

Under what circumstances would "silence" be acceptance? Answer: Silence may constitute acceptance where there is a pre-existing agreement between the parties that silence may be acceptance.

Explain the term 'counter-offer' and how it might arise. Answer: A counter offer may arise where a party makes a conditional acceptance of an offer. The 'conditions' attached to the acceptance constitute a new offer.

Is an advertisement containing an offer of a reward for a lost pet a valid offer? How does it differ from an advertisement of goods for sale? Answer: An advertisement of a reward is treated as a binding offer to the public at large. It is accepted by the performance of an act. An advertisement of goods for sale is usually not considered as an offer because the seller is not expressing an intention to be bound by the advertisement - only inviting offers based upon availability of stock, etc.

Describe four instances where an offer might lapse before acceptance. Answer: An offer may lapse if: (1) either party dies before acceptance. (2) either party becomes bankrupt. (3) no acceptance within the time period specified in the offer. (4) no acceptance within a reasonable time, if no time of acceptance specified.

Explain the rationale behind the rule that states that an offer by mail invites acceptance by mail, and that the acceptance is complete when a properly addressed letter of acceptance is dropped in a mail box. Answer: The rationale behind the rule is that the offeree has done everything possible to accept the offer when the letter of acceptance is placed in the hands of the post office - hence that is the time of acceptance.

10. What condition must be met before revocation of an offer is effective? Answer: Revocation of an offer is not complete or effective until it has been received by the offeree, or the offeree has been clearly made aware of the revocation. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-66

11. ―The parties to a contract, if they do things right, create their own rights and duties." Is this a valid observation? Answer: Yes. Rights and duties created by a valid contract are enforceable at law by the courts. 12. How does acceptance of a unilateral agreement differ from that of an ordinary agreement? Answer: Acceptance of a unilateral agreement is made by the performance of an act specified in the offer itself. No communication of acceptance is necessary. 13. Written forms often contain ―YES‖ OR ―NO‖ check boxes. Why should on-line forms go one beyond ―OK‖ and ―CANCEL‖ boxes to establish ―CONFIRM‖ checks?

Answer: The ―CONFIRM‖ check is analogous to a ―last look‖ at a document we have manually signed. Even if signed, we may tear up contract, for the last step lies in the tenet of ―signed, sealed and delivered‖. ―CONFIRM‖ checks allow that same right of ―tearing up‖ the deal before releasing it from our hands to those of a would-be counterparty. Electronic means can only offer this dimension through such means. 14. What is a ―click-wrap agreement‖? Answer: A click wrap agreement is on an on-line agreement presented to the recipient (usually a prospective purchaser) where an acknowledgement of the terms and acceptance of the terms is signified by a mouse ‗click‘ in the appropriate box related to a statement that the prospective purchaser understands the terms of the agreement, accepts the terms, and intends to be bound by the agreement.

Mini-Case Problems

1. Potter, the owner of Industrial Castings Ltd., placed a for-sale ad in a trade paper. The ad read: ―HighSpeed Caster 750 for Sale, $25,000.‖ Yates and Zabel both arrive at the shop and wish to acquire the machine. Yates is the first to meet Potter and says: ―I accept your offer. Here is my $25,000 cheque.‖ Zabel then states: ―Here is a $26,000 cheque. I will take your machine.‖ Must Potter sell the machine to Yates? Answer: If an advertisement is considered to be an invitation to do business (to invite offers) then Potter is free to accept which ever offer he pleases.

2. D offered to sell his automobile to E for $5,000 cash. E responded to D‘s offer by saying: ―I will buy your automobile for $5,000. I will pay you $2,500 now, and $2,500 in one week‘s time.‖ Have D and E formed a binding agreement? Answer: No. E has qualified his acceptance by stating the terms of payment. E has made a counter-offer which D may accept or reject. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-67

3. The president of A Co. wrote a letter to B Co. offering to sell B Co. a large quantity of steel at a specific price. B Co. did not respond to the letter, but A Co. sent a ―sample load‖ of one tonne that B Co. used in its manufacturing process. A month later, A Co. sent the quantity of steel specified in its letter along with an invoice at the price specified. Is B Co. bound to accept and pay for the steel? Answer: The 'sample load' sent by A Co. may be treated as a gratuitous delivery, perhaps for testing purposes, etc. as this may be a custom of the trade. Unless customs of the trade dictate otherwise, A Co. cannot argue silence as acceptance, unless it can establish that the use of the steel in its manufacturing process constitutes an act of acceptance. See text for a discussion of this topic.

4. Joe met Larry on the main street of their town. Both owned used car lots in the town, and were casual acquaintances. Parked at the curb beside them was a vintage muscle-car Joe had long admired. Pointing to it, Joe said ―I love that beauty. I‘d pay $40,000 in a heartbeat for that one.‖ ―Yeah?‖ said Larry, ―Well, I accept your offer. That‘s a $5,000 profit for me. I bought it this morning for $35,000. It‘s yours now, buddy.‖ Joe protested that he had not been serious about the car. Larry intended to hold him to his word. Advise the parties. Answer: The issue here is whether Joe intended to create a legal relationship. He was unaware that Larry was the owner when he made the statement. Was it an offer to the world-at-large? Simply conversation? Probably conversation, unless it could be established that Joe and Larry had previously bought and sold vehicles in that manner.

5. Alexandre attended an auction sale of the property of a bankrupt restaurant. Among the items for auction was a stainless-steel food preparation table. The auctioneer commenced by asking for bids: ―Do I hear seven hundred dollars?‖ Alexandre raised his hand, and the auctioneer cried ―SOLD.‖ Is this a binding contract? Answer: At an auction sale, the offers usually come from the audience in attendance, usually by raising one‘s hand in response to the auctioneer, and acceptance made by the auctioneer. In this case it might be argued that acceptance was made by the auctioneer when he stated ―sold‘.

6. Ann‘s electric clothes dryer was unreliable, and she sought a replacement. She noticed an advertisement in the newspaper for a used dryer, in like-new condition, at a price of $200. She visited the residential address given, and was shown the dryer, sitting against the wall inside a garage. The elderly lady who owned it had died, and her son was selling her possessions. Ann was delighted, paid $200 and took the dryer home. When she tried to install it, she discovered it was designed to run on natural gas rather than electricity, a fact that had not even occurred to her to check. Does a contract exist in this situation? Answer:

In this case Ann entered into an agreement to purchase the dryer, the seller had also agreed, and a contract was formed. Offer and acceptance requirements were satisfied, as was the intention to create a legal relationship. Ann is probably bound by the contract on this basis as she had the opportunity to examine the goods before purchase.

7. Alphatech, an Ontario firm, employs Jane. She sends an offer by e-mail on behalf of her company to Fayeed, to purchase equipment. Fayeed replies by e-mail three days later, accepting the offer, but in the interval Jane leaves her job at Alphatech. Her e-mail account is closed, and Fayeed‘s reply is bounced back as undeliverable. After a cumbersome effort of some days to find out who replaced Jane, Fayeed is informed that the offer has lapsed as Jane‘s replacement found an alternate supplier for the equipment. Was there an enforceable contract between Fayeed and Alphatech? Answer: Like other instant electronic means, email is valid on receipt as opposed to sending (as is the case for postal mail), subject further to the provisions of provincial legislation. The legislation is becoming quite uniform regardless of province, but in Ontario, the standard common law concept of receipt is refined for email as ―when it becomes capable of being retrieved and processed by the addressee‖. As Fayeed‘s acceptance was never valid, the offer is capable of lapsing or being revoked. As this appears to be the case, there never was an enforceable contract created between Fayeed and Alphatech.

Case Problems for Discussion Case 1 Ming‘s home was located on a rural residential lot overlooking a pretty ravine, and he thought that he might enjoy a small terrace behind his home for a patio. He placed a sign at the road in front of his home with the words ―Clean Fill Wanted‖ and his telephone number. While Ming was at work one morning, a caller rang about the sign, and Ming‘s teenage son answered. He told the caller that his father wanted fill in the ravine, at which the caller was delighted. Dump trucks began arriving non-stop through the afternoon, bearing the logo of Rock-kut Highway Excavators Ltd. When Ming returned from work, he was aghast at the sight before him. Discuss the issues raised in this situation. Answer: The central issues in this case are offer and acceptance. Did the words ―Clean Fill Wanted‖ represent an offer? Was it an unilateral offer? Did Ming‘s son bind him in contract with his statements to the contractor? No quantity was discussed, but did the son establish this by his comment to the contractor? No price was mentioned for the fill, but the contractor was apparently providing it without charge. On the facts, the parties may have established offer, acceptance and the intention to create a legal relationship (assuming Ming‘s son could bind him in the contract) and the contractor would appear to, or did perform the agreement according to the terms stipulated by the son.

Case 2 McKay operated a large farm on which he grew a variety of vegetables for commercial canners. He also grew a smaller quantity for sale to local retailers and wholesalers as fresh produce. On August 5th, Susan Daigle of Daigle Wholesale Foods Ltd. approached McKay and offered to purchase 5,000 5-kilogram bags of carrots from him at a fixed price per bag. McKay stated that the price was acceptable to him, but Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-69

he was uncertain as to whether his crop would be sufficient to make up the 5,000 bags. He told Daigle he could definitely supply 4,000 bags, and that he would be in a position to tell Daigle Wholesale Foods Ltd. by the next week if the additional 1,000 bags would be available. Daigle nodded approval and left. A few days later, McKay discovered that crop failures in other parts of the province had pushed carrot prices substantially above the price offered by Daigle Wholesale Foods Ltd. McKay‘s crop, however, was abundant, and he discovered that he had 6,000 bags when the crop was harvested. At the end of the week, Susan Daigle called to determine if McKay could supply her with 5,000 bags, or only 4,000. McKay refused to supply Daigle Wholesale Foods Ltd. with any carrots, and informed her that it was his intention to sell the crop elsewhere. Discuss the negotiations between the parties, and determine the rights (if any) and liabilities (if any) of the parties. Assume that Daigle Wholesale Foods Ltd. brought an action against McKay. Discuss the nature of the action and render, with reasons, a decision. Answer: This case requires identification of the offer, and its acceptance, as well as the nature of the offer. Did the parties establish a contract to buy/sell 5,000 or 4,000 bags? Was there actual acceptance by Daigle, or merely an "agreement' to wait until the next week, when McKay could make a firm commitment? In the negotiations, Daigle's offer to purchase was not accepted by McKay, but McKay may have made a counter-offer to sell 4,000 bags. If this should be the case, Daigle's approval could be interpreted as acceptance of the offer to sell 4,000 bags, and an agreement to wait until the next week with respect to the remaining 1000 bags. If a contract can be established, McKay would be obliged to deliver the 4,000 bags. As to the remaining 1,000 bags, if the agreement could be interpreted to mean that McKay would sell the additional 1,000 bags if the crop was sufficient, then McKay might also be obliged to deliver up the additional amount (See: H. R. and S. Sainsbury Ltd. v. Street, [1972] 1 W.L.R. 834). The extension of the agreement in this fashion may, however, be difficult unless the facts could be so interpreted.

Case 3 Armstrong Aggregates Co. wrote a letter to Bishop on May 2nd offering to sell him 200 tonnes of scrap mica at $180 per tonne. Bishop received the letter on May 3rd. A few weeks later, Bishop checked the price of mica, and discovered that the market price had risen to $185 per tonne. On May 22nd, Bishop wrote Armstrong Aggregates Co., accepting the offer. Armstrong did not receive Bishop‘s letter until May 30th. Armstrong refused to sell the mica to Bishop at $180 per tonne, but expressed a willingness to sell at the current market price of $187 per tonne. Bishop instituted legal proceedings against Arm-strong for breach of the contract that he alleged existed between them. Discuss the rights (if any) and the liabilities (if any) of the parties, and render a decision. Answer: In this case, the question of lapse of an offer must be considered. Armstrong's offer was made on May 2nd, and no acceptance was made until May 22nd. As a general rule, a written offer will normally lapse after a reasonable time, and it is necessary to determine if a reasonable time had elapsed, before the acceptance took place. Where non-perishable goods are sold, a reasonable time is not usually short (hours, or a few days) but a longer period of time, depending on the volatility of the price, etc. If mica should be normally subject to wide fluctuation in price, then nineteen or twenty days

may be too long a period of time, and the offer could have lapsed before the acceptance date. See: Shatford v. B.C. Wine Growers Ltd., [1927] 2 D.L.R. 759.

Case 4 The Clear Fruit Juice Company purchased a quantity of a special variety of apple that Ely grew in his orchards. The apple was of a type that kept well in winter storage, and the company would market a portion of the apples purchased as fresh fruit and process the remainder into apple juice that it sold under a private brand name. The company purchase represented approximately 50 percent of Ely‘s total harvest each year. Initially, the Clear Fruit Juice Company and Ely entered into a formal, written purchase agreement for each year‘s crop. However, over time the agreement became less formal. Eventually it consisted at first of a telephone order for the ―usual supply,‖ and later to an arrangement whereby Ely would deliver the normal quantity to the company each year, and in due course would receive payment at the going market price for the crop. This latter arrangement carried on for a period of about ten years. In the last year, the president of the Clear Fruit Juice Company fell seriously ill and retired. He had been responsible for the original contracts with Ely, and had made the later informal arrangements for the supply of apples. For many years, the two men had been good friends. The new president of the company moved to the area from a subsidiary corporation and was not aware of the arrangement between Ely and the company. He decided that for the current year he would purchase the company‘s apple requirements from another orchard. Over the course of the summer, Ely heard rumours that an orchard some kilometres distant had acquired a contract to supply his variety of apple to the company, but he did nothing to investigate the matter further. In the fall of that year, he delivered his usual supply in large pallet boxes to the company and placed them in the storage yard. No employees were in the yard at the time, but Ely did not find the fact unusual, as that was typically the case when he made his deliveries in the past. He was not concerned about identification of the crop as each pallet box bore his name and address as well as the variety and quantity. The yard foreman noticed the apples in the supply yard some time later on the day of delivery, and informed the plant manager. The plant manager did nothing about the apples until the next day, when he informed the company president. The company president decided to write a letter to Ely requesting him to take back his apples, but it was Friday, so he left the letter until Monday of the next week. Ely received the letter on the Wednesday, some six days after delivery of the fruit to the company. During the six-day period the apples had remained in the hot sun and had deteriorated from the exposure. Ely refused to take back the apples, and the company refused to pay for them. Advise the parties of their rights in this case, and determine the probable outcome if Ely should bring an action against the company for the value of the goods. Answer: This case involves the effect of a long-standing practice on the contractual rights of the parties. Does the practice established by the parties over the years constitute a standing offer which requires withdrawal by the offeror in order to be terminated? The conduct of the parties in the case would obviously be important. The facts may be considered to raise two separate areas for discussion: (1) the "standing offer," and (2) the conduct of the Plant Manager and Company President, when they discovered that the apples had been delivered. If the delivery constituted an offer to sell on the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-71

implied condition that if the Company did not wish to accept the goods they should return them promptly - did the action of placing the apples in a position where they would deteriorate expose the Company to liability for the loss? Did the delay in reaching Ely extinguish the Company's right to reject the goods? These matters should be discussed in class. The past practice of the parties (for some twenty years) may have created a situation where the courts might infer a standing offer, and an obligation on the Company to revoke the offer before acceptance by Ely, or in the alternative, an obligation on the Company to promptly return the goods before they deteriorated. Should a standing offer be determined, then a failure to revoke the offer before acceptance would mean that the Company was bound by a contract when delivery was made by Ely. If the offer is treated as a conditional offer, the Company would be obliged to promptly return the goods. (See: for example, Wheeler v. Klaholt (1901), 59 N.E. Rep. 756). As to the price, the Company would only be obliged to pay a reasonable price for the goods, that is, an amount equal to the usual price for that type of apple on the market at the time.

Case 5 The Garden Book Company advertised in a local newspaper the publication of its latest book on flower growing. The advertisement indicated that orders would be taken by mail at a price of $30 per copy, but the book would be available at all book stores as well. In response to the advertisement, Laurel Bush sent her cheque for $30 to the Garden Book Company, and requested in her letter that the company send her a copy of the book by return mail. Laurel mailed her letter on February 19th. On February 21st, Laurel noticed the same book on sale at a local book store at a price of $9.95. She purchased a copy, then went home and immediately wrote a letter to the Garden Book Company revoking her offer to purchase the book, and requested a return of her $30 cheque. Laurel mailed her letter at 4:20 p.m. on February 21st. The Garden Book Company received Laurel‘s letter of February 19th on February 22nd, and mailed her a letter the same day that acknowledged her order and advised her that the book would be sent to her by courier within a few days. The Garden Book Company received Laurel‘s letter of February 21st on February 23rd. The company ignored her second letter, and delivered the book to the courier on February 25th. Discuss the rights of the parties in this case. Identify and explain the legal principles and rules applicable, and indicate in your answer how the case would be decided if the matter came before the court. Answer: This case raises the issues related to acceptance of an offer, and the application of rules concerning acceptance and revocation. Students should note that Laurel Bush made an offer by mail to purchase a book. The nature of this offer might be examined by asking the question. Was this an offer that required acceptance by an act? Was the letter of acceptance by the Company a valid acceptance of the offer? Was the acceptance complete when the letter was mailed? Laurel's letter of revocation would only be effective when received by the Company, and was received by it on February 23rd. The Company, aware of the revocation, completed its part of the 'contract' on February 25th. Students may be asked if the revocation was effective on February 23rd. Under the terms of Laurel's offer, acceptance was to be made by sending her the book by return mail. The offer did not require acknowledgement, but rather, the performance of an act. The Company's letter of acceptance, therefore, would probably not be effective acceptance when mailed, but only effective when received. The mailing of the book after receipt of the letter of revocation would probably not be effective acceptance of the offer.

The Golden Lake Mining Company decided to dispose of two of its undeveloped mining properties (A and B) and authorized the company president to find a buyer. On September 10th, the president wrote a letter to the East Country Exploration Corporation offering to sell the properties ―en bloc‖ for $500,000. On September 16th, East Country Exploration Corporation replied by mail to the letter in which it expressed an interest in the purchase of property A at a price of $275,000 if Golden Lake Mining was prepared to sell the properties on an individual basis. On September 22nd, the president of Golden Lake Mining replied by fax that he would prefer to sell both properties, but if he could not find a buyer for the two parcels within the next few weeks, the Company might consider selling the properties on an individual basis. On September 30th, the East Country Exploration Corporation made an inquiry by fax to determine if Golden Lake Mining had decided to sell the properties on an individual basis. The president of Golden Lake responded with a fax that stated: ―Still looking for a buyer for both properties.‖ Following this response, East Country Exploration decided to examine property ―B,‖ and sent out its two geologists to do a brief exploratory evaluation. On October 6th they reported back to say that they had examined property B and found some surface evidence of what might be a potentially economic or body worth between $5 million and $15 million. East Country Exploration then prepared a letter accepting the offer of Golden Lake Mining to sell properties A and B for $500,000. The letter was mailed on October 9th. On October 10th the president of Golden Lake Mining Company found a buyer for the B property at a price of $300,000, and signed a sale agreement the same day. He then wrote a letter to East Country Exploration in which he accepted their offer to buy the A property for $275,000. The president of Golden Lake Mining received the October 9th letter of East Country Exploration on October 11th. Discuss the issues raised in this case, and indicate in your answer how the case might be decided if it was brought before the court. Answer: The facts of this case concern the timing of offers and their acceptance. Students should identify the September 10th offer by Golden Lake and the response by East Country as what might be considered a counter-offer (or perhaps an inquiry and offer to purchase property 'A'). In any event, the response of September 22nd probably revived the original offer of September 10th, which East Country could then accept or reject. The letter, however, may have kept open the offer to purchase property 'A'. The September 10th offer was again confirmed as 'open' on September 30th by the President's response. East Country accepted the offer on October 9th (applying the rule that an offer of mail invites acceptance of mail, etc.) even though it was not received until October 11th. If this reasoning was followed by a court, Golden Lake would be bound in contract to sell both properties 'A' and 'B' to East Country when it 'sold' property 'B' on October 10th to another buyer.

Case 7 Tamiko lived in Calgary, Alberta, and owned a river barge moored on the Fraser River in British Columbia. Percy was among a group of mutual acquaintances who knew Tomiko‘s barge was ―for sale‖. On September 10th, he wrote a letter to Tamiko offering to purchase the barge for $270,000. Tamiko received the letter on September 15th, and she sent Percy a reply by email agreeing to sell the barge for $300,000. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-73

Percy did not respond to the email immediately, but on a business trip to Calgary on September 22nd, he spoke to Tamiko about the barge in an effort to determine if Tamiko might be willing to reduce the price. Tamiko replied that her price was ―firm‖ at $300,000. When Percy returned to Vancouver, he replied to Tamiko‘s email saying he was willing to pay the $300,000. The email was timed at 11:40 a.m. on September 23rd, but Tamiko did not see it in her email inbox. Having not heard from Percy, on September 26th, Tamiko offered to sell the barge to Johnson, who had previously expressed an interest in purchasing it. Johnson accepted the offer on the morning of September 27th. Later that day, Tamiko discovered Percy‘s email reply in her ―deleted items‖ email box. Identify the various rights and liabilities that developed from the negotiations set out above. Answer: This case is a useful fact situation for the discussion of offer, acceptance, lapse, and counter-offer. An approach that may be taken would be to deal with the case in a sequential fashion, asking in turn the questions: Is there an offer? Identify it. Was the offer accepted? If not, did it lapse? Did it constitute a counter-offer? etc. An analysis of the facts on this basis should determine that Percy's offer of September l0th was not accepted, and instead, Tamiko made a counter-offer to sell the barge for $300,000 by email on September l5th. Percy's inquiry of September 22nd should be identified as an inquiry, and Tamiko's comment as an affirmation of the offer at $300,000. The question should be explored of whether Tamiko‘s affirmed offer lapsed on September 22nd, when not instantly accepted by Percy. Percy wrote the email of acceptance on September 23rd. If the affirmed offer lapsed immediately, then Percy‘s email becomes an offer, not an acceptance. It would seem to most people that Tamiko‘s affirmed offer would be available for acceptance for at least a day, and most reasonably, Percy‘s email constituted an acceptance of the affirmed offer. For the email to appear in Tamiko‘s ―deleted items‖ it had to first arrive in her ―inbox‖ and was thus received shortly after having been sent on the 23rd. Unless facts support a belief that the email had not been received (due to a computer or communications problem) prior to the September 26-27 exchange between Tamiko and Johnson, there was a binding contract between Tamiko (the September 22nd offeror) and Percy, having accepted on the 23rd. (See also: Adams v. Lindsell (1818), 1 B. and Ald. 250; 106 E.R. 250).

Case 8 Tom was tired of running his business and was looking for a buyer so he could retire before the winter. Bill wanted to buy the business, but needed another month to raise the necessary finances. Tom said to Bill: ―Look, for $5,000, I will give you an option to purchase in 30 days, but if you are not ready to buy at that time for fifty thousand, I am going to sell it to Dan.‖ Bill paid Tom the $5,000. Thirty days later, Bill appeared at Tom‘s door with $45,000. Tom said: ―Sorry, I am going to sell it to Dan. I said the price was $50,000.‖ Bill was confused, and sought legal advice. What advice would the lawyer provide to Bill? Answer:

The option to purchase in this case was a promise by Tom to hold open the promise to sell the business for a 30 day period. Offer and acceptance in the option agreement was finalized when Bill paid over the $5,000. The issue here for students to consider is whether the $5,000 was to be a part of the purchase price of the business. Was the option a separate contract? No mention was made of the $5,000 being a part of the purchase price. Was the offer to sell the business for $50,000 a separate contract offer? It could be argued that it was, in which case Bill did not properly accept the offer when he met with Tom in 30 days and presented him with $45,000 instead of the $50,000 stated in the offer.

Case 9 Janine owned a shop selling fine bone china. After a customer dropped an expensive bowl and shattered it, Janine made a new policy by posting a sign reading ―Lovely to look at, lovely to hold, if you break it, consider it sold.‖ In time, another customer broke a vase she was examining but refused to pay for it. Discuss the legal position of both Janine and her customer. Answer: The sign in this case may be considered in terms of a contract, but does it constitute an offer? Does a prospective purchaser ‗accept‘ the offer by picking up a piece of china? It is important to decide who the offeror and offeree would be. Would the prospective purchaser be bound if he or she did not see the sign? Should the sign simply be considered a notice to prospective customers that they would be responsible for the price of the china if they break it while handling it? This may be the case, as a careless handler would likely be liable for any breakage in tort.

CHAPTER CHARTS

Note: Additional Chart for Instructor‘s use. Not in 12th edition textbook

CHAPTER 8. THE REQUIREMENT OF CONSIDERATION Chapter Topics Consideration Quantum Meruit The Debtor-Creditor Relationship Equitable or Promissory Estoppel Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Chapter Objectives After study of this chapter, students should be able to: • Illustrate how contracts are intended to exchange a mutual benefit. • Explain how ―consideration‖ represents this mutuality. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-78

• Identify exceptions to the rule requiring ―consideration.‖ • Explain how estoppel prevents injury from reliance on a gratuitous promise.

YOUR BUSINESS AT RISK To earn a profit, a business cannot operate as a charity. It expects something in return for its actions. As simple as that sounds, there are times when one-way relationships exist, and these create problems in enforcing contractual rights and obligations. You must understand the rules of ―consideration‖ to avoid inadvertently creating these difficult business law traps. CHAPTER COMMENTARY Chapter 8 adds a new element to the requirements introduced in the previous chapter, and one which is sometimes difficult for students to fully understand. Because consideration represents the "something" that the promisor receives for his or her promise, examples are often useful methods of explaining the concept. For example, the following statements might be put forward: "I will sell you my car for $30,000." What is the consideration that an offeror would receive in return for such a promise? From whom would it come? Similar questions may be asked in connection with an offer of this nature: "I will give you two dollars if you will deliver this parcel to the post office for me." Promises for which consideration is received and gratuitous promises should be distinguished, and in addition, the effect of a seal on the requirement of consideration should be discussed. As well, the question of adequacy of consideration and the question of its legality should be explored. The importance of the seal as consideration as it relates to a tender is explained in this Chapter. The nature of a tender, and the effect of a tender made under seal should be discussed in class. As to the former, the courts have held that a tender is an offer, and constitutes an irrevocable promise to hold the offer open for a period of time if made under seal. If no seal is present, a tender would probably be subject to revocation at any time before acceptance. As the text indicates, whether a contract is under seal or not, the courts will not go into the adequacy of the consideration in a contract, as long as it contains some valuable consideration in the eyes of the law. Apart from situations where a party has made a mistake in stating the amount of consideration, the courts are not concerned about adequacy or whether proper value is received for a promise. Students should note that the important thing is whether consideration is present. In the analysis of any contract case, the existence of consideration is essential, unless it falls within one of the exceptions, or the agreement is made under seal. An area where confusion sometimes arises is where a contract is not performed by a party who has a duty to perform. In this instance, if the terms of the agreement should be altered, it is necessary to ask the question: What consideration does the party receive in return for the promise to compensate a party to carry out an obligation which the party has a duty to perform? If the answer is "nothing", then the promise is merely gratuitous. In the United States, the courts have sometimes held a gratuitous promise to be binding, but as a general rule, the common law courts in Canada and the United States will not enforce such a promise. This is so because past consideration is not treated as good consideration for a present promise. The application of the doctrine of consideration to the debtor-creditor relationship raises a problem where a gratuitous promise is made to reduce a debt. The text also provides a number of illustrations of the "exceptions" which the courts have established to limit the application of the rule. The fact that many Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-79

provinces have dealt with this situation through legislation should be emphasized (eg: the Western provinces, Ontario) as students frequently overlook this change. Included in the chapter is a discussion of quantum meruit and promissory estoppel which may require class time to review. Both of these concepts are frequently a source of difficulty for some students, although quantum meruit normally should not be difficult to understand. For promissory estoppel, a discussion of the quotation from the judicial decision of Lord Denning in the text might provide a useful springboard to expand upon the topic. Students should be aware that where a person by words or conduct has led another to believe that a certain state of affairs exists, and the person so informed acts upon the representations to his or her detriment, the person making the statements cannot later repudiate them, even though no consideration was given for the promise contained therein. It should be noted, however, that as a general rule promissory estoppel does not constitute a cause of action, but only a defence.

Review Questions 1. In what way does agreement on the price for services made after the services have been performed affect the right of the person who performed the service to claim quantum meruit? Answer: An agreement as to price after the services have been performed would be binding upon the parties and would fix the price of the services.

2. Must consideration always be present to render a promise enforceable? Answer: Generally yes, the major exception being a contract or promise made under seal, where a person endorses a bill of exchange without receiving consideration, or in certain cases where a promise of a donation to a charity is made.

3. Does a contract under seal require consideration? If not why not? Answer: A contract under seal does not require consideration for historical reasons. The act of sealing the agreement was indicative of the person's intention to be bound by the promise made after giving the matter considerable thought. This type of contract derives its validity from its form rather than from the presence of consideration.

4. Consideration may be "present" or "future". How do these forms of consideration differ? Answer: Present consideration would involve an immediate act (giving a person goods in return for a promise of payment). Future consideration would involve something given in the future, for example, the promise of delivery of goods at a later date in return for a promise of payment). Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-80

5. A creditor's promise to accept a lesser sum as payment in full for a larger debt is considered gratuitous at Common Law. Why is this so? Answer: The promise is considered to be gratuitous at common law because the promisor receives nothing in return for the promise. There is no consideration given for the promise to forego the balance owing. See question 10 for exceptions.

6. Explain promissory estoppel. What are its uses in a contract setting? Answer: Promissory estoppel may arise where a person states a material statement of fact as being true, and another relies upon the statement to his or her detriment. If the person making the untrue statement brings a claim against the other party, the truth of the statement cannot be denied, and may be raised as a defence to the claim of the party who made the statement.

7. In what way does the Mercantile Law Amendment legislation in some provinces alter the Common Law rules for gratuitous reduction of debt? Answer: Mercantile Law Amendment laws state that where a person accepts a lesser sun in full settlement of a debt, the creditor cannot later claim the balance.

8. What conditions must be established to put forward a claim of quantum meruit? Answer: A person who claims payment, quantum meruit must establish that a request was made for the services, and the service was performed without the price for the service established in advance. 9. Explain the nature of ―consideration‖ as it applies to a contract. Answer: Consideration is something which a person receives in return for a promise.

10. How have the Common Law courts in some cases permitted a debtor to enforce a creditor's gratuitous promise to reduce a debt? Answer: Three exceptions to the common law rule concerning gratuitous reduction of a debt: (1) payment before due date, Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-81

(2) payment of the debt by someone other than the debtor, and (3) payment in kind (e.g.: giving of a chattel as payment.

Mini-Case Problems

1. X offered to deliver a parcel for Y to a downtown shop, as he would pass the shop on his way to work. Y agreed and gave X the parcel. The next day, Y told X he would give him $5 for delivering the parcel. X accepted Y‘s offer, but, later, Y refused to pay the $5. What are X‘s rights? Answer: X made a gratuitous offer to deliver the parcel for Y. The promise was fully performed by X. Y made a gratuitous promise to X to pay $5 because there was no consideration for the promise. X cannot sue Y because he cannot show present or future consideration for Y's promise of the $5. 2. A, a wealthy widow, was approached by a women‘s group for a donation that the group intended to use to construct a women‘s centre in the community. A offered to donate an amount that would cover 25 percent of the cost of the proposed building. If the group commenced construction based upon A‘s promise, could A later refuse to pay? Answer: If the women's group could satisfy a court that it undertook the construction on the strength of A's pledge, the group might succeed if it took legal action to enforce A's promise. A promise of a donation of 25% of the construction cost may not be sufficiently large enough (as a percentage) to support this argument, however, since the group would be obliged to collect most of the cost (75%) from others. See: Governors' of Dalhousie College v. Boutilier reference in the text.

3. Markus owed Landers $5,000, and since Markus had fallen on hard times, Landers cut the debt in half. Some months later, Markus was successful in getting a good paying job, and wrote a cheque payable to Landers for $2,500 with his thanks. Landers wrote back suggesting that Markus now pay the remaining $2,500. What is Markus‘ obligation? Answer: Landers promise to cut the debt in half (to $2,500) would be a gratuitous promise. If Markus acted on the promise to his detriment, Landers would be bound by it under promissory estopppel. But did Markus act to his detriment? If Markus cannot establish this, then Landers may be able to revoke his promise, since there was no consideration for the promise given by Markus. The old English case of Foakes v. Beer may apply here, or a later case, Tool Metal ManufacturingLtd. v Tungsten Electric Co. Ltd. [1955] 1 W.L.R. 761.

4. A municipality called for tenders for the construction of a recreation centre. A construction firm submitted a bid of $8 million, under seal. The municipality accepted the bid. Shortly thereafter, the construction firm realized it had made a simple but serious error in calculation and refused to complete the contract, unless the award was increased by $500,000. The municipality refused. Discuss the rights of the parties. Answer: The tender was under seal, and constituted an offer, and the offer was accepted by the municipality, creating a binding contract. The construction firm would be bound by the contract, and must perform. The municipality could sue for breach of contract if the construction firm refuses to perform the contract work.

Case Problems for Discussion Case 1 Jane and Henry were married and Jane‘s father, a farmer, told her and Henry that he had no use for the old pasture north of the meadow. He suggested that they could build a house on the property, saying, ―It will be all yours anyhow when I‘m gone.‖ Jane and Henry did so, and five years later, Jane and her father had a terrible falling out. Her father changed his will to give all of his property to the Humane Society, and within the year he died. When the executor of the will read its terms, he began proceedings to evict Jane and Henry from the property and to sell their house. Discuss the legal issues raised in this scenario. Answer: The facts of this case raise the issue of promissory estoppel, since Jane and Henry clearly acted to their detriment by building a house on the property in reliance on her father‘s promise of the property on his death. One question may be the extent of the property Jane and Henry may claim. Would this be only the ―old pasture north of the meadow‖or the father‘s entire estate? A court might decide that their claim would be limited to the property where the house was located, as their reliance on the father‘s promise (by building a house) was limited to ‗the old pasture‘. Case 2 Hansen and Dhafir owned cottage lots that abutted each other along a line at right angles to a lake front. Nothing marked the boundary between the two lots, and neither landowner could recall with any degree of accuracy where the lot line actually lay. The parties had mentioned a survey of the lots on several occasions, but nothing had been done to fix the boundaries. One summer, when both Hansen and Dhafir were vacationing at their respective cottages, Dhafir noticed a large diseased limb on a tall tree that was growing at a point approximately equidistant from each cottage. As he was concerned that the limb might fall on his cottage, Dhafir suggested to Hansen that he do something about the situation. To this suggestion Hansen replied: ―That tree is growing on your lot, and it is up to you to cut the limb. If it should fall my way and damage the roof of my cottage, I would look to you for the repairs.‖ Dhafir decided to cut down the entire tree instead of just the diseased limb. He did so with some reluctance because the elimination of the tree would remove the only protection Hansen had from the hot Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-83

afternoon sun. Hansen did not object to the cutting of the tree at the time. Some time later, however, when a survey that he had requested revealed that the tree had been entirely on his side of the property line between the two cottage lots, he brought an action against Dhafir for damages. Identify the defences that might be raised by Dhafir and explain how the courts might decide this case. Answer: The facts of this case illustrate a potential promissory estoppel situation, where Dhafir relied on the statement of fact by Hansen, and in doing so, acted to his detriment. The question raised by the case, however, is whether the statement which Hansen made concerning the limb of the tree would be sufficient to enable Dhafir to raise promissory estoppel as a defence when he proceeded to cut down the entire tree, and not just the diseased limb. One argument might be that Hansen's implied threat of legal action (if the tree should cause damage to his cottage), might justify Dhafir's actions. Some general questions which could be put forward for discussion might run as follows: Since neither party knew for certain where the property line was, did Dhafir have an obligation to make this determination before cutting down the entire tree? What was the effect (if any) of Hansen's inaction after the tree was cut down? Should he have objected immediately? Could Dhafir rely on Hansen's statement when he knew that Hansen was unaware of the exact location of the lot line, and hence the ownership of the tree? A helpful case might be the following: Shupe and DeSutter v. Rural Municipality of Langenburg No. 181, 2009 CanLII 92492 (SK QB). Case 3 On a cold evening in January, the furnace in the Bisrams‘ home failed to operate properly, causing the water pipes to freeze and later burst, flooding their basement. Mr. Bisram made a hurried telephone call to Brown‘s Plumbing when he discovered the water in his basement, and asked Brown if he could come over immediately and fix the leaking pipes. Brown agreed to do so, and arrived about an hour later, only to find that Mr. Bisram had discovered the leak and fixed it himself. Brown left immediately, and the next day he submitted an account to the Bisrams for $95 for services rendered. The Bisrams refused to pay Brown‘s account. If Brown should sue the Bisrams on the account, explain the arguments that might be raised by each of the parties and indicate how the case might be decided. Answer: This case deals with the question of quantum meruit. Students should identify the request for services on Bisram's part, and Brown's compliance with the request by his attendance at Bisram's residence and being prepared to fix the plumbing. The fact that Bisram received nothing in the agreement should also be discussed, but Brown's loss (in terms of his travel time) should be noted, along with Bisram's obligation to compensate him for his lost time. A question that should also be raised is: Does $95 represent a reasonable price for Brown's services? Bisram would only be obligated to compensate Brown in terms of a reasonable price for the time lost in travel to his home. See: De Bernardy v. Harding (1853), 8 Ex. 823; 155 E.R. 1586 for a discussion of similar issues. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-84

Case 4 Nuptial Creations carried on business as a custom manufacturer of wedding dresses and accessory products. The company offered a standard line of dresses that it sold through its own retail establishments. The prices for the basic dress line were available to prospective purchasers, but the final price was dependent upon the amount of lace, beading, and changes that a customer requested in the product. For her wedding, Marie selected a particular dress design that carried a basic price of $1,200. She requested a number of changes in the design that included a great deal of beadwork, requiring timeconsuming hand application. No price was quoted by the company for the custom dress at the time that Marie requested that it be made for her. Some time later, when the dress was finished and ready for delivery, Marie went to the shop and enquired as to the price. She was informed by a salesperson that the completed dress would probably cost ―around $2,000.‖ Nevertheless she accepted the dress, with the complaint that she was surprised at the cost. Two weeks later, the company submitted an account to Marie for $2,368 for the dress. Marie refused to pay it. Advise the parties of their rights and, if legal action should be taken, discuss the way in which the case might be resolved. Answer: Case 4 concerns quantum meruit/quantum valebant claim for the value of the custom made dress. Marie Day requested the basic dress with changes which the retailer proceeded to add to the basic design. Since no price was discussed, the retailer was entitled to a ―reasonable price‖ for the services rendered. If the difference in price between the $1,200 basic design and the ―additions‖ is the ―going price‖ charged by retailers for this type of work, the retailer would probably be successful in claiming the $2,368 price. Students should consider the statement of the salesperson that the dress would probably cost ―around $2,000.‖ Does this fix the price? Probably not, since it is not a specific sum, and perhaps close enough to the final price to be considered only an estimate. The quote, however, might be considered by the court in the determination of a reasonable price if $2,368. is slightly higher than the price charged by competitors in the area.

Case 5 A service club in a small community decided to raise funds for the purchase of a special wheelchair that it intended to donate to a disabled child. The wheelchair was of a special design and made only on special order. The estimated purchase price was $5,600. Donations were solicited throughout the community, and a total of $2,100 was raised toward the purchase price. The club, unfortunately, found it difficult to solicit further donations, as the $2,100 represented the contributions of nearly every family in the community. A meeting of the club members was held to discuss ways and means of raising the further $3,500. After some discussion, one member stood up and promised to ―match dollar for dollar every additional Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-85

contribution received, if the club can raise a further $1,750.‖ The next day, the local newspaper reported the club member‘s pledge, and the publicity produced a large number of donations to the fund. By the end of the week, the donations totaled $3,700, of which $1,600 had been donated that week. The club immediately placed an order for the special wheelchair, confident that the additional $150 could be raised by the club members. A few weeks later, the club was advised that the wheelchair was ready for delivery, and that the price would be $5,300 instead of the $5,600 originally quoted. The club was delighted to receive the news that the wheelchair would only cost $5,300, and it immediately notified the club member who had promised to match the contributions. When the member was advised that the $1,600 donated, together with his matching pledge, would be sufficient (along with funds previously collected) to pay for the wheelchair, he responded: ―I promised to match dollar for dollar only if the club could raise a further $1,750. Since it did not do so, I have no intention of matching the donations.‖ Discuss the position at law of the parties in this case and explain how this matter might be determined if each party exercised his (or its) legal rights (if any). Answer: Case 5 illustrates a situation where a charitable organization acted to its detriment on the strength of a gratuitous promise of payment. However, the nature of the promise should be discussed. How important is the proviso (attached to the promise) of the words "if the club can raise a further $1,750"? Does the failure on the part of the club to do so release the promisor from his obligation? Can it be assumed that the intent was that the club raise one-half of the balance required for the wheel-chair, and the actual amount was unimportant, since the essence of the promise of the member was to match the donations? Text comments on the Sargent v Nicholson case, and the Governors of Dalhousie College v.Boutilier should be examined by the students in dealing with these issues. Since the club proceeded with the purchase only when it honestly believed that it had complied with the member's offer, the court might very well find that the club, by raising one-half of the balance of the funds for the wheel-chair, had provided sufficient consideration for the promised donation. See also the case of Y.M.C.A. v.Rankin 1916 CanLII 382 (BC CA). Case 6 Great Adventures Ltd. offered white-water rafting trips involving a relatively short 50-kilometre journey down a swift river. The price of the trip, including overnight hotel and meals, was advertised at $450. Jack and Jill, in response to the advertisement, entered into a verbal arrangement with the operator of the tour to join in on a journey, and they agreed to appear at the designated hotel the evening before the date of the excursion. At the hotel, they met the president of the tour company and paid him the tour price. The next morning, as Jack and Jill assembled their gear with the nine other passengers, a representative of the company spoke to the participants and instructed each of them to sign a form entitled ―Standard Release.‖ The form stated that the operator of the tour was ―not responsible for any loss or damage suffered by any passenger for any reason, including any negligence on the part of the company, its employees, or agents.‖

Jack and Jill were reluctant to sign the release, but when they were informed by the tour representative that they would not be allowed on the raft unless they signed it, they did so. When the release was signed, the representative gave each of them a life jacket with a 10-kilogram buoyancy rating. After they donned the life jackets, they were allowed to climb aboard the raft. During the course of the journey, the raft overturned in very rough water, and Jack and two other persons drowned. An investigation of the accident by provincial authorities indicated that the life jacket Jack had been wearing was too small to support the weight of a person his size. The investigation also revealed that, due to the swiftness of the river at the place where the accident occurred, a more suitable life jacket would probably not have saved Jack‘s life. Jill survived the accident and brought an action against the tour company under the provincial legislation that permitted her to institute legal proceedings on behalf of her deceased husband. Discuss the issues raised in this case and indicate the arguments that might be raised by each party. Render a decision. Answer: The case raises a number of contract issues as well as the tort of negligence. Some contract points to note are: the "release" to exempt the tour operator from any breach of contract, etc.? Did the tour operator negligently perform the contract? Was the tour operator in breach of the contract by providing an inadequate life jacket to Jack? If it was a term of the agreement to provide a life jacket could the tour operator argue that he had done so? Could Jill argue no consideration for the signing of the waiver? What would be the response of the tour company to the argument? The facts of the case are essentially those found in Delaney v. Cascade River Holidays Ltd., 1983 CanLII 387 (BC CA), where the court found that the consideration for the waiver was the company allowing the deceased to continue on the trip. The release as a result was valid and enforceable. Case 7 Speedy Delivery Service Ltd. had been engaged by the Commercial Bank as its regular courier for documents and other bank correspondence for both local and long-distance deliveries. The parties had an ongoing agreement for services under which Speedy‘s maximum liability to the bank for any matter arising out of their relationship was limited to $100,000. Speedy also held business insurance in the amount of $10,000,000, from which it could claim indemnification should any claim be made against Speedy by the bank or by any other party with which Speedy did business. A term of its insurance policy required Speedy to make an immediate report to the insurer if it suspected that there may be a claim made against it. A few days after Speedy had made a delivery of documents to one of Commercial Bank‘s branches, a letter arrived from the bank stating that the documents had been lost. Apparently the Speedy driver had placed the documents in the usual outside receptacle at the branch, which was used for deliveries after the branch has closed, but he could not remember whether he had properly secured the receptacle afterwards. The bank‘s letter stated that bank employees were trying to locate the missing documents and that they related to an important mortgage transaction that was to have been finalized that week. The letter further stated that there would be losses to the bank if the documents could not be found, but, in any event, the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-87

bank would further advise Speedy at a later date of its progress. Speedy heard nothing more from the bank about the documents and assumed that they had been located. Almost three years later the bank wrote to Speedy stating that it was suing for its damages for the lost documents in the amount of $100,000. When Speedy refused to pay, the bank threatened to bring legal action. Discuss the legal issues raised in this case and the arguments that all of the parties, including the insurance company, will rely on. Answer: The case raises the issue of estoppel. Students may be asked to decide if the bank had caused Speedy to act to its detriment by waiting 3 years to notify it of the loss. The questions here might be: Was the Bank aware of the obligation to advise the insurer of any potential claim that might be made for Speedy's negligence? Did Speedy have an obligation to notify the insurer in any event? The statement in the Bank letter that it would notify Speedy at a later date of its progress in its search for the letter could probably be relied upon by Speedy as an estoppel to the claim 3 year's later. Since Speedy heard nothing more from the Bank after its receipt of the letter, Speedy might reasonably assume that the documents had been found, and on the strength of this, did not inform the insurer. By failing to notify Speedy of the loss for 3 years might prevent the Bank from recovering its loss from Speedy (and the insurer).

Case 8 Levine‘s car stopped running on the highway, and a passing motorist called a service station for him on a mobile phone. The service station called an independent tow truck operator, who soon towed the car to the service station, some 5 km distant. A mechanic examined the car, and realized that a wire had come loose from the distributor cap. He snapped the wire back into place, and wrote up a bill. Levine was charged $5 for the repair and $175 for the tow. Levine was outraged and refused to pay. What would be the nature of the claim, and what factors would the court consider in deciding the case? Answer: This case concerns quantum meruit. The passing motorist made the call to the service station at Levine‘s request. The request for service was probably broad enough to authorize the service station operator to tow Levine‘s vehicle to the service station – a reasonable expectation, but was it also reasonable for Levine to believe that the service station operator might come to where Levine‘s vehicle was located to make the repairs? Probably not. Under quantum meruit, the service station operator would be entitled to charge a reasonable price for his services. The $5 was probably reasonable. The tow truck operator charged $175 for a 10 km. round trip. Was this a reasonable charge? If this was the usual charge by other operators in the area, then the charge would stand, and Levine would be obliged to pay both of the charges. Case 9 Able and Laryssa had been good friends for many years. Able wished to make a gift to Laryssa of a house he owned that was subject to two mortgages held by a third party. In order to avoid the tax legislation in force at the time, the parties agreed that Able would convey the property to Laryssa and take back an interest-free mortgage equal to the difference between the two existing mortgages and the value of the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-88

property. The third mortgage would be forgiven each year in an amount equal to the permissible tax-free gift allowed under the legislation. The gift transaction at the time was a lawful method of disposing of the property, and Laryssa accepted the gift of the property. Laryssa moved into the house and made the payments on the first two mortgages for a number of years; then, after a difference of opinion on another matter, Able demanded payment of the third mortgage. Laryssa refused to pay, and Able sued Laryssa for the amount owed. Discuss the respective positions of the parties to the transaction and render a decision. Answer: This case was prepared to reflect the facts of the case of Bojtar v. Parker, 1979 CanLII 2029 (ON CA). The case may be discussed from the point of view of the promise being a gratuitous promise to make a gift of the property to Laryssa, or from the point of view of it being the gratuitous reduction of a debt. The key issue in the case is the determination of the consideration for the promise to give Laryssa the property, either in terms of the overall promise, or the reduction of the mortgage. Students in each case should attempt to find consideration for the promise. For example, did Laryssa's payment of the installments on the two prior mortgages constitute consideration sufficient to make Able's promise binding? Had he not done so, Able would have been obliged to make the mortgage payments himself. Could the payment made by Laryssa of the prior mortgages be considered rent for the use of the premises? What effect would this have on the enforceability of the promise? The case also raises the question of estoppel. Since Laryssa moved into the premises on the strength of Able's promise, and paid the prior mortgages, should Able be later permitted to act in a manner contrary to his promise? The issue of Laryssa's reliance on Able's promise should be discussed. In the Bojtar case, the court held that sufficient consideration was given by the 'donee' in the form of payment of the prior mortgages, etc., and the donor was bound by his promise to release the property to him. On appeal, the court indicated that the donor was estopped from enforcing the mortgage. Case 10 Devon, a contractor, checked out the yard of Adams Equipment Sales and noticed a backhoe that looked to be in good shape. Beside it was a set of buckets and a rock breaking point. Adams noticed his customer and yelled across the yard ―Seventeen-five takes it away.‖ Devon nodded and waved, and returned later with a certified cheque for $17,500. Adams accepted the cheque, but when Devon started to load the other buckets on his flatbed, Adams stopped him. ―They‘re not in the deal,‖ he said, ―They are worth $2,500 on their own.‖ Devon agreed on the value, but said the backhoe wasn‘t worth $17,500 on its own, because the going rate for similar models was $15,000. What position will the court support, if Devon and Adams proceed to litigation over the agreement? Answer: The issue in this case is the consideration for the buckets and the rock breaking point. Cases of this sort tend to turn on the statements of the parties, and their respective understanding of the transaction. Was there a ‗meeting of the minds‘? What would be the significance of the word ‗it‘ in the offer? Was this an expression limiting the price to only the back hoe? Adams would certainly take this position on the offer. Note that the courts normally do not take into consideration whether the price ‗is a good deal‘ – they are only concerned about the existence of consideration. Devon may have some difficulty in convincing the court that the extra

buckets and rock point were a part of the deal, since as an experienced contractor, he should perhaps have queried what ‗it‘ meant in the offer. In an unreported case concerning the word ‗it‘ in the offer, the court concluded that the offer did not include the additional equipment, but only the one piece of machinery, since the machinery was fully operational without the extra equipment.

CHAPTER 9. LEGAL CAPACITY TO CONTRACT AND THE REQUIREMENT OF LEGALITY Chapter Topics The Minor or Infant Drunken and Insane Persons Corporations First Nations Bands Labour Unions Bankrupt Persons The Requirement of Legality Legality Under Statute Law Legality at Common Law: Public Policy Contracts in Restraint of Trade Summary Key Terms Review Questions Mini-Case Problems Chapter Objectives After study of this chapter, students should be able to: • Explain and illustrate the various situations where capacity to contract is absent or diminished, and its effect on the contractual relationship. • Explain and illustrate what types of contracts would be illegal contracts. • Demonstrate situations where business activities may be illegal as contracts in restraint of trade. YOUR BUSINESS AT RISK Public policy makes some transactions voidable and others illegal. The consequences of failing to appreciate these risks are serious, unnecessary and avoidable. CHAPTER COMMENTARY Chapter 9 introduces the elements of capacity and legality. As the text indicates, not everyone who enters into an agreement may be bound by it, as the law attempts to protect some individuals, such as minors, who lack experience in business matters, and whose inexperience might therefore be taken advantage of by others. Care should be taken, however, to emphasize that the protection granted to such persons is not absolute, but rather, balanced by the need for those individuals to contract for necessaries such as food, clothing, and shelter. To do otherwise would work a hardship on the very group that the law attempts to protect. The balance of the common law is a key point to discuss in class.

The ratification of contracts made during minority should be noted, and also the implications of the right of repudiation of contracts made by minors where the goods used or acquired by the minor are damaged. The rental car situation is an example which might be used to illustrate the latter, where the rental agency may not sue a minor in tort to get around the fact the minor is not liable under the contract for damage to the goods. This is also illustrated by the case quote from Noble's Ltd. v. Bellefleur. In that case, the seller attempted to hold the minor liable for damage to the automobile by way of a tort action, but failed, since it was damaged by the minor while using it as contemplated under the terms of the contract. The judge held that tort law could not be used against a minor to enforce a matter which was a part of the repudiated contract. Case 4 of the discussion cases would also be a suitable case problem for discussion of this point. The Court Decision, Gregson v. Law and Barry illustrates a situation where a minor sold property at market value after representing that she was of full age and had capacity to contract, then later attempted to recover the property. In that case, the judge found that while she could not be made liable on the contract under ordinary circumstances, because she had committed a fraudulent act in the course of the contract, the court would not later allow her to acquire back the property which she had sold. While the court acknowledged the right of an infant or minor to avoid a contract, the court also made it clear that it would not provide such relief to a minor that was, in effect, asking the court to assist her in the fraud. While minors are the largest and most important group to consider with respect to capacity, enemy aliens, mentally impaired and drunken persons, undischarged bankrupts, labour unions, and corporations may also be subject to limitations on their capacity in particular circumstances. To the elements of intention, offer and acceptance, capacity, and consideration, Chapter 9 also introduces the additional requirement of legality. The chapter deals first with the question of enforceability, then examines the requirement of legality under both statute law and common law. Students are occasionally surprised at the number of different types of agreements that they believed were lawful, when in fact the law renders them unenforceable. In particular, the unenforceability of an agreement between a dishonest employee and an employer which involves the employee's promise to return the stolen goods in exchange for the employer's promise not to press criminal charges, appears to be difficult for many to comprehend. So too, are contracts where an unreasonable restriction on the employee is contained in a contract of employment. For contracts in restraint of trade between businesses, a brief examination of Chapter 32 on Restrictive Trade Practices might be useful if additional information on restrictive trade practices or examples are desired. The case quotes in the chapter, in particular the quote from Archbolds (Freightage) Ltd. v. S. Spanglett Ltd. provide good examples of the judicial view of legality and the effects of illegality on an agreement. In the case quote from Stephens v. Gulf Oil Canada Ltd. the judge explains the conflicting public policies and freedoms which are touched by the element of legality. The Court Decisions also provide a number of examples of the extent of the law. In the J. G. Collins the case concerned a mix of the sale of a business with an employment contract. Since it did not fit neatly into either of the two categories, the judge in that case was obliged to establish some sort of protection for the plaintiff who was able to justify the non-competition clause, and the need to enforce it. In the decision the judge decided that the two contracting parties were experienced and competent businessmen, with approximately equal bargaining power, which distinguished them from the ordinary employer and employee. Further, the covenant was reasonable and necessary, and therefore, in the circumstances, enforceable against the defendant. The case quote from Sherk v. Horowitz deals with a restrictive covenant as it applies to medical practitioners, and how public policy is considered.

Review Questions 1.

Why are courts reluctant to enforce restrictive covenants in contracts of employment? Under what circumstances would such a covenant be enforceable? Answer: A restrictive covenant could prevent a person from earning a living if it was enforceable under all circumstances, hence, the limitation on its applicability.

2. Discuss the application of public policy or the "public interest" to contracts of employment containing a covenant that would limit the ability of an employee to compete with the employer in a given area for a period of time. Answer: Public policy dictates that the freedom of the employee to work and earn a living should only be fettered where it can be demonstrated that the employer's business would suffer serious damage if the restriction was not enforced. Consequently, a restriction under those circumstances would be enforceable if it can be demonstrated that both the time and area were reasonable for protection of the employer.

3. If an adult entered into a contract with a minor without realizing that he was dealing with a minor, would the adult be in a position to enforce the agreement? Would your answer to this question apply under all circumstances? Answer: Regardless of the impression which the adult had, an executory contract for non-necessaries would generally be voidable by the minor at the minor‘s option. If the contract was for "necessaries" it would be enforceable by the adult person. 4. Where a minor is engaged in business, how are the courts likely to view business contracts entered into by the minor? Answer: A minor engaged in business is engaged in "non-necessary" activity, and consequently, the agreement between the minor proprietor and another would likely be voidable at the minor‘s option.

5. Identify the three major classes of contracts considered to be in restraint of trade. Answer: 3 classes of contracts in restraint of trade: (1) agreements contrary to the Competition Act. (2) contracts between vendors and purchasers of businesses where the vendor's future actions are restricted unduly. (3) employment contracts where the employee's future employment right is unduly restricted.

6. How does the capacity to contract of a minor differ from the capacity to contract of those who are drunk or of diminished mental capacity? Answer: A minor‘s contracts and those negotiated by mentally impaired or drunken persons differ in the sense that an mentally impaired or drunken person will normally be bound by all contracts unless they can show that: (1) they were drunk or mentally impaired at the time, (2) the other contracting party was aware of this, and 1.

the contract was repudiated promptly on returning to a sane or sober state.

7. What are the limits on the powers of a "special act" corporation to bind itself in contract? Answer: The powers of a "special act" corporation are limited to those given to it by the special act. Any contract which falls outside the corporation's powers would be unenforceable and a nullity.

8. How does the law limit the capacity of a bankrupt person to enter into a binding contract? Answer: A bankrupt person may not enter into contracts (except for necessaries) until discharged. The bankrupt must reveal that he or she is an undischarged bankrupt before entering into any contract which involves more than $500.

9. Distinguish between "illegal" and "void" with respect to contract law. Answer: An illegal contract is a contract for an unlawful purpose. A void contract is a contract which in unenforceable, but not necessarily illegal.

10. What is the basis upon which the requirement of legality of a contract is determined? Answer: Legality is based upon public policy. A legal contract does not offend public policy; an illegal one does.

11. Explain the risk assumed by an unlicensed tradesperson when entering into a contract to perform a service that may only be performed by a person possessing a license. Answer: An unlicensed trades person cannot enforce a contract entered into to perform "licensed" work. In effect, the unlicensed person cannot take action on the contract to obtain payment for the services rendered.

Answer: A minor may pledge the credit of his or her parents for necessaries of life, although parents are not otherwise liable at common law for debts incurred by their children. 13. Explain the rationale behind the passage of the Competition Act. Answer: The Competition Act was designed to protect competition by restricting practices which interfered with open competition.

14. Under what circumstances would a restrictive covenant in the contract for the sale of a business be enforceable? Why is this so, when contracts in restraint of trade are contrary to public policy? Answer: A restrictive covenant may be enforced where the restriction is reasonable in terms of geographic area and time. The reasoning behind this is that the purchaser is buying the vendor's goodwill, and the purchaser should be given time to create a relationship with the vendor's clientele without interference by the vendor, otherwise the vendor would be taking unfair advantage of the purchaser.

15. Explain the reasoning behind the Common Law rules that limit the capacity of certain persons to bind themselves in contract. Answer: Public policy dictates that certain persons, due to their inexperience (or immaturity) or their inability to appreciate the nature of their acts should be protected, and are thereby not held to their contracts except where it is in their interests to be bound.

16. Indicate the purpose of a devotion to business clause in a contract of employment, and explain the conditions under which this type of clause would be enforceable. Answer: A devotion to business clause is sometimes used to ensure that an employee devotes the required time to the employer's business, and to prevent an employee from engaging in other activities which might be in competition with the employer's business. Such clauses are usually enforceable because an employer is normally entitled to the time and energy of the employee as long as it does not unnecessarily affect the employee's personal freedom.

17. Why do the courts make certain exceptions to the general rule concerning the capacity of minors to bind themselves in contract? Answer: The exceptions to the general rule concerning minors are related to contracts where the subject matter is essential or necessary for the minor. If persons could not enforce contracts for "necessaries" (food, shelter, clothing etc.) no credit would be extended for these, and as a consequence, would work a hardship on the minor.

18. An employee is caught stealing money from her employer, confesses to the theft, and agrees to repay the money taken. The employer, in response, promises not to report the incident to the police. Discuss the validity or enforceability of the employer's promise. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-94

Answer: The theft of money is a criminal offence. The agreement not to report the crime by the employer and the employee would be unenforceable since its purpose would be to interfere with the system of justice. 14. Explain the requirements for First Nations bands to achieve an enforceable contract. Answer: First Nations bands are not recognized as legal entities or as persons at common law. The Indian Act provides that a band must exercise its powers, such as entering into contracts with outside parties, through a majority resolution of its band councillors. This can be a practical impediment to obtaining meaningful contracts for the goods and services needed by First Nations communities. 19.

Mini-Case Problems 1. X, aged 17, purchased a bicycle on credit for the purpose of transportation to and from her place of employment. She made no payments on the bicycle, and the seller brought an action against her for the debt. Discuss the issues raised in this case and render a decision. Answer: X is a minor, and must establish that the bicycle is a non-necessary item in order to avoid the contract. If the seller can establish that the bicycle was a necessary, the contract would be enforceable. If the minor is successful, she would be obliged to return the bicycle, but would not be responsible for any wear and tear due to its use.

2. A and B agree to carry on a business in partnership as hardware merchants. A and B agree that if either party wishes to end the partnership he must not carry on a similar business within 80 kilometres for a period of ten years. A leaves the business a year later and sets up a competing hardware business across the street from their old shop, which B continues to operate. Advise B and A. Answer: A could probably set up the competing business with impunity because the restrictive covenant is unreasonable and therefore unenforceable. The business probably draws customers from a much smaller radius, probably no more than a few miles if in a city, and an 80 km. radius is excessive. 10 years is probably too long a time period in view of the nature of the business (frequent customer purchases, etc.).

3. A and B are rival salespersons in the same firm and each have earned 2 tickets to the Grey Cup based on last quarter‘s sales. Each wants to take two friends to the game, and thus A and B agree to compete for the top sales position in the next quarter, winner taking the Cup tickets of the other. If B takes top spot in sales, and A refuses to hand over the tickets, can B sue successfully? Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-95

Answer: The "bet" between A and B represents a wagering contract and would be unenforceable as contrary to public policy. However, if the tickets represent a prize to the winner, it might be argued that the agreement was not a wager but a prize for the effort of the successful participant.

4. Monica, at age 16, is an Olympic silver-medal swimmer. A swimwear company wishes to engage her to endorse a line of new racing suits. The endorsement package will require her to make public appearances, and appear for photo-shoots and in advertising copy. Discuss the difficulties that the firm may face in holding Monica to her commitments in the future. Answer: Monica is a minor, and may at any time repudiate the contract, as it is not a contract for necessaries.

5. On the above facts, if it is later found that Monica won her medal using banned performanceenhancing drugs, what challenges will the company face in terminating the endorsement arrangement? Answer: The difficulty that the company may face is that they are bound by the contract, assuming that Monica wishes to enforce it. They may, however, be able to avoid the contract on the grounds that she won her medal by using banned drugs, and the purpose of entering the contract was based upon the legitimacy of her win. Note that the law relating to these grounds are not covered until a later chapter, but students may be able to guess at the laws that might apply.

6. Fred purchases a vibrant nightclub from Amin. Amin is a dynamic impresario with a track record of success in being able to gauge the pulse and tempo of entertainment tastes of young people, and being able to build clubs and bars suited perfectly for university students. Fred‘s club is located in a university town with a population of 350,000. What terms might be appropriate for a non-compete agreement between Fred and Amin? How dependent on population is your answer — if at all? Answer: Fred may wish to protect himself with a no competition clause, but he must be careful to limit the area on a geographic basis to the area where the club would draw its target patrons. Given Amin‘s skills, Fred may wish to make the time frame a little longer than usual, perhaps 5 years, to ensure that Fred had plenty of time to establish himself with the students without a ‗come-back‘ from Amin to the area.

7. The parents of 5-year-old Amelia gave her an iPad to keep her entertained during a long car trip. They had loaded the iPad with numerous games and Amelia kept herself busy for hours. At the end of the trip, her parents received an email from their mobile provider that there were new charges of $700 for In-App purchases of gems and princess clothing. Apparently, these had been bought by Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-96

Amelia for the characters in her games. What arguments do the parties have in this case to either enforce or avoid payment? Answer: It is important to determine who the parties to the contract are in this case. If the parents purchased or downloaded the game Apps onto the iPad (tablet) for Amelia, she, as the minor, was not involved in the formation of the contract for use of the App. She would not have accepted any of the contract terms, one of which was surely the option to make In-App purchases on the promise of the existing payment terms. Nonetheless, it ought to be foreseeable to the vendors of such games targeted at young children that the temptation to click on shiny objects to enhance their play is irresistible. If these vendors lured the minor into making the subsequent In-App purchases, arguably, they should not be able to enforce payment under the contract for such non-necessary goods. It should be equally foreseeable that young children will not be constantly supervised by an adult while playing such games and purchases by a minor who cannot comprehend the consequences of their actions are inevitable. This may constitute a questionable business practice on the part of the game vendor. There is, however, a compelling argument that Amelia‘s parents, as the contracting parties, were negligent in their supervision of her use of the game and should not be able to avoid payment under the contract.

Case Problems for Discussion Case 1 A major manufacturer of advanced electronic game play units agreed with an equally large international retailer on certain terms for the production and distribution of the newest such game units. It was agreed that the manufacturer would provide the retailer with the first 1 million units to the exclusion of all other retailers. The retailer would receive its units for an exclusive product launch week, before any other units would be sold wholesale to other retailers. In turn, the retailer agreed to sell the units at precisely $599.99, this price being ideal, according to the manufacturer‘s market research. Every purchaser would also receive a T-shirt with the manufacturer‘s logo and $20 in gift coupons for the retail store. If the business relationship later fell apart, which party could enforce which parts of this agreement? Could it be attacked by others? Answer: Students should attempt to identify the restrictive trade practices in this case, as well as the agreement to maintain prices. Note however, that the agreement concerns an international retailer, and students should be made aware that agreements concerning foreign sales may not be caught by Competition legislation as the Act is for the most part concerned only with domestic competition, and the domestic market. This distinction is not covered in this chapter, and student should be either directed to Chapter 32 (Restrictive Trade Practices) where it is covered, or the instructor should explain this fact to the class. Students should recognize that the agreement is unfair to other retailers who will carry the product, and given its restrictive nature, the resale price may not be enforceable by the manufacturer against the large retailer.

Case 2 Ilsa Sharp had operated Sharp‘s Wholesale Grocery for a number of years with limited success. Eventually, she found herself seriously in debt as a result of a number of unfortunate purchases of goods that spoiled before she could find a market for them, and she made a voluntary assignment in bankruptcy. A few weeks later, while still an undischarged bankrupt, she purchased $1600 worth of farm produce on credit from a farmer who was unaware of the fact that she was an undischarged bankrupt. Sharp sold part of the goods at a profit to a friend, and kept the remainder of the food for her own use. When Sharp failed to pay the farmer, the farmer instituted legal proceedings to collect the $1600. Explain the rights of the farmer in this case, and render a decision. Answer: Sharp in this case, is subject to the statutory duties related to her position as imposed by the Bankruptcy Act. As an undischarged bankrupt, Sharp has a duty to disclose that she is undischarged if the amount of the credit extended exceeds $500. The reasons for the purchase are material in this case, as it is the purchase of goods on credit for the $1600 which places Sharp in violation of the Bankruptcy and Insolvency Act. R.S.C. 1985 c.B-3 (as amended) See: Allard v. The King, [1949] 3 D.L.R. 232. The position of the farmer under the contract, however, is different. Sharp would be liable for the goods purchased for her own use as necessaries. Sharp may also be liable for the value of the goods acquired for resale, since they were acquired fraudulently when she concealed from the farmer the fact that she was an undischarged bankrupt. Case 3 Tuma entered into a rental agreement with Cross-Moto-Cycle for a one-year lease of a motorcycle by misrepresenting his age as being 20 when, in reality, he was only 17. The agreement that Tuma signed prohibited the use of the motorcycle in any race or contest, and required Tuma to assume responsibility for any damage to the machine while it was in his possession. A week after Tuma acquired the machine, he made arrangements to enter a motorcycle race that was to be held in a nearby city. On his way to the race, he lost control of the motorcycle on a sharp turn in the road, and the machine was badly damaged in the ensuing accident. Tuma refused to pay for the rental and the damage on the basis that he had not attained the age of majority and he was not liable on the contract. Discuss the rights of Cross-Moto-Cycle, and comment on its likelihood of success if it should take legal proceedings against Tuma. Answer: This case raises the questions of misrepresentation of age, repudiation, minority, and the damage to goods which may not be necessaries. The first question to consider should deal with the nature of the goods: Is a motorcycle a "necessary"? If so, Tuma is clearly bound by the contract, and his repudiation would entitle the lessor to bring an action for damage to the goods if they were damaged due to Tuma's negligence. However, if a motorcycle is not a necessary item, then the position of the parties may be quite different. Even though Tuma misrepresented his age, if the contract is voidable at his option, he will not be bound by it if he chooses Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-98

to repudiate the agreement. His only obligation on repudiation would appear to be the obligation to return the wrecked motorcycle. Cross-Moto-Cycle would not likely succeed if it framed its action for damages in tort rather than contract, since Tuma was using the machine at the time in the manner contemplated by the contract, and the courts will not usually permit enforcement of the contract, where the contract is voidable at the option of the minor. See: Noble's Limited v. Bellefleur (1963), 37 D.L.R. (2d) 519; Dickson Bros. Garage &. U. Drive Ltd. v. Woo Wai Jing (1957), 11 D.L.R. (2d) 477. Case 4 Linda and John, aged 17 and 18, respectively, entered into a partnership agreement to carry on business as a local parcel-delivery service. The business was to be operated under the name ―L & J Parcel Delivery.‖ In order to conduct the business, the two partners purchased a small truck on credit from a local truck dealer. The purchase agreement for the truck was signed ―L & J Parcel Delivery‖ by John, who negotiated the purchase. Linda purchased a motorcycle on credit from a local dealer for the twofold purpose of (1) delivering parcels, and (2) transportation to and from her home to the place of business of L & J Parcel Delivery, a distance of some eight kilometres. She had informed the seller that the motorcycle would be used by L & J Parcel Delivery and for personal transportation, but signed the purchase agreement in her own name only. A few days before Linda‘s 18th birthday, John and Linda decided to cease their business operations. A substantial part of the purchase price remained owing to the sellers of both the truck and the motorcycle, and, with the intention of avoiding liability on the two purchase agreements, Linda repudiated the contracts and the partnership agreement. Over the next few months, John and Linda retained possession of the truck and motorcycle, while they argued between themselves and with the two sellers as to responsibility for the payment of the balance of the purchase price on each vehicle. Finally, after three months of fruitless discussion and argument, the sellers each brought an action against John and Linda for payment of the debts. Discuss the rights of the parties and the issues that might be raised in the case. Render a decision. Answer: Assuming that 18 is the age of majority in the province, in the case of a partnership, a 17 year old minor partner may bind the partnership in contract. However, the partnership agreement itself may be voidable at the option of the minor. The purchase of the truck should be first considered. The contract to purchase was made by John in the partnership name. The partnership is thus bound by the contract. Linda's purchase of the motor-bike is a different type of contract. Linda‘s purchased it in her own name, and it would appear that she alone had a contract with the seller, even though she informed the seller it would be used part of the time by L & J Parcel Delivery. Would this latter fact make the partnership liable? Perhaps not, because Linda indicated that it would be for personal use as well. This would oblige the seller to probably show that the motor-bike was a necessary for her to travel back and forth to her work - something which might be difficult since she is in business, and the motor-bike was also used for that purpose. Since partners have unlimited liability (a point not covered until Chapter 16) (Law of Sole Proprietorship and Partnership) John is liable to the seller of the truck, and the Seller would probably be successful in his claim. If John and Linda successfully argue that the motor-bike was a non-necessary purchase by Linda (and not the partnership) John would avoid liability on the contract, and Linda would be able to successfully repudiate it, her only obligation being to return the machine to the seller.

Case 5 A company owned a parcel of land upon which it wished to have a commercial building constructed. An architect was engaged to design the building, and a contractor was contacted to carry out the construction. Contracts were signed with both. Before the construction was completed, it was discovered that the building violated a municipal bylaw that required certain safety features to be included in the building. Neither the architect nor the contractor were aware of the by-law at the time they entered into their respective agreements with the company. The safety features required by the by-law could be incorporated in the building at a cost of approximately $10,000, but the contractor refused to do so unless he was paid for the work as an ―extra‖ to the contract price. The company refused to do so, and it withheld all payment to the contractor on the basis that the construction contract was illegal. The contractor then instituted legal proceedings against the company. Explain the nature of the contractor‘s claim, and explain the defence raised by the company. Discuss the issue of responsibility in the case. Render a decision. Answer: The contract for the construction of a building in itself is not illegal, but the failure of the building to conform with the municipal building code suggests the questions: Is the contract illegal because it violates a local building code? What is the significance of the fact that neither the architect nor the building contractor were aware of the law? Is ignorance of the law an excuse in the case of the architect? The contractor? The property owner? What are the ramifications of illegality in this case? If the contract is illegal, and the contract unenforceable, the property owner would acquire a building perhaps at no cost to him. Would this then be "unjust enrichment"? Are not all parties expected to be aware of the law? As a general rule, if a contract cannot be performed without violating a law, the contract will be considered void, regardless of whether the parties were aware of the law or not. According to One Hundred Simcoe Street Ltd. v. Frank Burger Contractors Ltd., 1969 CanLII 918 (SCC), a case with similar facts to the case here, the fact that the design incorporated an error which violated the law, and which was unknowingly made by the architect, would not necessarily render the entire contract illegal, and therefore unenforceable. The cost of changing the building to comply with the building code, however, would fall on the negligent party or parties. The property owner, therefore, would likely be bound by the contract, but would be entitled to compensation for the negligence in an amount which would be required to bring the building in conformity with the building code. The liability of the contractor would depend upon whether the nature of the design error was one which the contractor would likely be aware. Case 6 The Suburban Medical Centre was founded in 1981 as a medical clinic by eight physicians and surgeons. In 2008, the clinic advertised in the medical press for an obstetrician. Umesh, a medical specialist, answered the advertisement. Following an interview, Umesh was employed by the clinic and signed an employment contract that contained the following clause: Should the employment of the Party of the Second Part by the Parties of the First Part terminate for any reason whatsoever, the Party of the Second Part COVENANTS AND AGREES that he will not Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-100

carry on the practice of medicine or surgery in any of its branches on his own account, or in association with any other person or persons, or corporation or in the employ of any such person or persons or corporations within the said City of Suburbia or within ten kilometres of the limits thereof for a period of five (5) years thereafter. Umesh proved to be a difficult, but hard-working employee, and after some years an argument arose between Umesh and one of the founders of the clinic. As a result of the argument, Umesh resigned. He immediately set up a practice in the same city. The clinic continued to operate without the services of Umesh and later brought an action for damages and an injunction against him. Discuss the factors the courts should consider in deciding this case. Render a decision. Answer: This case is based upon the case of Sherk v. Horowitz, [1972] 2 O.R. 451, an excerpt from the same being reproduced in the text. The case illustrates a very common form of restrictive covenant found in employment contracts. The first question to be decided is whether the "10 km, 5 year" limitation is "reasonable". The nature of the protection required by the employer should be examined in this light, and the issue of public policy should be raised. What effect (if any) would the fact that the medical profession itself supports a policy of universal access to medical care have on the public policy considerations in the case? What attempt would the courts make to balance the need for protection from competition for the employer with the "right" of the public to medical care? Would it have any effect on the public policy aspect if the employer had hired a replacement for Harvey immediately after he resigned? Would this have been adequate protection for the public? An essential part of the plaintiff's case clearly must be to satisfy the court that the public would be protected if the covenant was enforced. In the Sherk v. Horowitz case, this was not done, and the plaintiff was unsuccessful. Case 7 In 2015, Herbert entered into the employ of TOPE Limited as an electrical engineer. He was employed to design electronic testing equipment, which the company manufactured. At the time he was hired, he signed a written contract of indefinite hiring as a salaried employee. The contract contained a clause whereby he agreed not to disclose any confidential company information. The contract also required him to agree not to seek employment with any competitor of the company if he left the employ of TOPE Limited. Some years later Herbert was asked to develop a dwell tachometer suitable for sale to home mechanics through a particular hardware store chain under the chain‘s brand name. He produced a prototype in less than a week, and then he went to the president‘s office to discuss the development and production of the equipment. During the course of the discussion, Herbert and the company president became involved in a heated argument over manufacturing methods. At the end of the meeting, the president suggested that Herbert might begin a search for employment elsewhere, as his job would be terminated in three months‘ time. The next morning, Herbert went to the president‘s office once more, ostensibly to discuss the dwell tachometer. Instead, Herbert informed the president as soon as he entered the room that he no longer intended to work for the firm. He complained that the company had never given him more than a twoweek vacation in any year, and that he often worked as much as 50 hours per week, with no overtime pay Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-101

for the extra hours worked. In a rage, he smashed the dwell tachometer prototype on the president‘s desk, breaking it into a dozen small pieces. He then left the room. The following week, Herbert accepted employment with a competitor of TOPE Limited to do a type of work similar to that which he had done at his old firm. He immediately developed a dwell tachometer similar in design to the previous model; he then suggested to the management of his new employer that they consider the sale of the equipment through the same hardware chain that TOPE Limited had contemplated for its product. The competitor was successful in obtaining a large order for dwell tachometers from the hardware chain a short time later. TOPE Limited presented its new product to the hardware chain a week after the order had been given to the competitor, and only then discovered that Herbert had designed the equipment for that firm. The hardware chain had adopted the competitor‘s product as its own brand and was not interested in purchasing the product of TOPE Limited, in view of its apparent similarity in design. TOPE Limited had expected a first year‘s profit of $65,000 on the dwell tachometer if they obtained the contract from the hardware chain. Discuss the nature of the legal action (if any) that TOPE Limited might take against Herbert, and indicate the defences (if any) that Herbert might raise if TOPE Limited should do so.

Answer: The facts of this case raise the question of the use of confidential information by an employee after he leaves the employ of his employer. The nature of the information must, however, be considered: that which is truly confidential may not be used by the employee to the prejudice of the employer. The onus rests on the employer to prove that the disclosed information was confidential, and was first disclosed to the employee as such. See: Consolidated Textiles Ltd. v. Central Dynamics Ltd. et al. (1974), 18 C.P.R. (2d)1. Students should be encouraged to identify the confidential information. The restrictive covenant with respect to employment should also be examined. Since the covenant contains only a restriction "not to work for a competitor" is it too wide? Would the courts likely strike it down since it contains no time limit? What obligation rests on the plaintiff in the enforcement of the covenant? The dwell tachometer, from the facts of the case, would appear to be a relatively standard electronic device, and one which would unlikely contain anything of a confidential nature such as a "trade secret," or use a secret production process in its manufacture. The identity of the customer in this case, however, might be confidential if the "contact" for the purchase had been made only between the two companies. While the restrictive covenant on employment might not be enforceable, the action for the breach of confidentiality might be successful. Case 8 Lui was a qualified journeyman electrician who was employed by a municipal public-utilities commission on a full-time basis. On weekends and evenings, he occasionally assisted friends who were constructing their own homes by installing their electrical wiring for them. In most cases he did the installation work gratuitously, but from time to time he would be given a sum of money in appreciation of his services. One day, while on vacation at his summer cottage, a neighbouring cottage owner who was renovating his cottage approached Lui and inquired if he might be interested in taking on the job of rewiring the cottage. Lui thought about the offer, then agreed to do so, and a price was agreed upon. Lui would do the work and supply the materials (estimated at $1950) for $2,800. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-102

A few days later, Lui purchased the necessary materials and proceeded to rewire the cottage. Upon completion of the job, Lui presented his account for $2,950, which represented the cost of materials at $2,100 and his labour at $850. Lui‘s neighbour refused to pay the account, insisting that the agreed price was $2,800. Lui‘s argument was that the $1,950 price quoted was only an estimate, and subject to change. The only firm part of his quote, he maintained, was his labour charge of $850. The two parties continued to argue over the price for several months, and eventually Lui instituted legal proceedings to collect the account. Identify and discuss the legal issues that might arise in this case that could affect Lui‘s right to recover payment. If you were called upon to act as counsel for the defendant, what inquiries would you make? Answer: The issue in this case concerns the legality of the electrician to perform work if the electrician must be licensed to do so. From the facts of the case, the electrician is employed by the public utilities commission. The question is silent on the need for a licence from the municipality to perform installation work. If a license is required, the contract concerning his labour is unenforceable by him, and he may only collect for the materials, and that amount can be determined by the court. If a licence is not required, then the issue is whether the contract was for the entire amount of labour plus materials. Students may be left to decide this question, based upon the facts of the case. Case 9 Mala Anand was a computer scientist with over 25 years of experience in the computer field. For the last five years of her 12 years with a large computer manufacturer, her mandate was to develop ―nextgeneration‖ computer hardware. She was, in essence, responsible for most of the ―high-tech‖ research in the area of data-reading technology in the company. She was also a recognized international authority in this highly specialized area of research. A competitor offered Mala a position in its firm to carry out the same type of research, as it, too, was interested in producing next-generation data-reading equipment. Mala accepted the position and began working for her new employer. Mala‘s previous employer then sought an injunction to prevent Mala from engaging in any work for the competitor that was similar to the work she had carried on at her previous place of employment. The above employment scenario raises a number of significant legal and public policy issues. Identify and discuss these issues. In your answer, indicate how the courts attempt to deal with them. Answer: This case illustrates the problem facing the court when there are equally compelling reasons put forward by each party to the dispute. In this instance the employer would be seriously affected if the employee was permitted to reveal the 'secrets' she had developed for the employer to the new employer. The employee, on Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-103

the other hand would be restricted in her employment, and career if she was denied the opportunity to work for the new employer. Students should identify and discuss these issues on the basis of facts set out in the case. Given the critical knowledge that Mala possessed, the court might agree with the employer in this instance, and prevent Mala from working at any research at the new employer related to her previous research. The case upon which this text problem is based is a U.S. Federal Court unreported decision in which a preliminary injunction was granted to the plaintiff to prevent the employee from working in a similar position for the new employer pending the outcome of the trial. International Business Machines Corp. v. Seagate Technologies Inc. and Bonyhard. Case 10 Alice, a young woman who was 17 years of age, saw an advertisement by Silver Flatware Ltd. in a magazine that offered a 24-piece set of silver flatware for sale on the following terms: ―$100 payable with order, and monthly payments of $50 each, payable over a three-year term.‖ The advertisement was accompanied by a coupon setting out the terms of payment and requiring the purchaser to provide his or her name and address and signature in the space provided. Alice completed the coupon and mailed it, together with a cheque for $100, to the company. A few weeks later, the 24-piece set of silverware arrived by post. Alice made a number of payments according to the terms of the agreement, then decided that she did not wish to continue with the agreement. A week before her eighteenth birthday, she wrote to the seller and repudiated the contract, but did not offer to return the silverware because she had lost several of the teaspoons. The company and Alice then engaged in a protracted round of correspondence in which the company demanded a return of the silverware and the retention of all money paid as the price of her release from the agreement. Alice refused to return the silverware. She maintained that she was entitled to a return of the payments as she was a minor at the time she entered into the agreement. The company, some 10 months later, brought an action against Alice for the balance of the purchase price. Discuss the defences (if any) that Alice might raise in this case and render a decision. Answer: This case deals with a number of different issues concerning the capacity of a minor, the nature of "necessary" goods, the effect of repudiation by the minor, and the law related to recovery of goods in the hands of a minor. Alice clearly entered into a contract during her minority, but the binding effect of the agreement is dependent upon the nature of the goods purchased. Is a set of silver flatware a necessary item for a seventeen year old? If she is living at home, perhaps not. However, if she is living apart from her parents, in her own apartment, would the flatware possibly be a necessary item, considering her "status"? If the goods are not necessaries, the contract is voidable, but her ability to recover any monies paid will depend to a considerable degree on her ability to restore the seller to his former position. See: Bo-Lassen v. Josiassen, [1973] 4 W.W.R. 317; Sturgeon v. Starr (1911), 17 W.L.R. 402. On the basis of these cases, the seller should be able to recover the goods through his legal action, but Alice may not be able to recover all of her payments, due to the fact that she lost some of the silverware.

Case 11 A company produced a line of sophisticated toys using a secret special plastic and process. The company hired a chemist to work on the special plastic, but before she was allowed out into the lab, she was obliged to sign a confidentiality agreement with respect to all aspects of her work. Some years later, she left the firm and joined a competitor, and in time, that competitor began producing toys with plastics of very similar properties. The first company commenced legal action against her and her employer on the basis that she had revealed confidential information to her new employer. Discuss the issues raised in this case, and how it may be decided if it reached the courts. Answer: This case concerns the enforceability of a confidentiality agreement intended to protect the employer‘s trade secrets. Class discussion should consider the restrictiveness of the agreement. Is it too restrictive if it covers all aspects of her work? No time limit or geographic limits are covered. Would she be barred from discussing any aspect of her work forever? Is the agreement unenforceable for this reason? Note that some ‗secrets‘ must be kept secret for very long periods of time, e.g.: the formula for Coca-Cola. Note also that any restrictive agreement must be reasonable since it may affect the employee‘s ability to find other work. The facts of the case are somewhat similar to the case of Reliable Toy & Reliable Plastics Co. Ltd. v. Collins [1950] 4 D.L.R. 499, where the court held that the employer was entitled to protection of its secret processes. The employee was restrained from revealing the information after leaving the employ of the employer.

Chapter 10. The Requirements of Form and Writing Chapter Topics Formal and Simple Contracts The Statute of Frauds Requirements for the Written Memorandum Reduction to Writing Sale of Goods Act Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion

Chapter Objectives After study of this chapter, students should be able to: • Identify situations in which the Statute of Frauds (or similar legislation) applies. • Explain the importance of a written memorandum of a contract at Common Law and under the Sale of Goods Act.

Some contracts may be verbal, but others must be in writing, or in a certain form to be enforceable. Business persons must respond to these differences to secure their rights and to limit their obligations. CHAPTER COMMENTARY Previous Chapters 7 through 9 inclusive have been concerned with the various elements which must be present to establish a binding agreement at Common Law. To some extent these have been altered by statute. For example, in the area of legality and capacity, statute law has imposed a number of restrictions, but apart from these alterations, the requirements are essentially those established by the courts. In addition to these basic elements, it is necessary to now examine two additional requirements that affect only certain types of contracts. Formal contracts, which usually require a seal, derive their validity from the form which they take, and they must of course, also be in writing to be enforceable. The Statute of Frauds and the Sale of Goods Act, however, have expanded the writing requirement to cover a number of different kinds of contracts which were not formal agreements in the past. The Statute of Frauds, in particular, is unusual in its application with regard to writing, as it does not render the contract void, but merely unenforceable by the courts. This point should be emphasized in class discussion. So, too, should the methods employed by the court to overcome the hardships that the statute has produced. Some emphasis should be placed upon the doctrine of part performance, and the exceptions to the parol evidence rule under the Requirements for the Written Memorandum. Because the courts have established certain exceptions to the statute, these should be carefully reviewed. Among these are the rules for part performance of a contract concerning land, and the exception for contracts which may be performed by either party in less than one year. The guarantee, in particular, is a special type of agreement, because it involves three persons: the creditor, the debtor, and the guarantor. Students should be aware that to have a guarantee situation, a debtor-creditor relationship must exist, or be created. This in turn, will be supported by the guarantee, thus creating a secondary relationship between the creditor and the guarantor. Emphasis should be placed upon the fact that the guarantor does not have primary liability for payment of the debt. The debtor is primarily liable for the payment. Where the guarantor becomes liable is when default occurs on the part of the principal debtor. This is explained in case excerpt from: Western Dominion Investment Co. Ltd. v. MacMillan. In the case, the judge explains the nature of the liability of the debtor and the guarantor, and sets out the conditions under which the guarantor may be absolved from liability. It is important to note as well that payment of the debt by the guarantor does not release the debtor from all obligation on the debt. When the guarantor has paid the debt, the guarantor is entitled to a transfer of the security, and the creditor‘s claim for payment. The guarantor then becomes entitled to claim payment from the debtor. The Gallen et al. v. Allstate Grain Co. Ltd. Court Decision provides an illustration of the parol evidence rule, and how a court views its application in a specific contract setting. The case might be used to discuss this particular rule and the various fact situations where it might arise. The Manulife Bank of Canada v. Conlin et al. decision illustrates the position of a guarantor of a mortgage debt and the importance of including the guarantor in any changes to the debt repayment or security underlying a debt. In the case, the parties failed to obtain the consent of the guarantor, and when default later

occurred on the mortgage, the court held that the guarantor was released from liability because no consent to the changes had been given by the guarantor.

Review Questions 1. Explain the rationale behind the general Common Law rule which states that an agreement in writing may be terminated by a subsequent verbal agreement. Is this always the case, or is it subject to exception? Answer: The rationale behind this rule is that the new agreement has as its subject matter the existing agreement which the parties intend to alter or terminate. An exception to this rule would be an agreement under seal which would require a subsequent agreement under seal to alter it.

2. What are the legal implications of failing to comply with the requirements of writing under the Statute of Frauds or other equivalent provisions? Answer: The failure to comply with the writing requirements of the Statute of Frauds renders the contract unenforceable in a court of law.

3. Distinguish a guarantee from an indemnity. relationships?

How does the Statute of Frauds affect these two

Answer: In an indemnity the third party becomes a principal debtor. A guarantee creates a contingent liability for the debt on the part of the guarantor: Only if the principal debtor defaults does the guarantor become liable. The Statute of Frauds requires the guarantee to be in writing to be enforceable.

4. Explain the doctrine of part performance and the rationale behind the establishment of the doctrine as a means of avoiding the Statute of Frauds. Answer: The doctrine of part performance may be used to avoid the Statute of Frauds in a verbal contract concerning land if a party can establish that the verbal contract is otherwise valid, and evidence is available to establish it, that there was a reliance on the agreement by the party attempting to enforce the agreement, the party would suffer a loss if the agreement was unenforceable, and that the statute would constitute a fraud on the party if it was not enforceable. The injured party must also show that the acts of part performance relate, and could relate only to the agreement in question.

5. Describe the minimum requirements for a written memorandum under the Statute of Frauds or other equivalent provisions? Answer: To meet the requirement of writing, the agreement need not be formal, but it must: (1) identify the parties, (2) contain the terms of the agreement, and be signed by the party to be charged.

6. What exceptions to the Statute of Frauds have the courts established for contracts that do not require immediate performance? Answer: Where the Statute of Frauds includes a one year writing requirement, the courts have stated that if either party can fully perform the contract in less than one year, the contract need not be in writing to be enforceable.

7. How does the parol evidence rule affect evidence related to a contract in writing? Answer: The parol evidence rule limits evidence pertaining to a written contract to evidence which explains the terms of the agreement. Evidence may not be admissible if it would have the effect of adding to, changing, or contradicting the terms of the agreement.

8. Explain the effect of a collateral agreement and the doctrine of implied term on a written agreement subject to the parol evidence rule. Answer: Collateral agreement is an exception to the parol evidence rule. If a separate agreement (with separate consideration) can be established the collateral agreement may alter the terms of the original agreement. The doctrine of implied term states that the courts will recognize certain terms as being a part of the agreement even if they are not included, if the terms are those that by custom or practice the parties normally include, and the terms were omitted due to an oversight.

9. Explain the effect of the Statute of Frauds or other equivalent provisions on the law of contract. Answer: The statute imposes a requirement of writing on certain informal contracts.

Mini-Case Problems 1. X enters into a verbal agreement with Y to purchase Y‘s farm for $750,000. X pays Y a deposit of $10,000 cash. What are X‘s rights if Y later refuses to go through with the agreement? Answer: X may not enforce the agreement as it concerns land, and must be in writing to be enforceable. X would be entitled to a return of his deposit.

2. How would your answer to the problem in question 1 differ if X refused to fulfill his part of the agreement? Answer: If X refused to perform, he would not be entitled to a return of his deposit, because it was money properly paid under the contract which continues to exist. X cannot treat the contract as at an end because Y is not in Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-108

default. 3. A offers to buy B‘s sailboat for $10,000, provided that he can obtain a loan of $5,000 from his banker. A and B put the agreement in writing, but the agreement does not mention the loan. If A cannot borrow the $5,000, can B sue A for failing to comply with the agreement of purchase? Answer: A may be able to argue the loan was a condition precedent to the agreement. Since he could not obtain the loan, the agreement is ineffective.

Alex agreed to purchase a used light aircraft for $180,000 (as is) from Aeroventure Aviation Company. On the day agreed for transfer, Alex appeared with his certified cheque for $180,000 and was met with an invoice for $203,400 being the price plus harmonized sales tax. Discuss the issues raised as a result.

Answer: The agreement between Alex and the company was for the purchase of the aircraft for $180,000. The contract was subject to taxation, and Alex would be expected to know the law, and include the tax even though the contract was silent on the matter, as Alex would be liable for the tax as a purchaser. The tax payment might be considered an implied term in the contract. 5. Tom agreed to sell his car to George for $11,000 and the two exchanged e-mails to that effect. Later meeting at a party, George asked if Tom would throw in his boat trailer along with the car. Tom agreed. A week later, George brought an $11,000 certified cheque to Tom‘s home and received the keys to the car. The boat trailer remained locked in Tom‘s garage. In response to George‘s protest, Tom said: ―We had no agreement about a trailer.‖ Advise George. Answer: The written agreement was for the sale of the car. The verbal agreement was to include the boat trailer. This may be caught by the parol evidence rule. Since no consideration was given for the promise, George could not argue collateral agreement, however, he may argue subsequent agreement. See: Johnson Investments Ltd. v. Pagritide [1932] 2 D.L.R. 985.

6. Zhao, the owner of a thriving drug store, discusses the trade with Victor, the son of a friend. Victor decides to open a drug store, and Zhao loans him the money. As matters turn out, Victor purchases a franchise that is as much a general store as it is a drug store. Zhao considers this venture much more risky and demands that Victor find another investor willing to buy out Zhao. What argument in law can Zhao raise to suggest that Victor must do so? Answer: Zhao and Victor apparently made a verbal agreement that Zhao would finance the purchase of a drug store. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-109

The funds advanced were not used for this purpose. Zhao might argue that this was a condition of the verbal agreement, and Victor in breach (perhaps using the Gallen v. Allstate Grain Co. Ltd. case).

Case Problems for Discussion Case 1 Maria intended to open a store in a major mall. She invited Yasmin to join her through investment and management of the operation. Yasmin agreed on the condition that she could raise the money and work it into her schedule as an assistant in an accounting firm. She did raise the money, and sent it to Maria, and on the strength of that, Maria signed the shopping centre lease agreement. When Yasmin‘s employer discovered her plans, it informed her that ―no moonlighting‖ was a condition of her employment contract. Discuss the implications of this for Maria and Yasmin. Answer: This case discusses the matter of a condition precedent and its effect on business arrangement between Maria and Yasmin. From the facts, the intention was that Yasmin would play an active part in the management of the business, and her offer of the investment was based upon the condition that she could raise the money and work it into her schedule. This would be a condition precedent to the agreement. When Yasmin‘s employer refused to allow her to work elsewhere under her employment agreement, the condition was probably unfulfilled. Yasmin would be entitled to a return of the money she gave to Maria, and their agreement would terminate Maria, however, signed the shopping centre lease, and would likely be bound by it. Case 2 Habitation Apartments Ltd. borrowed $5,000,000 from the Good Times Bank and secured the loan by way of a three-year mortgage on its apartment building. The bank demanded additional security for the loan, and Simple, the president of the corporation, personally guaranteed repayment of the loan. Several years later, as a result of a dispute between shareholders, Simple was voted out of office as president along with most of the Board of Directors, and a new president and Board of Directors were selected by the shareholders. During the months that followed, the new president and Board of Directors reorganized the corporation‘s operations. As a part of the reorganization, it was necessary for the corporation to rearrange its mortgage loan with the bank. The bank agreed to extend the loan for a further three-year term but at a higher interest rate. Simple, who was still a shareholder of the corporation, was unaware of the new refinancing arrangement the corporation had made with the bank. A year later, as a result of tenant problems and a high vacancy rate, the corporation was unable to meet its mortgage payments, and the mortgage went into default. When the corporation failed to pay the mortgage, the bank turned to Simple and demanded payment under the guarantee. Discuss the rights of the parties in this case and explain the possible outcome if the bank should take legal action against the corporation and the guarantor. Answer: Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-110

The guarantee of the mortgage by Simple was in writing (although the question does not specifically indicate that it was), and accordingly would comply with the requirements of the Statute of Frauds. The issue raised in the case, however, is whether the corporation, by changing the terms of the original security (extension of term, and a higher interest rate) without Simple's consent released him from his guarantee. Since Simple was unaware of the changes, he would be in a position to argue that he was discharged from any liability as a result of the corporation's action, and would probably be successful. See: Manulife Bank of Canada v. Conlin et al. Court Decision. Case 3 Clement entered into a verbal agreement with Calhoun to purchase Calhoun‘s farm for $440,000. In the presence of his friend Saunders, Clement gave Calhoun $1000 in cash ―to bind the bargain.‖ The farm adjoined the farm that Clement already owned. Immediately after the deal was made, both he and Saunders proceeded to remove an old fence that separated the two farms. A few days later, Clement plowed a large field on his ―new‖ farm, and Saunders cut down a few trees. Later that day, he prepared a cheque in the amount of $339,000 and took it to the farmhouse where Calhoun was still living. Calhoun met Clement at the door and said that he had changed his mind. He did not wish to move off the land and had decided not to sell the farm. Discuss Clement‘s rights (if any) in this case. Explain the possible outcome if Clement should decide to take legal action against Calhoun. Answer: Contracts concerning interests in land are caught by the Statute of Frauds, and this point should be identified by the students as relevant to this case in class discussion. If the contract would normally be unenforceable because it is not in written form, the doctrine of part performance should be examined as a means of avoiding the statute. The requirements for part performance, however, should be determined in the course of the discussion. The four criteria are set out in the text. Would the enforcement of the statute perpetrate a fraud on the buyer? Were the acts of part performance ones which would refer to the agreement alleged and to no other? Obviously, the payment of $1000 cash in itself would not be adequate as part performance. Would the removal of the fence, the plowing of fields, or the cutting of the trees be adequate? Possibly they would represent the acts of an owner of property, and support the existence of a contract. All four criteria however, must be satisfied in order for Clement to succeed in his enforcement of his rights by way of the doctrine of part performance. See: Haskett v. O'Neil, [1939] 4 D.L.R. 598; Deglman v. Guaranty Trust Co. of Canada and Constantineau, [1954] 3 D.L.R. 785. The Haskett case has a particular application here, where the acts of part performance such as working the land, etc., were considered by the court to be sufficient to enable the purchaser to enforce the contract. Case 4 Slippery Silica Mining Corporation entered into a contract with Highgrade Transport Company to haul its ore from its mine to a railway terminal, a distance of some 50 kilometres. The contract called for the hauling of approximately 60 tonnes a week for a one-year period. Because Slippery Silica Mining Corporation was a very small company, Highgrade Transport requested that Wilson and Rose, its two principal shareholders, personally guarantee the payment required under the terms of the contract.

In due course, Wilson and Rose provided a written guarantee of payment. It bore their signatures and that of their witness, Sheila Drew, a young woman who worked in their office as a receptionist and typist. The guarantee was not under seal, so the owner of the transport company immediately drove down to the mine office to have the two owners affix seals to the document. At the mine office, the owner of the transport company met Sheila, who informed him that both Wilson and Rose were away for the day. When he told her the purpose of his visit, she took a box of red legal seals from her desk and offered them to him with the comment, ―I don‘t think they would mind if you put on the seals yourself.‖ The owner of the transport company took two red seals and affixed them next to the signatures of Wilson and Rose on the guarantee. Then he left the office with the document.

Some time later, the mining company fell into arrears in its payments under the contract. The transport company notified Wilson and Rose that it intended to look to them for payment under their guarantee. Discuss the issues raised in this case and determine the legal position of the parties. Answer: A guarantee must be in writing to be enforceable, and consideration must be present if the creditor expects to enforce the guarantee. The Statute of Frauds is met if the guarantee is in writing and signed (assuming it meets the requirements for the written memorandum). The question might be asked: Why did the owner of the transport company wish to have this guarantee under seal? The answer would be that a guarantee under seal would not require him to prove consideration was given in return for the guarantee. Note, however, that the owner of the transport company affixed the seals himself. His act would clearly not make the promises of the mine owners promises under seal unless they had authorized the secretary to instruct him to affix the seals. He would, therefore, be obliged to prove consideration in order to enforce the guarantees unless this was the case. For an example of such a case: See: Bank of Nova Scotia v. Spear (1973) 6 N.B.R. (2d) 377. See also: New Brunswick v. Olsen (1984) 57 N.B.R. (2d) 321, where the court stated that unless there is a clear intention in the wording of the document to indicate the agreement is under seal, the court will not make it so. A similar fact situation may be found in Petro Canada Exploration Inv. v. Tormac Transport Ltd., Torgerson and McConnell (1983) 4 W.W.R. 205, where the court dismissed an action brought on the personal guarantee. Case 5 Karl and Wilbur were older men who each owned small apartment buildings in the same city. Karl renovated his buildings in his spare time, and he was owed $2,000 by Wilbur for a job. Karl‘s health was poor and he told Wilbur he wanted to retire. He told Wilbur that he had a mortgage on his building for $300,000, and that he was prepared to sell it to Wilbur for $500,000. Wilbur did not have access to such money, but by the end of the conversation, Karl and Wilbur agreed that Wilbur would make Karl‘s mortgage payments, and in four-and-a-half years, when $250,000 in GICs that Wilbur owned came due, Wilbur would pay Karl $245,000 (the $200,000 balance plus some interest) in cash. Wilbur made the next three monthly trips to the bank, at the end of December, January, and February, paying the appropriate $1,750 on each trip. During that time, the men had discussed Karl‘s impending retirement. In the first week of March, Karl died, and Karl‘s executor told Wilbur he knew of the deal, but Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-112

that it was ―off.‖ He offered Wilbur a cheque for $3,250, which represented a refund of Wilbur‘s payments to the bank, less the money Wilbur owed to Karl for renovations. Wilbur refused the cheque, wrote his own cheque to the executor for $2,000 in payment of his repair bill, and told him that he would sue to enforce the deal as ―the deal was really good for me, and you want to hold out for more cash.‖ The property, independently appraised, was worth $670,000. Assess the likelihood of Wilbur succeeding in obtaining an order of specific performance, compelling the sale on the agreed terms. Answer: Students should recognize that the subject matter of the arrangement between Karl and Wilbur was the purchase of land and a long-term contract concerning payment. The impact of the Statute of Frauds on the arrangement should be examined. If the transaction is examined from a 'land' perspective Wilbur might argue that the doctrine of part performance would allow him to enforce the agreement, given his act of making mortgage payments, but this would probably be a weak argument given the fact that Karl was still in possession of the land. Karl's executor, while aware of the agreement might characterize the mortgage payments as simply payments made on the debt owed by Wilbur to Karl for tractor repairs. He might also argue that the transaction was caught by the statute as it could not be fully performed within the period of 1 year. Wilbur's response might be that Karl could fully perform his part in less than 1 year by giving up possession. The payment aspect, however, would continue to exist as an obligation on Wilbur's part. In the unreported case upon which these facts were based, the Court held that the transaction was caught by the Statute of Frauds as Wilbur's acts of part performance were insufficient to bring his case under the doctrine of part performance exception. Case 6 Reid owned a car and travel trailer that he wished to sell. The trailer was outfitted with a stove and refrigerator as built-in equipment. Reid had added a small plasma television set as a part of the equipment, but the television set was not built into the trailer. Calder expressed an interest in the car and trailer, and also examined the equipment. Reid advised Calder that the price was $21,000 and that the television set would be $1,000 extra if Calder wished to buy it as well. Calder indicated that he wished to do so. Reid prepared a written purchase agreement that itemized the car and trailer, but simply referred to the appliances as ―equipment.‖ The contract price was $21,000, and the agreement called for a deposit of $1,000. Both parties signed the agreement, and Calder gave Reid a deposit cheque in the amount of $2,000. Reid changed his mind about the sale of the television set. Shortly before Calder was due to return for the car and trailer, Reid telephoned to say that he was selling only what was specified in the written agreement. Explain Calder‘s rights (if any) in this case. Answer: The parol evidence rule and its application is central to the discussion of this case, consequently, its effect on the contract should be highlighted. One of the exceptions to the rule is the argument that a collateral Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-113

agreement exists, but to be successful, Calder would be obliged to satisfy the requirements for a separate contract concerning the T.V. set. The fact that he paid a $2,000 deposit instead of $1,000 could be raised by Calder in this regard. Was the additional $1,000 to be applied to the purchase price of the trailer, or was it payment in full for the T.V. set? In this light, should Reid's telephone call be considered as repudiation of the agreement to sell the T.V. set? If the Sale of Goods Act is applied, the contract for the sale of the T.V. set should be in writing, but the fact that the $1,000 was paid (Calder's argument) would bring the contract within the exception, and make the verbal agreement binding. For discussion purposes the case may be used to examine and review a number of previously treated concepts, for example, executory contracts, consideration, and revocation, etc. From the evidence of the extra $1,000 payment, Calder might be successful with his argument that a collateral agreement to purchase the T.V. set exists. It might also be possible to establish that the agreement to purchase the T.V. set was a subsequent agreement and outside the parol evidence rule. If he cannot, the parol evidence rule will restrict him to the terms of the written agreement. For a discussion of the law related to collateral agreements. See: Hawrish v. Bank of Montreal (1969), 2 D.L.R. (3d) 60. Case 7 Marcus and his father Louis visited Megabank, where Marcus borrowed $25,000 to purchase a car. The manager was satisfied with Marcus‘ ability to repay the loan, but in closing added to Marcus: ―if you start getting into financial trouble, be sure your father knows, because I don‘t want to be forced to look to him to pay your debts.‖ Louis spoke up and said, ―Not to worry, I‘ll keep things on track and keep my boy out of trouble.‖ In time, Marcus did face financial difficulties, after having a falling out with his father. Louis refused to assist Marcus, and ignored the Megabank demand that he pay the debt of his son. Discuss the resolution of this case. Answer: From the facts of the case, students should consider whether the father was a guarantor or principal debtor on the loan to Marcus. Is the father‘s response to the manager‘s comment a guarantee? The manager appears to be saying that he would look to the father for payment if Markus defaulted on the loan. If this is the case, then it would be a guarantee situation and a written agreement would be required to render the father liable. Since no writing exists, the promise (guarantee) would not be enforceable. If on the other hand it is concluded that the discussion created a situation where the father was a principal debtor, then the promise of the father would be enforceable, as it would be outside the Statute of Frauds and no written agreement required. Case 8 When approached by Norman, Ivan decided to sell him a 250-acre parcel of farm land. Ivan intended to retire and move into the city, leaving his home located on a lake within the parcel. After the paperwork went to their lawyers, Ivan discovered that Norman intended to use the house as a summer home only, and would be absent for the rest of the year. Ivan, an avid hunter, called Norman and asked if it would be OK if he continued to hunt on the land for one week in each November. Norman agreed, and in time the lawyers completed the deal and Ivan received his payment. That November, Ivan found the fencing posted with ―No Hunting‖ signs, and called Norman again to assure himself that their deal still stood. Norman told Ivan that his wife did not want hunting on the land, and when Ivan protested, Norman pointed out that the paperwork showed no mention of their telephone discussion. Advise Ivan.

Answer: The issue raised on this case is whether the hunting agreement is enforceable. The verbal agreement was made prior to the preparation of the written agreement. Ivan had an obligation to check the written agreement prior to signing, and lost the opportunity to correct the written agreement to include his hunting rights. He could not argue collateral agreement, as there was no consideration for the promise of Norman. Nor would the MacLean v. Kennedy case in the text appear to apply to the situation. Case 9 Evelyn is delighted at the engagement of her niece Anne. She writes to her niece, ―Kevin is such a nice fellow. I want you to have a nest-egg for your future, so on your wedding day I will give you $50,000.‖ Anne breaks her engagement to Kevin, and marries Philip. Is the letter enforceable? Answer: This case illustrates a written promise of a gift. Discussion should consider the question of enforceability on the basis of both consideration and promissory estoppel. Since the promise referred to Kevin, was the promise ‗person specific‘ in the sense that it was approval of Kevin as the reason for the offer? How should the term ‗your‘ in the promise be interpreted? Is it reference to both Anne and Kevin or Anne only? Note that the promise is not under seal, and raises the question of consideration for the promise. Is the consideration Anne‘s promise to marry Kevin? If not, what is the consideration, if any? Is the promise gratuitous, and unenforceable on that basis? Given the reference to Kevin in the letter, Anne may have difficulty enforcing the promise.

CHAPTER CHART

CHAPTER 11. FAILURE TO CREATE AN ENFORCEABLE CONTRACT

Chapter Topics Introduction Mistake Misrepresentation Undue Influence Duress Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion

Chapter Objectives After study of this chapter, students should be able to: • Explain how the legal doctrine of mistake may result in the failure to create an enforceable contract. • Distinguish between different kinds of misrepresentation, and the results of each. • Explain the difference between undue influence and duress, and the effect of these factors on enforceability of a contract. YOUR BUSINESS AT RISK Having brought a contract into existence, some events (by accident, neglect or malice) can easily create a contract that a court will not enforce. You must learn to identify these dangers so that you do not create a situation where you cannot enforce your rights. Equally, you must learn how these enforcement rules protect you from being a victim, if someone attempts to take advantage of you via a flawed contract. CHAPTER COMMENTARY The failure to create an enforceable contract may arise when the parties have formed an untrue view of the agreement which they have made. The different forms of mistake should be examined, and its effect on the contractual rights of the parties. The implications of void and voidable contracts as a result of mistake should also be reviewed. For example, the mistake of law and mistake of fact should be noted, and the limitations of non est factum should be explained. The Marvco Color Research Limited v. Harris establishes the limitations on this type of defence. It is important to note and stress the limitations, as the courts have said basically that any carelessness on the part of the party claiming non est factum will result in rejection of the defence. With respect to unilateral and mutual mistake the remedy of rectification should be discussed, and particularly its limitations. It may not be used to revise an established agreement, but only to correct obvious typographical errors, or to save the agreement by correcting terms which through error or oversight were omitted or wrongly inserted. The example illustrates the type of error which rectification may be used to correct. The case of McMaster University v. Wilchar Construction Ltd. illustrates the different forms which mistake might take, and the effect of each. While it is a lengthy excerpt from the case, it does outline judicial thinking on what is often a difficult concept to grasp, and provides a careful review of each form of mistake. In particular, mutual and unilateral mistake are discussed in some detail. Misrepresentation, in its two forms which render a contract voidable, should also be noted. In particular, the fact that fraudulent misrepresentation gives rise to a tort action (deceit) as well, should be emphasized. The Siametis v. Trojan Horse Court Decision might be used as a example of fraudulent misrepresentation as it illustrates judicial thinking on the issue. The case excerpt from Charpentier v. Slauenwhite contains the classic statement on the proof of fraudulent misrepresentation as stated by Lord Herschell in the famous case of Derry v. Peek. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-117

The brief paragraph from Re Gabriel and Hamilton Tiger Cat Football Club Ltd. illustrates the circumstances surrounding a contractual arrangement which required full disclosure because it was considered by the court to be one requiring "utmost good faith". The case comment sets out the kinds of contracts uberrimae fidei. The Court Decision, Siametis et al. v. Trojan Horse (Burlington) Inc. et al. concerns a sale of a business where the financial information presented to substantiate the sales, etc. of the business were altered by the seller to indicate a higher profit than the business actually produced. The purchaser bought the business, but did not discover the fraud until quite some time later. The judge hearing the action concluded that the seller had acted fraudulently, then proceeded to examine the law as it relates to the measure of damages to be awarded. The difficulty was due to the fact that the purchaser had expended a substantial amount of his own money to improve the property, and therefore, rescission as a remedy would not be adequate. The damages awarded by the judge for the tort deceit were substantial as a result, (See the final paragraph of the judgment). The Court Decision, Vukomanovic v. Cook Bros. Transport Ltd. and Mayflower Transit Co. Ltd. provides an example of mistake in the terms of a written agreement and a failure to inform the other party of the errors. The conclusion reached by the judge was that if a party is aware of errors in an agreement and fails to have them corrected at the time, the party can't later object if the other party performs the agreement according to its terms. Undue influence and duress, while less common grounds for rendering a contract voidable, should be reviewed, and some attention given to the conditions under which the rights arise. In this regard, the need for prompt action on the part of the party subject to the influence or duress to avoid the contract once free of the influence should be underscored.

Review Questions 1. In what way or ways would mistake in its legal context differ from what one would ordinarily consider to be mistake? Answer: Mistake at law refers to a situation where the parties have entered into an agreement in such a way that it does not express their true intentions. It does not mean a simple "oversight".

2. How does unilateral mistake differ from mutual mistake? Answer: Unilateral mistake arises where only one party is mistaken as to the agreement. Mutual mistake occurs where both parties are mistaken as to the agreement or its subject matter.

3. What effect does mistake, if established, have on an agreement which the parties have made? Answer: Mistake renders the agreement voidable or void depending upon the nature of the mistake (e.g.: mistake as to the existence of the subject matter would render the agreement void. Mistake as to the identity of the party may render the agreement voidable when the error is discovered).

4. Explain the difference between mistake and misrepresentation. Answer: Mistake is a failure of the parties to make an agreement that expresses their true intentions. Misrepresentation is a statement of a material fact by one party which induces the other party to enter into the agreement.

5. Distinguish innocent misrepresentation from fraudulent misrepresentation. Answer: Innocent misrepresentation is a statement of a material fact which the person who makes the statement believes to be true, and which is later discovered to be false. Fraudulent misrepresentation is a statement of a material fact which the person knows is false (or made recklessly) and which is made with the intention to deceive. In both cases the other party must be induced to enter into the agreement on the basis of the statement.

6. What obligation rests upon a person who made an innocent misrepresentation when he or she discovers the error? Answer: A person who makes an innocent misrepresentation, upon discovering the error, must advise the other party to the contract of the error, otherwise the misrepresentation becomes fraudulent.

7. Why do the courts consider non-disclosure to be misrepresentation under certain circumstances? Identify the circumstances where this rule would apply.

Answer: Non-disclosure applies to the narrow range of contracts called contracts of utmost good faith. With each of these, there is a duty to disclose all material facts. (e.g.: insurance, partnership, etc.).

8. Explain the rationale behind the rule that a person who applies for insurance from an insurer must disclose all material facts concerning the subject matter of the insurance. Answer: The insurer, in order to assess the risk and set a premium (or decide whether to take on the insurance) must have all relevant information in order to make the decision. Only the prospective insured has that information, and hence, must disclose it.

9. The presumption of undue influence applies to contracts made by individuals in specific types of relationships. Why is this so? Answer: The relationships are generally those where the weaker party is generally dependent upon the dominant party due to the special relationship (e.g.: doctor-patient, etc.).

10. What obligation rests on the "dominant party" in a contract where the presumption of undue influence applies, if the other party alleges undue influence? Answer: The obligation is to show that no undue influence existed, and that the contract was "fair" to the weaker party.

11. How does undue influence differ from duress? Answer: Undue influence involves persuasive means of influencing a person to enter into a contract. Duress involves violence or the threat of violence to force the person to enter into the contract.

12. Identify the situations where duress as a legal means for avoiding a contract may be raised. Answer: Duress may be raised as a legal defence if a person enters into a contract as a result of threatened violence (or actual violence) to the person or a member of his/her family or a close relative.

Mini-Case Problems 1. A and B entered into a verbal agreement whereby A would sell an automobile to B for $6,500. B drew up a written agreement (which A and B signed) that set out the price as $6,000. A failed to notice the change at the time of signing the agreement. What advice would you give A?

A may be bound by the written agreement, as the courts assume that a person reads the agreement and intends to be bound by it. The court would have no way of knowing if it was an error in the price unless A could present evidence to support the verbal agreement and satisfy the court that the "0" instead of a "5" in the price was a typographical error. If A could satisfy the court that it was simply a typographical error, A may be entitled to rectification to bring the written agreement into conformity with this verbal agreement.

2. How would your answer to question 1 differ if A was illiterate and B read the contract aloud to him, stating the price to be $16,500 instead of the $16,000 price set out in the written agreement? Answer: A might be able to avoid the agreement on the basis of fraudulent misrepresentation if A could establish that B's statements were made with the intention of deceiving A. Note, however, that A cannot claim non est factum because the nature of the document was not misrepresented to him.

3. At a sports bar, Martin offers to sell an authentic Wayne Gretzky Edmonton Oilers hockey jersey to his friend Alfred for $1,400. Unknown to both, Martin‘s dog at home has just finished shredding the jersey. Carl arrives at the bar, and hearing of the deal, tells Alfred he has previously seen the jersey, and that it is not ―game-worn‖ by Gretzky, but rather a current authorized production official replica jersey, made by an NHL-licensed supplier. What legal principles apply to this deal? Answer: Mistake as to the existence of the subject matter would apply here, as the jersey was destroyed before the transaction was made. The contract would be void: If the jersey was not ‗game worn‘ but an official replica, Martin‘s statement may constitute innocent misrepresentation, if he was unaware of the nature of the jersey, or fraudulent misrepresentation if he was aware that it was not ‗game worn‘ and he made the statement with the intention to deceive Alfred.

4. An industrial bakery agrees to supply one hundred thousand loaves of bread monthly to a major Canadian grocery chain at a price of $1.00 per loaf. Before deliveries begin, the baker rethinks the deal, feeling it should have charged more. On review, it discovers that the contract recites ―one hundred‖ loaves of bread monthly at $1.00 per loaf. What recourse will the grocery chain have if the bakery refuses to honour its price beyond 100 loaves? Answer: If the grocery chain could establish that the original agreement was for 100,000 loaves per month, then it may apply to the courts for rectification of the written agreement to state its true meaning, and then enforce it as it was intended to read. This would be on the basis that the 100 loaves per month would make no sense for such large business entities.

5. Eric, at age 80, owns a large property of about 100 forested acres, half of which is covered with walnut and butternut trees he had planted as a boy. Eric is approached by a real-estate agent who tells Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-121

him he has a client who is looking for land with trees where a new house can be built. Eric severs the treed half of his property and sells it, and the new owner builds a family home. In talking with his new neighbour, Eric discovers to his horror that the buyer is the owner of a custom sawmill, and intends to cut down all of the hardwood trees for furniture and veneer. Does Eric have any recourse? Answer: Eric probably does not have any recourse in this case, as he sold the land aware of the fact that it contained the trees. The new owner built a family home on the land as represented by the real estate agent. No mention was made of the trees, and the new owner would be free to do as he wished with them. The new owner had no obligation to reveal the fact that he owned a custom sawmill.

Case Problems for Discussion Case 1 An industrial firm purchased a rivet-making machine from a distributor whose advertising materials claim that the machine will produce up to 300,000 rivets per day. After purchase and installation the firm discovers that the machine, at maximum settings, will produce only 100,000 rivets per day. After an exchange of e-mails, the distributor asked if the firm was running three 8-hour shifts, or just one. The firm was running only one production shift, and could not afford to consider 24-hour operations. Discuss the legal issues that apply here, and what factors might influence a judge to decide the case in favour of one party over the other. Answer: This question raises the issues of mistake and misrepresentation. Were the parties talking about different meanings for the word ‗day‘? Did it mean a typical 8 hour shift or 24 hours (3 shifts)? The court might be interested in the ‗customs of the trade‘ concerning the sale of manufacturing equipment such as the machines in question. Is it normal to operate this type of equipment on a continuous (24 hours) basis? On the question of misrepresentation was the advertisement misleading? If so was it deliberately so? Was the manufacturer of the equipment aware that from the wording it might be misinterpreted by a prospective purchaser? A decision may well hinge on the interpretation of the advertising material, and if so, may entitle the purchaser to rescind the contract. Case 2 Chamberlain of Chamberlain‘s Antiques carried on business as a used-furniture dealer. He would occasionally purchase all of the furnishings in a person‘s home if the person was leaving the country or moving a long distance. Mrs. Lyndstrom, an elderly widow, indicated to Chamberlain that she intended to sell her home and furniture, as she was planning to move into her daughter‘s home to live with her. Chamberlain expressed an interest in purchasing her furniture, so an appointment was arranged for Chamberlain to examine the contents of her home. When Chamberlain arrived, Mrs. Lyndstrom took him to each room and indicated the furniture that Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-122

she intended to sell. Chamberlain listed the different items by groups, such as ―all chairs and table in kitchen,‖ or ―bedroom suite in front bedroom.‖ When they reached the living room, Mrs. Lyndstrom said, ―all the furniture in here,‖ and Chamberlain recorded, ―all furniture in living room.‖ Chamberlain offered $3,500 for the lot when the list was complete. Mrs. Lyndstrom agreed, and Chamberlain added to the bottom of the list: ―Agreed price of all above furniture, $3,500.‖ Both signed the document. The next day, Chamberlain arrived with a truck to pick up the furniture and a cheque for $3,500. As he was about to have the grand piano moved from the living room, Mrs. Lyndstrom informed him that he was to take only the furniture, not the piano. Chamberlain protested that the piano was included. However, Mrs. Lyndstrom argued that a piano was not furniture, but a musical instrument. Explain how this matter might be resolved. Answer: This case raises a problem similar to the problem in Case 10, where the parties failed to agree upon the same thing. In a sense, it hinges on the classification of the grand piano. Is it a piece of furniture as well as a musical instrument? What would it be considered in the case, where most other household goods were sold regardless of classification? What is the effect of the execution of the document by Mrs. Lyndstrom? Is this a case of mutual mistake? Where the evidence is conflicting, how would the court likely decide? In the case of Industrial Tanning Co. Ltd. v. Reliable Leather Sportswear Ltd., [1953] 4 D.L.R. 522, the court stated that in the face of contradictory evidence, the proper method to take is the "reasonable man" approach, where all of the evidence is considered, and not simply the conflicting evidence of the two principal witnesses. If this test is applied, a number of different factors may be considered, such as the value of the grand piano vis-a`-vis the rest of the furniture. If the grand piano in itself is worth several thousand dollars, then a "reasonable man" would not expect it to be included as a part of the furniture. On the other hand, if its value is very low, say, a few hundred dollars, then the reverse might be true on this point. Case 3 Corgi was the breeder of prize-winning pedigree dogs that often sold for very high prices. Reynolds, a wealthy businessman who had recently retired, decided to purchase one of these dogs. His intention was to enter the animal in the various dog shows that were held from time to time across the country. Reynolds knew very little about dogs. He explained to Corgi that he wished to purchase a young dog that was already a prize-winning specimen of the breed. Corgi took Reynolds to a fenced run where several young dogs were caged. He pointed to one dog that he said, in his opinion, had the greatest potential, and that it had already won a prize at a local dog show. Corgi pointed to a red ribbon pinned to the opposite wall of the kennel building and explained that it was a first-prize ribbon that the dog had won. Reynolds did not bother to examine the ribbon. Reynolds purchased the dog for $1,000 and took it home. His neighbour later saw the dog in Reynolds‘ backyard. He instantly recognized it as the dog that had recently won the first-prize ribbon in the children‘s pet show at the neighbourhood park. When he told Reynolds where he had last seen the dog, Reynolds telephoned Corgi immediately and demanded his money back. Corgi refused to return Reynolds‘ money or take back the dog, and Reynolds threatened to take legal proceedings against him. Reynolds was unable to do so immediately, however, as he was called out of town on a family matter the next day. He was obliged to leave the dog with his neighbour during his absence. Reynolds advised the neighbour to take care of the animal as if it were his own. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-123

Reynolds was out of town for several weeks. During that time, his neighbour entered the dog in a dog show sponsored by a kennel club. The dog won first prize in its class for its breed. On Reynolds‘ return, the neighbour advised him of his success. The two men decided to enter the dog in another dog show that was scheduled to be held in a nearby city. At this second show, the dog placed only third in its class, and Reynolds was disappointed. He returned home and immediately took legal action against Corgi.. Discuss the basis of Reynolds‘ claim and the defences (if any) of Corgi. Render, with reasons, a decision. Answer: A number of issues are raised in this case. The first to explore is the nature of the statement by Corgi that the dog had already won a prize at a local dog show. Did the statement constitute misrepresentation? Fraudulent misrepresentation? To establish fraudulent misrepresentation the untrue statement of fact must be made knowingly and with the intention of deceiving the other party, or it must be made recklessly, without regard to its truth or otherwise. Would Corgi's statement fall into this category? Probably not, but perhaps it did contain an element of deception since the dog show was not of the type that Reynolds would be expected to contemplate. A second point to note is the expression of opinion by Corgi that the dog in question had the greatest potential. As a general rule, the statement of an opinion carries little weight except when given by an acknowledged expert. Would Corgi be considered an "expert"? Would his opinion be considered along with the statement of fact as a part of a deception? Does the fact that the dog won a first prize in its class vindicate Corgi? It should certainly support his opinion as to the dog's potential. A third issue raised in the case concerns the actions of Reynolds after he discovered the nature of the dog's initial prize ribbon. He continued to keep the dog and entered it in another dog show. Would this act constitute confirmation of the contract notwithstanding the misrepresentation (if any)? See: Campbell v. Fleming et al. (1834), 1 A.D. & E. 40, 110 E.R. 1122 for an example of a case where a person induced to purchase an article as a result of misrepresentation, continued to deal with the article only to find that his subsequent dealings with the article precluded him from obtaining his money back. Case 4 Silica Mining Ltd. acquired a lease from the province that would allow it to mine mineral rights under a large block of land. The surface rights were owned by McCarthy. Silica Mining Ltd. assigned the mining rights for $250,000 and certain tonnage royalties to Granite Exploration Ltd., which intended to mine the silica deposits lying beneath the surface of the land. Both parties assumed that silica was a mineral that was reserved by the province and that the lease of mineral rights would allow the silica to be mined. When Granite Exploration Ltd. entered on McCarthy‘s land to begin mining operations, McCarthy ordered Granite Exploration Ltd. employees off the land. He informed them that silica was not a mineral reserved by the province and that he owned the silica under the surface. Granite Exploration Ltd. contacted the provincial ministry and was advised that McCarthy was correct. Silica was not reserved by the province, and McCarthy owned the deposits. Granite Exploration Ltd. demanded a return of its $250,000 payment from Silica Mining Ltd., and when Silica Mining Ltd. refused to do so, Granite Exploration Ltd. took legal action. Explain the nature of the Granite Exploration Ltd. claim and indicate the probable outcome of the action. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-124

Answer: This case is based upon the facts of McCarthy v. Godin Mining & Exploration Ltd. (1978) 20 N.B.R. (2d) 676; affirmed (1979) 34 N.B.R. (2d) 96. (C.A.). The parties here believed that silica was a mineral that could be granted by the Crown for mining purposes, and the owner of the land could not object to the mining. The parties were in error, and the owner did own the rights to the mineral. The court in reviewing the issues held that the agreement should be rescinded because the agreement was founded upon a mutual mistake. Case 5 A general contractor invited subcontractors to submit bids for mechanical work in the construction of a large office building. Several written bids were received by the contractor, as well as a telephone call from a subcontractor who responded with a bid about 12 percent below the lowest bid price of the written submissions. All written bids were within one percent of each other. The subcontractor who submitted the telephone bid checked his estimates the day following the telephone call. He discovered that he had made an error in his calculations, and immediately called the contractor to withdraw his bid. Unfortunately, the contractor was out of town, and the subcontractor could not reach him at his office. However, he left a message with the contractor‘s secretary to the effect that his bid was in error, and that his bid price for the contract would be 13 percent above the figure quoted on the telephone. The contractor, while out of town, prepared his contract price for the construction of the building, using the original telephone bid price for the mechanical work. He was awarded the construction contract. When he returned to the office, his secretary informed him of the subcontractor‘s error. The subcontractor refused to enter into a written contract or to perform the mechanical work at the original price. The contractor was obliged to get the work done by the subcontractor who had submitted the next lowest bid. When the contract was fully performed, the contractor brought an action against the telephone bidder for the difference between the contract price quoted on the telephone and the actual cost incurred in having the work done. Discuss the arguments that might be raised by the parties in this case. Render a decision. Answer: This case is based upon the facts of Northern Construction Company Ltd. v. Gloge Heating & Plumbing Ltd. [1984] 3 W.W.R. 63 where the court found the defendant liable for reasonable damages that the general contractor had suffered as a result of the breach of contract by the defendant. In arriving at this conclusion the judge observed that an invitation to tender is essentially a request for an option, leaving it open to the subcontractor to set a price, which if accepted, would constitute a binding contract. The points to note in Case 5 would hinge in part on acceptance of the bid. Was the "bid" by the subcontractor binding? Could he withdraw it? Did the general contractor have any constructive notice of the subcontractor's mistake? Would this render the contract voidable? In the Northern Construction case the judge held that the bid was an irrevocable option which the subcontractor was bound to perform if called upon to do so by the general contractor. The judge found no constructive notice of the error because so many variables affect price, and noted that the 12% difference was not sufficient to render the error obvious. Case 6 Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-125

Fatima attended an auction sale of race horses at a well-known and respectable racing stable. Prior to the sale, Fatima, who was interested in acquiring a particular horse, examined the animal‘s lineage, breeding history, and veterinary records, as well as the horse itself. At the time of the sale, the horse appeared to be ill, and Fatima asked the vendor‘s veterinarian about its health. The veterinarian replied that she thought the horse was suffering from a cold. On the basis of this information, Fatima entered the bidding on the sale of the horse, and she was the successful bidder at a price of $9,000. The conditions of the sale were that the purchaser assumed all risks and responsibility for the horse from the instant of the sale, when the title to the animal was deemed to pass. Fatima took the horse to her own stable and informed her veterinarian that the horse was ill with a cold. Without examining the horse, the veterinarian prescribed some medicine for it. The medicine did not appear to help the horse. It remained ill for two weeks, becoming increasingly more feeble, as the time passed. Sixteen days after the horse had been purchased, it died. An autopsy revealed that the cause of death was rabies. Fatima brought an action for a return of the purchase money paid for the horse. At the trial, expert witnesses for the plaintiff and defendant disagreed as to when the horse might have contracted the disease, but both agreed that it could possibly have had the disease at the time of the sale. Both also agreed that rabies was a disease most difficult to detect in its early stages of development. Neither the purchaser nor the vendor had any suspicion that the horse had contracted rabies, because of the rarity of the disease among horses vaccinated against it. For some reason, the horse Fatima had purchased was not vaccinated against rabies. Identify the issues raised in this case. Indicate how it might be decided. Answer: The most important issue in this case is the matter of misrepresentation by the seller. Was the statement that the "horse had a cold" a statement of fact, or simply an expression of opinion? The vendor's veterinarian was an "expert" in the sense that he was a professional person. A second question might be: Was Able entitled to rely on this opinion? Could he hold the vendor responsible for the statement? How would it affect his right to avoid the contract? The purchaser assumed all risks after the sale. Would this preclude a claim for a disease contracted by the horse before the sale? Would this be grounds for avoiding the contract? Even if neither party was aware? The case is based upon the facts of Gallant et al. v. Hobbs (1982) 37 O.R. (2d) 1, where the judge concluded that neither the defendant nor the plaintiff had considered the possibility of the horse having rabies, but if they had, the loss would lie on the defendant. The plaintiff recovered his purchase price. Case 7 Mary McDonald was an 86-year-old widow who lived in her own home. She complained frequently about the high cost of maintenance of her house and the high property taxes she paid. Mrs. McDonald eventually felt it was necessary to cancel her fire insurance to reduce her household expenses. However, she handled all her own business affairs, and maintained herself in her home. Mary‘s daughter, a real-estate agent, was aware of her mother‘s concern about her property. On a summer‘s day, she drove to her mother‘s home and informed her that she had some papers at the lawyer‘s office, which would protect her. The two women went down to the lawyer‘s office, where he advised Mary McDonald that the document was the deed to the property and required her signature. Mary briefly glanced at the document and said: ―Where do I sign?‖ Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-126

Some months later, the municipal tax bill arrived and Mary McDonald was surprised to see that the property was in her daughter‘s name. She immediately brought a legal action against her daughter to have the property transferred back into her own name. Discuss the arguments that the parties might raise in this case and render a decision. Answer: This case raises the issues of mistake/non est factum, and undue influence. One approach to the case might be to examine each of these issues in turn. If mistake as to the nature of the document is suggested, the problems which must be met to successfully claim non est factum should be assessed. Was the elderly woman aware of what she was signing? Did she have a legal obligation to ask how the paper she was signing would "protect her"? Did her failure to enquire constitute carelessness? The 86 year old woman had no apparent infirmity, and her failure to enquire as to the nature of the document would probably be considered carelessness, consequently, her claim of non est factum would probably fail. Undue influence might be raised in view of the relationship between the parties (parent/child). In this instance there would be a presumption which the daughter would be obliged to rebut. The question might be raised: Was the mother so dominated by her daughter that her actions were not her own? Should the daughter have urged her mother to obtain independent legal advice to avoid such a claim? The facts of the case are those of an unreported Nova Scotia case: MacDonald v. Creelman Nova Scotia Supreme Court, May 1988. In that case the court rejected the claim of non est factum because the claim was only available where there was no carelessness and a mistake as to the nature of the document. The court found that the plaintiff was aware of the fact that she was signing a deed. The claim of undue influence also failed, because the court found that the mother had signed the deed of her own free will. Case 8 Tower Installation Co., by way of a newspaper advertisement, learned of an invitation to bid on the engineering work for an electric-power transmission-tower line that a hydro-electric corporation wished to have erected in a remote area of the province. The advertisement indicated that the right-of-way had been laid out, and preliminary site preparation was in the process of completion. Engineers from Tower Installation Co. visited the site before making a bid. They noticed that many downed trees and branches cluttered the right-of-way throughout the entire length of the proposed line. The engineers assumed that the downed trees and branches were part of the preliminary site preparation. The proposed contract stipulated that the successful bidder would be ―responsible for the removal of standing trees and brush in those areas where they had not been cleared, and the final site preparation.‖ The proposal also stated that the bidders must inform themselves of all aspects of the site and the work to be done. Tower Installation Co. submitted its bid to perform the required work based upon its examination of the site and the proposed contract terms. Some three months later, the contract was awarded to Tower Installation Co. It immediately sent its engineers and work crews to the construction site to begin work. To the surprise of the engineers, the downed trees and branches still remained on the site, as no further work had been done since the site was visited before. The company engineers complained to the hydro-electric corporation, but were told that they should have enquired about the logs and downed trees before making their bid on the work. Tower Installation Co. proceeded with the contract and completed it in accordance with its terms. The company, however, lost $2 million as a result of the extra work required to clear the downed trees and Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-127

branches from the right-of-way. Tower Installation Co. took legal action against the hydro-electric corporation for the amount of its loss on the contract. Discuss the basis of the claim in this case and the possible defences of the corporation. Render a decision. Answer: This case raises the issue of mistake as to the terms of the agreement. The proposed contract included a clause to the effect that the successful bidder would be "responsible for the removal of standing trees and brush, and final site preparation". The proposal also required bidders to inform themselves of all work to be done. Could the contractor in examining the site assume that the downed trees would be removed as a part of the preliminary site preparation - since the advertisement referred to "removal of standing trees and brush"? Does this removal form a part of the "final site preparation"? How should "preliminary site preparation" (the responsibility of the power corporation) be interpreted? Would it be reasonable to assume that the cut trees and brush would be removed? Was there a duty to enquire about these elements of the contract? In the case upon which this case problem was based, the court held that the terms of the proposed contract were clear, and the successful bidder had an obligation to examine the site and verify the work to be done before entering a bid. Case 9 Efficient Management Inc. offered to purchase the shares of Clean Management Ltd. from its shareholders, Andrews and Beatty. Efficient Management Inc. also agreed to lease premises from shareholder Andrews under a long-term lease. Under the share-purchase agreement, Efficient Management Inc. agreed to purchase all of the outstanding shares, which were owned 50 percent by Andrews and 50 percent by Beatty. The total price payable for the shares was $2, $1 for all of the shares of Andrews and $1 for all of the shares of Beatty. Efficient Management Inc. also agreed to repay to Andrews and Beatty loans that they had made to their corporation, Clean Management Ltd., in the amount of $450,000. The purchase agreement provided that Clean Management Ltd. had accounts receivable outstanding in the amount of $350,000, which Andrews and Beatty warranted were all in good standing and could be collected by Clean Management Inc. from its customers within 60 days. Under the terms of the agreement, Efficient Management Inc. agreed to pay $100,000 as a deposit on the signing of the agreement and the balance of the money in 90 days. The shares of Clean Management Ltd. were to be delivered at the time of signing on payment of the $1 to each shareholder. The agreement was signed on May 1 and the $100,000 paid. Andrews and Beatty signed over their shares on the same day and each received $1 as payment in full. By June 30, Efficient Management Inc. had collected only $225,000 of the accounts receivable, and the balance had to be considered uncollectible. At that time they informed Andrews and Beatty that they expected them to provide the company with the remaining $125,000 that Andrews and Beatty had warranted were collectible accounts. Andrews and Beatty did not pay the balance owing. On July 31 the accountant at Efficient Management Inc. inadvertently sent Andrews and Beatty a cheque for the $350,000 balance owing under the agreement. When the error was discovered, the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-128

company claimed repayment for Andrews and Beatty of the $125,000. Andrews and Beatty refused to do so, and Efficient Management Inc. instituted legal proceedings against Andrews and Beatty to recover the $125,000, or, alternatively, to set off rent owing to Andrews against the amount unpaid. Outline the nature and basis of the claim against the shareholders, and any defences that Andrews and Beatty might raise. Render a decision. Answer: Students should carefully examine the facts of this case before attempting to consider the legal aspects. Students should note that the transaction involved not only the purchase of shares from Andrew and Beatty, but included a lease of the premises from Andrew. The transaction also included a warranty by Andrew and Beatty that the purchaser would be able to collect $350,000 in accounts receivable within 60 days. The purchaser was unable to collect $125,000 of these accounts in the end. Efficient Management as a result, could look to Andrew and Beatty on their warranty that the accounts receivable were collectable and should have been a set-off from the $350,000 balance owing to Andrew and Beatty. Efficient Management would, therefore, claim payment made under a mistake of fact. Efficient Management could also argue that it was entitled to deduct the amount from rent payments owed to Andrew, as Andrew and Beatty jointly warranted the accounts receivable. The facts of Case 9 are essentially those of Ferrum Inc. v. Three Dees Management Ltd. et al. (1992) 7 O.R. (3d) 660. In that case the court held that the purchasers were entitled to recover the money under mistake of fact or set-off the $125,000 from the rental payments owed to Andrew as an equitable set-off. Case 10 Schuster & Co. owned two volumes of a rare edition of Geoffrey Chaucer‘s Canterbury Tales. One volume was in excellent condition. The second volume was in poor shape, but nevertheless intact. Schuster & Co. sold both volumes to MacPherson, a rare book merchant. MacPherson loaned the two volumes to a local library for a rare-book display. Unknown to MacPherson, only the volume in excellent condition was put on display with a collection of other rare books. The second copy was placed in a display designed to show how rare books might be repaired, but the book was placed in such a position that neither its title nor its contents could be determined. A week after the books had been returned to their owner, Holt, a collector of rare books, telephoned MacPherson to determine if he had a copy of the Canterbury Tales for sale. MacPherson replied that he did, but it was ―not in top shape.‖ Holt then asked if the copy had been on display at the library, and MacPherson said, ―Yes.‖ Holt informed MacPherson that she had seen the display of books at the library and would be interested in purchasing the volume. A price was agreed upon, and Holt sent a cheque to MacPherson for the agreed amount. MacPherson sent the volume that was in poor condition to Holt by courier. On its receipt, Holt complained that the volume was not the same one that had been on display at the library. MacPherson maintained that it was and refused to return Holt‘s money. Holt brought an action against MacPherson for a return of the money that she had paid MacPherson. Indicate the nature of Holt‘s claim and express an opinion as to the outcome of the case. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-129

Answer: This case concerns a mistake as to the subject matter of the contract. The purchaser was clearly thinking about the copy of the book that was in excellent condition, and the seller, the copy in poor shape. Questions that might be raised are: Did MacPherson's statements constitute innocent misrepresentation? From the evidence, when MacPherson explained that the book he had for sale was "not in top shape", should Holt not have been aware that it was the volume in poor shape that was offered for sale? Does the case represent an example of mistake as to the subject matter? What kind of mistake might it be? From the facts, there was no attempt on the part of MacPherson to deliberately mislead Holt. The parties were clearly thinking about different books, and the discussion simply fitted the impression that each had formed with regard to the subject matter of the contract. A possible outcome of the case might be to treat the case as one of mistake, and as such, Holt would be entitled to a return of his payment, and MacPherson would receive back his book. For a case example, see: Cancilla v. Orr (1914), 16 D.L.R. 115. Case 11 Bob and Jane are looking for an older home with ―character.‖ Their real-estate agent shows them a number of properties, and the one most suitable is described by the agent as a ―real heritage home,‖ an old stone rural farmhouse. Bob and Jane purchase the property and complete extensive modern interior renovations. With the interior complete, they embark on restoring the exterior, but are stopped by a township building inspector who informs them that the property is a ―designated heritage site,‖ and that no alterations are permitted without town council approval. Moreover, when the interior modern improvements are discovered, Bob and Jane are charged a significant fine for their ignorance. Discuss the aspects of misrepresentation that apply in this case. Answer: The first issue to consider is the real estate agent‘s description of the property as a ―real heritage home‖. Is this misleading? Should it be interpreted to mean a ‗designated heritage site‘? Was this a deliberate misrepresentation by the agent? Did the agent have an obligation to obtain clarification of their request to see an older home with ‗character‘? Did the agent have an obligation to advise the couple of the restrictions imposed upon the owners of ‗designated heritage sites‘ if he was aware of the designation of this particular property? Note that the real estate agent may not have been made aware of the intentions of Bob and Jane to extensively change both the interior and exterior of the house. This may be a case of ‗buyer beware‘. Case 12 Gavin is a real-estate agent, and suggests to his dentist, Ravi, that he should invest $250,000 in commercial condominium real estate in a distant city. Gavin provides Ravi with legal papers to sign, but in the end the property address is not a commercial development, but rather a residential condominium. Ravi claims ―non est factum.‖ Discuss the nature of Ravi‘s claim against Gavin. Answer: This is a case where Ravi may not succeed in a claim of non est factum. In order to succeed in this claim, Ravi would be required to establish that he was not careless in signing the legal documents. Clearly he was, as he did not obtain legal advice on the documentation he was signing. Gavin had obviously given him the documentation, and at that point he could have sought advice on the nature of the documentation. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-130

See: Marvco Colour Research Limited v. Harris [1982] 2 S.C.R. 774.

CHAPTER CHART

CHAPTER 12. THE EXTENT OF CONTRACTUAL RIGHTS

Chapter Topics Privity of Contract Assignment of Contractual Rights and Obligations Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion

Chapter Objectives After study of this chapter, students should be able to: • Explain how the rule of privity establishes who may have rights or obligations under a contract. • Illustrate the exceptions to the rule of privity. • Explain how rights and obligations in a contract may be transferred to others who were not a party to the original contract. • Illustrate the advantages and flexibility such transfers offer to business operators.

YOUR BUSINESS AT RISK While a simple contract may be between two persons, the law often allows third parties into the picture. Business persons must know when and how their rights and obligations can be Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-132

extended to others. Without understanding this process you may retain responsibilities you may have wished (or paid!) to transfer to someone else, or you may be expecting benefits under a contract which you no longer have a right to receive. CHAPTER COMMENTARY The extent of contractual rights deals essentially with the concept of privity of contract and how a third party may perform or acquire rights under the contract. The basic rule for performance of a contract by the parties should be emphasized before branching out into the different ways that a third party might be introduced to the contract. In this fashion, the privity of contract rule might be highlighted, as well as the methods used to circumvent the effects of the rule (such as formal contracts, and the doctrine of constructive trust). One approach might be to examine the various statutes which provide exceptions to the privity of contract rule, (such as the Insurance Act) and then some examples of common law exceptions, such as the exception set out in the Shanklin Pier Ltd. case. The various methods for the assignment of contractual rights might next be considered, beginning with novation, and then on to equitable and statutory assignments. With respect to the latter type of assignment, a review of the requirements for a statutory assignment and in particular, the requirement of notice would probably be a useful exercise. Students sometimes have difficulty understanding how a third party may obtain rights under a contract. Instructors might explain that these are generally acquired by assignment, or by a second contract which relates to the initial contract. Novation, for example, is such a method. By novation, the contracting parties agree with the third party that the third party may replace one of the original parties to the contract. The essential elements of novation are explained in the case excerpt from Re Abernethy-Lougheed Logging Co. where the Judge identified the three requirements, then added that the agreement by which the novation is established need not be by a formal agreement, but one which may be inferred from an exchange of letters, etc. or even from the conduct of the parties. The important point to note is that the intention of the parties to create a novation must be shown from either the writing of the parties, or their actions. Students should be informed that novation is not necessary in order that a third party might perform a contract. In many cases, the actual performance of a contract is done by a person other than the contracting party, but the difference here is that the original contracting party remains liable for the performance if it is done improperly. Performance of a contract of this type is called vicarious performance, and the most common situation where it occurs is where an employee of a contracting party actually performs the work required under the agreement. If the employee does the work negligently, the employer is liable. This is due to the contractual relationships and the privity of contract rule. Eg.: A and B have a contract which requires performance by B. Under a contract of employment, C does the actual work, but B is vicariously liable for C's actions. The arrangement does not violate the privity of contract rule unless the contract required B to perform personally because of B's special skill or talent. This might arise, for example, where B is a musician or a skilled surgeon. Some time might also be given to the assignment of a debt, where performance is usually in the form of payment of a sum of money. In the past, this was initially quite cumbersome, but with the development of the statutory assignment, the process was streamlined. Students should be made aware that the law requires only that the assignment be in writing and signed by the assignor, be absolute, and with notice in writing to the party charged with performance. Under these circumstances, the assignee takes the contract as it stands between the assignor and the other party. The assignee, as a result, is exposed to a certain amount of risk, but the benefits of the simplified process make such transactions attractive to business persons.

Review Questions 1. What risk does an assignee take when a contract assignment is made? Answer: The assignee takes an assigned contract as it stands between the parties at the time of the assignment.

2. What are the major exceptions to the privity of contract rule? Why were these exceptions necessary? Answer: The main exceptions involve partnerships, land transactions/ goods subject to restrictions, vicarious performance situations, constructive trusts, and statutory assignments. These exceptions are necessary to recognize standard business practices or cases where statute or public policy dictates enforcement of such contracts.

3. Define novation, and explain its role in the assignment of contractual rights. Answer: Novation is a process whereby the parties to a contract agree to a change in the parties by allowing one of the contracting parties to drop out of the agreement, and another to step into the agreement. In effect, the old agreement terminates, and a new one is established. It is a useful way to confer benefits on the third party and allow the third party to perform.

4. Under what circumstances would a debtor be entitled to "set off" a debt against a claim for payment which the debtor has against another debtor? Answer: Since the assignee takes the contract as it stands between the debtor and assignor, if the assignor is indebted to the debtor at that time, the debtor may deduct the debt from the payment made to the assignee.

5. Discuss vicarious performance as an exception to the assignment of contractual rights. Why is this the case? Answer: Vicarious performance recognizes trade practices where employees of an employer perform work under contracts negotiated by the employer. The employer, nevertheless, is liable for any short-fall in performance.

6. Explain the requirements which must be met in order to make a proper statutory assignment of contractual rights. Answer: A proper statutory assignment requires that the assignment be in writing and signed by the assignor. It must be absolute, and notice of the assignment must be given in writing to the party charged.

Answer: The rule prevents parties to an agreement from imposing liability on others not party to a contract.

8. Indicate the rights and duties of a debtor when notice of the assignment of the debt is received. Answer: The debtor is obliged to make payment in accordance with the notice.

9. How is and equitable assignment of a contract made? Answer: An equitable assignment is one which requires all parties to be before the court in order to enforce the agreement.

10. Must a person always consent to a statutory assignment before it is effective? Answer: No. Because it represents an absolute assignment of a money amount, no consent is necessary.

Mini-Case Problems 1. C, a contractor, enters into a contract with D to construct a house for him. C engages E, a plumber, to install the plumbing in the house. If E installs the plumbing negligently, what are D‘s rights? Answer: The contract between C and D is one of a type where personal performance is not expected of C. C, nevertheless, is responsible for proper performance, and would be vicariously liable for E's negligent performance.

2. X owes Y $500. Some time later, X sells Y her canoe for $200, but Y makes no payment for it. Y assigns the $500 debt that X owes him to Z. Notice is given by Z to X that Z is now the assignee of the debt, and Z is to be paid the $500. What are X‘s rights? What are Z‘s rights? Answer: At the time of the assignment, X owes Y $500 and Y owes X $200. Z takes the assignment as it stands between the parties when the assignment is made, consequently, X is entitled to "set off" the $200 from the $500, and pay Z only $300. Z must look to Y for the balance.

3. Each year since he was born, Aunt Mabel has sent Dan $1,000 toward his future education. The money is always in the form of a cheque payable to Dan‘s father. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-135

Explain the legal principle which will allow Dan to claim these funds when he goes on to higher education. Answer: Dan may claim that the money sent by Aunt Mabel was intended for his education, and represented a constructive trust, with his father as trustee. As beneficiary of the trust Don would be entitled to have the money applied to his higher education.

4. Thompson ran an auto service shop and bought certain parts directly from the automobile manufacturers. He bought such a transmission to repair a customer‘s vehicle, installed it, and soon after went out of business. Should that transmission fail, the customer may be able to claim under a warranty given to Thompson. Explain how that would be possible under the Common Law. Answer: The manufacturer‘s warranty, while given to Thompson, would follow the transmission to the customer‘s vehicle, and when it failed, the customer would be entitled to claim under the warranty on the basis of the Shanklin Pier Ltd. v. Detel Products Ltd. case.

5. Angelo sells his flower shop business to Carla for $60,000 including the inventory, equipment and the balance of his lease. When the landlord hears of this, she draws up a new lease for Carla, and gives Angelo a release. What has happened regarding this lease arrangement, at Common Law? Answer: The replacement of the lease, and the issue of a release to Angelo would have the effect of releasing Angelo from his lease. The new lease with Carla would bind her as a tenant. Carla would have no obligations under the old lease.

Case Problems for Discussion Case 1 On January 20th, the Morrison Manufacturing Company assigned a block of its receivables to Acme Finance Company. On January 21st, it assigned a second block to Zenith Finance Company. One of Morrison‘s accounts assigned to Zenith — that of Jenkin — had already been assigned to Acme. Jenkin received notice of the assignment to Zenith on January 27th, and that of Acme on January 28th. To whom should Jenkin‘s next payment be made, and why? Answer: This case concerns statutory assignments. The rule here is that the debtor on receipt of notice of the assignment of the debt is obliged to pay the assignee named in the notice. Jenkin would be obliged to pay the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-136

assignee named in the first notice received, namely Zenith. This would be the case, assuming that Zenith had no knowledge of the prior assignment of Acme. Case 2 Personalized Performance Garage advertised ―personalized service‖ for its customers. A large sign at the front of the garage depicted the owner of the establishment placing a check mark in a box on a work order that read ―personally inspected and repaired by a certified A-1 Mechanic.‖ Rita Morales was impressed with the advertisement and the prospect of obtaining careful repair of her expensive automobile. She delivered the automobile for a minor engine adjustment and inquired if the owner did provide personal service. In response to her question, the owner replied, ―I look at every one.‖ Rita left the car at the garage and returned home. About an hour later, she received a telephone call from the garage owner who informed her that he had fixed the engine, but the automobile had a leak in its radiator. Rita requested that the leak be repaired as well. Some time later, Rita went to the garage and was informed that the car was ―ready.‖ She paid her account and drove away in the automobile. A few blocks away the vehicle broke down, because the radiator had not been filled with coolant after it had been repaired. The garage refused to repair the damage. They informed Rita that the radiator had been repaired by another repair shop that specialized in radiator repairs. It was apparently not a custom of the trade for ordinary mechanics to repair radiators in view of the special skill and equipment involved. Discuss the rights of the parties in this case. Answer: This case raises the question of whether a contract to repair automobiles must be performed personally. It also introduces "custom of the trade" as a basis for vicarious performance. Some of the questions that might be raised from the facts are: Does the sign, which states "personalized service," imply personal service by the proprietor? Would Rita's inquiry restrict the right of the proprietor to assign the work to another mechanic in his garage? Would the contract to repair the radiator, which was made subsequent to the first contract, be subject to any different limitations on the proprietor's right to sub-let the repair work? If the garage is a large establishment, is personal performance by the proprietor something which is reasonable to anticipate in any event? In the case, the repair of the radiator is something that is usually done by experts at that type of work, and represents a type of repair which most repair shops, by custom, do not perform themselves. Nevertheless, the Personalized Performance Garage will be liable for the damages caused by the negligence of the radiator repair shop, since it is vicariously liable on the repair contract to Rita. Breach of contract on the basis of the proprietor's failure to personally perform the contract may not be grounds for damages, however, since at no time did the proprietor confirm that he alone would do the repair work. For a contrasting decision, see: Martin v. N. Negin Limited, (1945) 172 L.T. 245. Case 3 Sly operated a used-car business. He sold Fox an automobile that he indicated was in good condition and suitable for use by Fox as a taxi. In the course of this discussion, Sly stated that, in his opinion, the vehicle was ―hardly broken in,‖ as the odometer registered only 26,000 kilometres.

Sly suggested that Fox test drive the car to satisfy himself as to its condition. Fox did so and, on his return from a short drive, agreed to purchase the automobile for $32,000. Fox signed a purchase agreement whereby he would pay for the car by monthly installments over a three-year period. On the completion of the transaction, Sly immediately sold the purchase agreement to the Neighbourhood Finance Company for $30,000. Fox was duly notified in writing of the assignment. A week later, the automobile broke down. When the vehicle was examined by a mechanic, Fox was informed that most of the running gear and the engine were virtually worn out. Unknown to both Sly and Fox, the previous owner had driven the automobile 226,000 kilometres and the odometer, which registered only six digits (including tenths of kilometres), was now counting the third time over. When Fox discovered the condition of the automobile, he refused to make payments to the finance company. Discuss the rights of the parties in this transaction. Answer: This case is complex in the sense that it involves opinion statements, innocent misrepresentation (with respect to mileage), and the statutory assignment of the contract to a third party. From the facts given, Sly's opinion, while based upon the evidence at hand, probably would not be fraudulent misrepresentation, since his statement constituted only an opinion. If he was considered an "expert," it might also be difficult to determine fraud, since his opinion was based upon the facts as he knew them. However, the question might be asked: Was his failure to inquire as to the use by the previous owner, a reckless act of negligence that would render him liable? Bear in mind that his statement was still in the nature of an opinion. A further point to raise is the act of Fox test-driving the car. Would this create a caveat emptor situation where the "buyer must beware"? He had the opportunity before purchase to take the car to a mechanic for examination, but failed to do so. How should this affect Fox's rights? The assignment of the consumer purchase contract to Neighbourhood Finance Company introduces the third party aspect of the case. The assignment is a statutory assignment from the facts, and the students might be asked to determine this. It is also important to establish that the assignee takes the contract as it stands between the assignor and the other party, and the innocent misrepresentation of the mileage might be raised by Fox to resist a demand for payment by the finance company. If he continues to use the vehicle, however, his right to avoid the contract on the basis of Sly's misrepresentation would be affected. For an example of a case involving third parties see: Mayer v. Baird Ranch and Company Ltd. (1919), 48 D.L.R. 724. Case 4 Carlos sold his business inventory to Avi for $10,000. Under their agreement, Avi was to pay Carlos $1,000 per month over a 10-month period, commencing on March 1st of that year. Before the first payment was due, Carlos became indebted to Avi for $5,000. Carlos then assigned the $10,000 debt agreement to Malcolm. Notice of this assignment was given to Avi. When he discovered that he was to make all payments under the agreement to Malcolm, he informed Malcolm that he would not make a payment until August. He would then make only the five remaining payments under the agreement and consider the debt fully satisfied. Discuss the rights of Avi and Malcolm and the reasoning behind Avi‘s response to the notice.

Answer: The issues raised in this case include assignment and set-off. The instalment debt was originally for $1,000, but when assigned to Malcolm, the indebtedness of Malcolm to Avi in the amount of $500 would entitle Avi to claim set-off of $500 of the debt. This represents a well-established rule of law. The question raised in the case, however, is the way in which Avi has set-off the debt. Should he be allowed to apply the set-off to the first five payments, or should the set-off constitute the last five? The assignee would of course be liable for immediate payment of the $500 if the debt was due or past due, but this would not be the case if the $500 was not payable until some future time. Since the $1,000 debt does not bear interest, it would clearly be to Avi's advantage to postpone payment as long as possible - hence the delay in payment of the remaining $500 for five months. A court however, would probably require Avi to make the payments as required under the agreement, but delete the remaining five on the basis of set-off. Case 5 Yolanda Adams was a naturalist who made a wildlife film that she hoped to use in conjunction with lectures to be given to conservation and hiking groups throughout the country. She engaged Basso, a well-known musician in her community, to prepare the musical background for the film. Adams paid Basso $5,000 for his work. However, unknown to Adams, Basso had given the work to another musician, Smith, and paid him $1,000 for his efforts. Adams used the film on one of her lecture tours, and the newspaper reviews without exception declared the film to be the highlight of her performance. Many of the reporters commented favourably about the beautiful musical background to the film. Some months later, while on a second lecture tour, a musician in the audience recognized Smith‘s musical style. He mentioned to Adams how much he enjoyed listening to the musical accompaniment that the musician had provided. Adams was annoyed when she discovered that the background music had not been played by Basso, but by another. On her return home, she confronted Basso with the evidence. Basso admitted that he had been too busy to do the musical background. Discuss the outcome of the case if Adams should decide to take legal action against Basso. Answer: This case highlights the privity of contract rule, and the requirement of personal service by a contracting party. The important matter to determine in this case is the type of performance expected of Basso. Is the contract one which requires personal performance, or is it one which might be performed vicariously? As a general rule, a contract for the services of a musician would normally be one which would be performed on a personal basis, since the essential ingredient in the performance is the special skill or ability of the musician. Some judges have stated that the law is well established on this point. See for example: Sullivan v. Gray, [1942] 3 D.L.R. 269. From the case, the musical performance by the musician contracted by Basso may have been of better quality than Basso could have produced, but the fact that the contract was not of a type that could be performed vicariously would probably render Basso liable to Adams for breach of contract Case 6 On August 4, Anchor Service Company entered into an agreement with Rolston Products Company. By this agreement, Rolston Products Company would assign to Anchor Service Company its right to payment under a contract it had with Werner Supply Company. This would settle its indebtedness for Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-139

certain services rendered by Anchor Service Company. Under the terms of the contract between Werner Supply Company and Rolston Products Company, Werner Supply Company was obliged to make monthly payments in the amount of $5,000 over a threeyear term. Johnson, a trustee, would collect the payments and forward them to Rolston Products Company. Rolston Products Company assigned the right to these payments to Anchor Service Company on August 4th. On the same day they gave written notice to Johnson that, as trustee, he was to make all future payments to Anchor Service Company. On August 10th, Rolston Products Company gave a general assignment of its accounts receivable to its bank as security for a loan. The bank notified Werner Supply Company in writing on December 27th that it held a general assignment of the accounts receivable of Rolston Products Company, and that all future payments of the company should be made to the bank. Included with the notice was a written request from Rolston Products Company for payment in full to the bank if Werner Supply Company could possibly manage it, even though the contract only called for monthly payments. When Werner Supply Company received the notice, the president of the company contacted Rolston Products Company by telephone, and asked if payment should not be made to Johnson, rather than to the bank. The response of Rolston Products Company was: ―Pay the bank.‖ On this advice, Werner Supply Company paid the balance of the money to the bank. A month later, when no payment had been received, Johnson contacted Werner Supply Company and was informed that the money had been paid to the bank. He immediately notified Anchor Service Company of the fact. Anchor Service Company then instituted legal proceedings against Werner Supply Company for payment under the contract. Discuss the legal issues raised in this case and the respective arguments of the parties. Render a decision. Answer: The contract between Werner Supply Company and Rolston Products Company was assigned by Rolston Products Company to Anchor Services Company. Notice was given to the trustee Johnson. Was this notice to the debtor? Since Johnson was authorized to collect the money from Werner Supply Company under the agreement, is it important that Werner Supply Company be aware of where the payments are directed? Strictly speaking, the debtor must receive written notice under a statutory assignment. When the bank acquires a general assignment of the Rolston Products Company's accounts receivable it is unaware of the assignment of the Werner Supply Company assignment by Rolston Products Company to Anchor Service Company. Notice is given to Werner Supply Company as required, and obligates Werner Supply Company to pay the bank. Rolston Products Company‘s answer when Werner Supply Company queried whether payment was to be made to Johnson or the bank, was that Rolston Products Company directed the debt to the bank. Since to Werner Supply Company's knowledge, Rolston Products Company had only assigned the debt to the bank, it complied. The question should be asked: Can the parties change the agreement terms to eliminate Johnson? If the trustee, Johnson, had no duty to inform Werner Supply Company of the assignment to Anchor Service Company, then the notice given to Werner Supply Company, would be the first notice, and the obligation would be on Werner Supply Company to pay the bank. See for example, Pettit and Johnston v. Foster Wheeler Ltd. (1950) 2 D.L.R. 42. Case 7 Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-140

Maya Black wished to purchase Seamus Green‘s farm. After lengthy negotiation, the two parties drew up and signed an agreement of purchase and sale for the farm with the assistance of and in the presence of Green‘s real-estate agent, Simms. The agreement that the parties signed was a standard, preprinted form used by all local real-estate agents that contained a clause which was an irrevocable direction by the vendor of the land, Green, to the purchaser, Black, to deduct from the sale price and pay the real-estate agent‘s commission directly to Simms, on the closing day of the transaction. The preprinted form had printed on it a black circle that looked like a seal and had the word ―Seal‖ written under it. Also, above the line for Green‘s signature were printed the words ―In witness whereof I have hereunto set my hand and seal.‖ Beside Green‘s signature line was a place for a witness to sign the agreement. Immediately above this place appeared the preprinted words ―Signed, sealed and delivered in the presence of.‖ Green and Black each had lawyers looking after the details of the transaction and each gave a copy of the agreement to their respective lawyers. Shortly before the closing of the sale, Green‘s lawyer prepared some final paperwork and had Green sign several important documents. Among them was a direction to Black and Black‘s lawyer to make the cheque for the full amount of the purchase price payable to Green. On closing, Black‘s lawyer presented to Green‘s lawyer a cheque made payable to Green for the full purchase price of the farm. Green‘s lawyer later turned over the cheque to Green. After the closing, Simms contacted Green to request delivery of his commission cheque. Green replied that neither he nor his lawyer had received a cheque for Simms from Black‘s lawyer on closing and suggested that Simms contact Black himself since that was the arrangement. When Simms called Black, Black stated that as far as she was concerned she had paid for the farm and didn‘t owe anyone any more money. Discuss the legal issues raised here and the respective arguments, rights, and liabilities of the parties. Render a decision. Answer: Under the terms of the written agreement, Simms was to be paid his commission as a real estate agent for arranging the sale of the property to Black. This part of the document was essentially an irrevocable direction by Green to Black to deduct Simms' commission from the money payable to him (Green) and to pay it to Simms. More simply described, Green owed Simms money, and he directed Black to pay this debt to Simms from the money Black owed him (Green). Green's lawyer inadvertently prepared a second direction to Black to make the entire amount of money payable to Green. The facts of this case may be considered in terms of an assignment of contractual obligations in which the debtor Black is directed (or given notice in the document) to pay money to Simms. This is a direction that Black would be obliged to follow, as he has written notice to do so. The second notice to Black directed all of the proceeds to Green. Black complied with the second notice. If the assignment is characterized as an equitable assignment, then in any action on the assignment, all parties must appear before the court. In this instance Black might argue that since his contract was with Green he complied with the second notice. Simms would argue that Black was obliged to comply with the first notice because it was an irrevocable direction to Black, and Green could not revoke (change) the direction. Green would be unjustly enriched in this case if he was entitled to keep the full amount and Black was obliged to pay Simms' commission. The court might find Black at fault for failing to pay Simms, but allow Black to recover the payment from Green on the basis of payment by mistake. In terms of the obligation of the lawyer for Black to pay the money to Green directly, it might be argued that the lawyer is not a party to the agreement, but only a stakeholder, and not bound by the irrevocable direction, as no consideration flows to the lawyer. See: Family Trust Corporation v. Morra (1987) 44 R.P.R. 250. Note, however, that another (Ontario) case appears to suggest to the contrary: Re/Max Realty Garden Inc. v. 828294 Ontario Inc., Louras and Fleming (1992) 8 O.R. (3d) 787. Because of the case law confusion, the Law Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-141

Society of Upper Canada (Ontario) suggests to its members that the money under these circumstances be paid into court, or held in trust until the parties resolve their differences. Case 8 Vivian carried on business as a plumber for many years; she used the Home Bank for her businessbanking needs. In 2017, Vivian incorporated the business as Vivian‘s Plumbing Inc., and she asked the bank to change the bank accounts to the new corporation. The bank did so and accepted all deposits and payments made in the corporation‘s name. Some time later, the corporation requested a line of credit from the bank in the amount of $50,000. This was granted, provided that Vivian personally guarantee the credit extended. Vivian agreed and signed a guarantee. The line of credit was never used, but the bank did lend $75,000 to the corporation on the security of a large contract that the corporation had obtained. Unfortunately, the contract proved to be virtually worthless for the corporation when the other contracting party became bankrupt, and the corporation was unable to repay the loan. The bank then took legal action against Vivian personally for payment. Explain the nature of the bank‘s claim and indicate the defences (if any) that Vivian might raise. Render a decision. Answer: This case problem is based upon the case of Emco Supply v. Vivian (1984) 46 Nfld. & P.E.I.R. 257. The question in the case was: did a novation occur that would make the corporation the principal debtor and release Vivian from any indebtedness incurred by the bank? The court in this instance concluded that the bank had accepted the corporation as its debtor, and the novation was complete. When the bank borrowed the money it was a direct loan and not an extension of credit under the line of credit, and consequently Vivian as guarantor of the line of credit only, was not liable when the corporation defaulted on the loan. The court dismissed the action against Vivian. Case 9 Morgan was visited by a travelling salesperson who talked him into buying a machine that produced pin-on buttons suitable for selling in bulk as advertising gimmicks, novelty slogans, and political party campaigns. A number of good contracts would produce enough money to cover the five instalments of $1000 owed for the machine. Morgan agreed to the deal, and the machine was delivered. It took much more skill to operate than Morgan could muster. The salesperson had effortlessly demonstrated the machine, but clearly had skills borne of long practice. The guide to operation was sketchy at best, and the machine consistently produced buttons with off-centre or crumpled graphics. Morgan tried to find the salesperson without success. Morgan was, however, soon found by the finance company to which the salesperson had assigned the debt. Advise Morgan. Answer: This case concerns a statutory assignment, and if the entire contract was assigned, Morgan may be obliged to deal with the finance company. Discussion of this case should consider any claim that Morgan might have concerning the contract with the machine manufacturer based upon representations made by the salesman. If misrepresentation can be established, and the whole contract was assigned, the assignee would be subject to any claim in this regard that Morgan might be able to raise. If only the promissory Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-142

note covering the debt was assigned the situation may be different, but consumer protection in most provinces may also assist Morgan, if Morgan could establish that the machine was a ‗‖consumer purchase‖. Students should be directed to Chapter 29 (Law of Negotiable Instruments) on this matter.

CHAPTER CHART

CHAPTER 13. PERFORMANCE OF CONTRACTUAL OBLIGATIONS Chapter Topics The Nature and Extent of Performance Discharge by Means Other Than Performance Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Chapter Objectives After study of this chapter, students should be able to: • Explain the significance and effect of tender. • Recognize how a contract may be discharged other than by performance. • Explain the significance and effect of a condition precedent. • Recognize and explain the effect of a frustrated contract.

YOUR BUSINESS AT RISK Contract disputes often centre on whether the parties have performed as they have promised and, if not, whether they can be excused from their obligations. This becomes a risk management decision for a business faced with a lawsuit. If you are certain your actions or rights fall within the legal interpretation of your contract, you may want to go ahead with a lawsuit. Any uncertainty should be a consideration in favour of settlement, knowing that the party on the other side will be weighing the same issues.

CHAPTER COMMENTARY The performance of contractual obligations must always be exact and precise, and until such time as the performance is complete, the contract remains in existence, unless discharged by some other means (such as frustration, etc.). As tender is an important part of performance, the two forms of tender should be examined, particularly in terms of their effect on the performance of the contract. Of the various other forms of discharge, the doctrine of frustration is perhaps the most difficult for students to understand. In addition to an examination of the legislation, and examples of frustrating events, the Cahan v. Fraser case excerpt might be reviewed as additional re-enforcement for the doctrine and its implications with respect to discharge. The Court Decision of Farnel v. Main Outboard Centre Limited [1987] 50 Man. R. (2d) 13, is a useful case for a discussion of the performance of a contract, and the issue of what constitutes 'performance'. In the case, the judge concluded that to 'winterize' the motor meant just that, and even though the company followed the usual procedures, it did not properly perform the contract. The concept of condition precedent might be reviewed using the excerpt from the case of Turney et al. v. Zhilka. This case underscores the concept, and in particular, the point that until the condition is satisfied, there is no right available to either party to demand performance by the other. The various other forms of termination, which include discharge by agreement, and by operation of law are also important, and a review of the examples of each of these in the chapter would be useful to set the stage for Chapter 14, which deals with the consequences when a contract is not properly performed. The following chart may be used to review the different forms of discharge other than performance.

Review Questions 1. What are the implications at common law where an unanticipated event renders performance of a contract impossible? Has this been altered by Frustrated Contracts legislation in some provinces? Answer: At Common Law, where performance is rendered impossible, the courts generally treat the contract as being at an end, and the parties are discharged from further performance. Any money paid for which a person received no benefit may be recoverable, but otherwise it may not. Frustrated contracts legislation permits the courts to apportion the loss in a more equitable fashion.

2. Does performance by one party terminate a contract? Answer: No. Performance by both parties is necessary to fully terminate a contract.

3. Describe the effect of a valid tender of payment of a debt. Answer: A valid tender of payment of money as payment of a debt causes interest to cease running, and ends the debtor's obligation to make further attempts to pay the debt to the creditor. The debt remains, however, but the creditor must seek out the debtor for payment.

Answer: Performance means the effort a person makes to carry out a contract obligation. Specific performance is a discretionary court order requiring a person to perform a contract obligation.

5. What are the usual consequences which flow from a failure or refusal to perform a valid contract? Answer: A failure or refusal to perform a contract at the time required for performance constitutes a breach of the contract, and would entitle the injured party to seek redress through the courts.

6. How might "custom" affect the performance of a valid contract? Answer: Customs of the trade often establish recognized conditions subsequent that the courts may "read into" a contract as implied terms. Those may have the effect of terminating a contract if the event or conditions arise. E.g.: Act of God, etc.

7. Explain the nature and purpose of a force majeure clause in a contract, and illustrate your answer with an example. Answer: A force majeure clause in a contract usually set out conditions under which performance may be excused or the agreement terminated. For example, an Act of God may be set out as grounds to termination, should such an event occur.

8. Other than by performance, in what other ways might a contract be discharged? Answer: Contracts may also be discharged by: operation of law, agreement, condition subsequent, condition precedent, frustration, implied terms, express terms, and by breach.

9. Describe the effect of material alteration on the enforceability of a contract. Answer: Material alteration affects the enforcement of an agreement where the parties have in effect substituted different terms for those in the original agreement, and essentially replaced it with a new agreement.

10. What is meant by "performance" with respect to contract law? Answer: Performance in contract law means that a party must carry out a promise exactly and precisely in order to discharge the contractual obligation. Anything less is a breach.

11. Distinguish between a void and a frustrated contract.

Answer: A void contract is a contract that is unenforceable, and in effect, never comes into existence A frustrated contract is a contract that is otherwise enforceable, but which becomes impossible to perform as a result of unforeseen circumstances.

12. Outline the nature of a valid tender. How does it relate to performance? Answer: A valid tender is a demonstration by the party obliged to perform an act or make a payment of money that he or she was ready, willing, and able to make the exact payment or perform the act at the time and place for performance.

13. Explain the effect of a condition precedent on the obligation of the parties to perform a contract subject to the condition. Answer: A condition precedent is a condition which must be fulfilled before a contract comes into existence. No performance is necessary until the condition is met.

Mini-Case Problems

1. X agreed to lease her automobile to Y for the month of July in return for the payment of $300. Before the end of June, X was involved in an automobile accident and the automobile was severely damaged. What are the rights and obligations of X and Y? Answer: The destruction of the automobile may be considered an event which frustrated the performance of the contract and relieved X of her obligation to perform. If so, Y would have no right of action against X, but would not be required to pay the rental fee. 2. A agreed to purchase B‘s snowshoes from him for $100 on the Saturday of the next week. On the specified date, A went to B‘s home with 10,000 pennies and demanded the snowshoes. B refused to deliver them. Discuss the rights and obligations of the two parties. Answer: Tender of payment must be exact, and at the required time and place for performance. The tender of payment of 10,000 pennies, while totaling the $100 price was improper because the seller is not required to accept more than 25 cents in pennies. NOTE: Students may not be aware of the maximum number of pennies that may be payable, as the text does not state this explicitly. It only mentions "currency" as legal tender.

3. A Canadian exporter sends goods to an importer in Phantasia. While the goods are at sea, the United Nations declares a trade embargo on Phantasia, and the ship is prohibited from entering Phantasian waters. What has happened to the contract between the Canadian and Phantasian business persons? Answer: The trade embargo would be treated as a frustrating event that would have the effect of terminating the agreement between the two parties. Under the Frustrated Contracts Act, the court may apportion the loss if a deposit was paid by returning the deposit less any expenses incurred by the exporter in shipping the goods. If no deposit paid and no benefit received by the importer, the exporter may have to assume the costs incurred to recover the goods from the carrier. 4. Through their lawyers, Wilson agreed to buy Jackson‘s business for $500,000. On the date fixed for closing the transaction, Wilson‘s lawyer gave Jackson‘s lawyer a certified cheque for $550,000, drawn in error. Describe whether Jackson can keep the $50,000 extra, is obligated to return the $50,000, or can avoid the transaction altogether. Answer: The tender of payment must be exact, otherwise it represents an improper tender. Assuming, in this case that a certified cheque was specified as the method of payment, the tender of the larger amount would constitute an improper tender and could be rejected by the seller. See: Blanco v. Nugent in the text. 5. The manufacturing supplier of electronic components, Techco, destined for lightweight laptops delivered the components to the laptop manufacturer, ComputerCo., four months after the scheduled delivery date. ComputerCo. accepted the components, inserted them and sold the laptops in the consumer market. Unfortunately, the delay resulted in ComputerCo.‘s laptops arriving in the market later than their major competitor and market share was lost. During a shareholders‘ meeting five years later, management was questioned about the inability of ComputerCo. to regain its market share and profitability. What rights does ComputerCo. have against Techco for its failure to perform according to the contractual terms? Answer: The doctrine of laches or, if applicable, a provincial Limitations Act, will likely prevent ComputerCo. from seeking any remedy from Techco due to the delay in bringing any claims. The underlying contract remains valid but the disadvantaged party will be prevented from receiving a remedy. If there were an ongoing contract for supply of the components from Techco, there may be an opportunity for ComputerCo. to revive a right of action and acknowledge the liability of Techco, perhaps with reduced payments as a set-off for damages.

The Ebert Electrical Company contracted and paid for 80 air-conditioners at a special discount price made by the Kool-Air Equipment Company. The units were to be installed by Ebert in a new condominium development planned by Carson Developments Ltd. Delivery of the air-conditioners was to take place within 7 days of Carson‘s architects confirming that final electrical inspections were complete. Carson eventually went bankrupt and the confirmation was never issued. What is the legal position of Ebert and Kool-Air? Answer: In this case, Ebert Electrical Company bought and paid for 80 air conditioners. Only the delivery was delayed. Discussion should address the contract itself. Is Ebert the owner of the air conditioners at this point in time? If so, what is the significance of the architects approval? Does it matter? Could Ebert Electrical Company ask for delivery at any time since it has paid for the units? Does the bankruptcy of Carson Developments Ltd. constitute a frustrating event? Were the air conditioners standard models, or of a specific design for installation in the condominium? Kool-Air may take the position that the sale was complete (assuming standard design units) and argue that Carson‘s bankruptcy had no effect on the transaction with Ebert. Ebert Electrical Company may not wish to have 80 air conditioners on its hands, and may argue frustrating event. The court however, may side with Kool-Air, since the units had been purchased, and only the delivery date was in issue. Case 2 Hamish, an experienced painting contractor, entered into an agreement with Mr. McPhail to paint the McPhail residence both inside and out for $8,200. Mrs. McPhail selected the colours, and Hamish proceeded with the work. During the time Hamish was painting the interior of the house, Mrs. McPhail constantly complained that he was either painting too slowly and interfering with her housecleaning, or painting too fast and splattering paint on the wood trim. Hamish never responded to her remarks. By the fifth day, Hamish had painted all of the house except the eavestroughs and down-spouts. As he was climbing the ladder to begin painting the eavestroughs, Mrs. McPhail appeared and warned him not to drop paint on her prize azaleas. At that point, Hamish turned and, without a word, climbed down from the ladder and left the premises. The next day, he presented his account for $8,200 to Mr. McPhail. When Mr. McPhail refused to make payment, Hamish instituted legal proceedings to collect the amount owing. Discuss the nature of the claim and indicate the defence (if any) which Mr. McPhail might raise. Render a decision. Answer: This case raises the issues of substantial performance, abandonment, and performance rendered impossible by interference from a third party. The degree to which each of these affect the rights of Hamish and McPhail should be explored by way of questions such as: At what point would the contract be completely performed? Would completion, except for the eavestroughs, constitute substantial performance? Did Hamish abandon the contract? Or was his performance rendered impossible by the actions of Mrs. McPhail? If performance was in fact rendered impossible, would Hamish be entitled to bring an action quantum meruit? As a general rule, the contractor would be entitled to payment quantum meruit unless the work done was of no value to the property owner, the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-149

contractor had refused to complete the work, or the work done was completely different from what the party had contracted for. (See: H. Dakin & Co. Limited v. Lee, [1916] 1 K.B. 568). On this basis, the question of abandonment becomes important. Later cases, however, indicate that abandonment where the work is substantially complete would entitle the contractor to payment, less a deduction for the incomplete work. (For example, See: Hoenig v. Isaacs [1952] 2 All E.R. 176). Case 3 Gina Potter owned a farm that had a rather odd-shaped land formation at its centre. Gill, a road contractor, suspected that the land formation might contain a quantity of gravel. He entered into a purchase agreement with Gina to purchase the farm for $280,000. On the offer to purchase Gina deleted the words ―or cheque‖ and insisted that she be paid only in cash. Before the date fixed for Gill and Gina to exchange the deed and money, Gina heard rumours that Gill wished to buy the farm because it contained a ―fortune in gravel.‖ Gina accused Gill of trying to steal her land by offering her only a fraction of its true worth. She instructed her lawyer not to prepare the deed. In actual fact, the $280,000 was slightly more than the value of most similar farms in the area. On the date fixed for closing, Gill arranged with the bank for $280,000 in cash. He drove to Gina‘s farm with the money in a brief case. At the gate, he met Gina who refused to allow him entry. Pointing to the brief case, Gill said that he had the money and wanted the deed. Gina refused, so Gill returned to the city. Discuss the actions of Gill and Gina in this case. Determine the rights and obligations of each if Gill should institute legal proceedings to enforce the contract. Render a decision. Answer: This case deals with the requirements for tender, and the issue of repudiation by a party. An approach to the case might be to review the requirements for a valid tender by a series of questions such as: What are the requirements for a valid tender? What would Gill be obliged to do to comply with these requirements? Did his actions constitute a valid tender? When the tender was refused, what were Gill's rights? His duties? Tender must be exact, and in accordance with the terms of the contract. This would mean that Gill must show that he was ready, willing, and able to complete his part of the contract at the required time, and at the required place. By having the cash in hand (as required by the contract) and tendering it to the vendor at the vendor's farm on the required day, he established a valid tender, which would in turn entitle him to apply to the court for an order for specific performance of the agreement. Case 3 is based upon an unreported case in which the author acted as counsel for the purchaser, but a number of other reported cases deal with the same type of problem. See: O'Neil v. Arnew (1976), 78 D.L.R. (3d) 671 as an example. Case 4 Hansen admired a sports car that Sports Motor Sales Ltd. wished to sell. Hansen informed the company salesman that he would buy the automobile if he could obtain a loan from the bank to cover part of the $27,000 asking price. The salesman agreed to hold the car until Hansen could check with his bank. Hansen discussed a loan with his bank manager. The manager stated that he would be prepared to make a $10,000 loan, but, due to the nature of the purchase, he must first get approval from the regional office. He indicated that this was usually just a formality, and he did not anticipate any difficulty in Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-150

obtaining approval for the loan. Hansen then entered into a written agreement with Sports Motor Sales Ltd. to purchase the sports car, with payment to be made in 10 days‘ time. Both parties signed the agreement, and Hansen paid a $1,000 deposit. The company retained the sports car pending payment of the balance. A few days later, the bank manager telephoned Hansen to say that he had encountered a problem with the loan approval. The most he could lend would be $54,000. As a result of the reduction in the loan amount, Hansen found himself $5,000 short. Advise Hansen of this position at law. Indicate how the case might be decided if Sports Motor Sales Ltd. wished to enforce the agreement. Answer: This case initially involves two separate agreements, one being conditional upon the other. Hansen made an agreement with Sports Motor Sales Ltd. which was conditional upon Hansen obtaining a loan from the bank. In a sense, this agreement was also conditional upon approval as to the amount by the Bank's regional office. However, on the strength of the bank manager's representation, Hansen entered into a written agreement with Sports Motor Sales Ltd. to purchase the sports car. The written agreement made no mention of the condition. Query: Would this mean that Hansen waived the condition, and is now bound by a firm contract? Does the fact that payment is not due until ten days indicate or imply that the agreement is subject to the condition? Hansen has a problem when the amount of the loan available is limited to $54,000, as he has failed to include the condition in his contract with Sports Motor Sales Ltd. One approach might be to argue condition precedent or oral collateral condition (See: J. I. Case Threshing Machine Company And Oster v. Welsh, [1918] 3 W.W.R 57) to avoid the agreement. If successful, Hansen would be free of any obligation under the agreement, and entitled to a return of his $1,000 deposit, otherwise, he would likely be bound by the agreement. The loan agreement is conditional upon approval, and consequently does not come into effect unless Hansen agrees to accept the lesser amount as a loan. Case 5 The Metro Mallards Baseball Club was concerned about the practice of ―reselling‖ tickets to its games by persons who would appear at the entrances of the baseball stadium just before game time and offer tickets for sale to ticketless patrons at premium prices. These persons, known as ―scalpers,‖ would purchase a quantity of tickets in advance of the games with the intention of selling them at a profit, a practice that the club wished to curtail. The practice was also prohibited under provincial laws. In an effort to stop the resale of tickets (except through authorized agents) the club printed the following terms on the back of each ticket: This ticket is a personal, revocable license to enter the stadium and view the game described on the front side hereof, and shall not be resold to any other person without the express consent in writing of the issuer or its authorized agents. Management shall have the right to refuse admission to the stadium to anyone in possession of this ticket on return of the stated purchase price. The issuer, on notice to the person in possession of this ticket, may revoke at any time the license represented by this ticket and recover the same without compensation if the person in Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-151

possession attempts to resell the ticket. The notice was included in very fine print on the back of each ticket, along with the usual clauses related to liability for injury and cancellation-of-game matters. John and Jane Doe purchased a number of tickets with the intention of reselling them at the stadium before a game. They were not aware of the change in the printed information on the back of each ticket. At the stadium, an employee of the club noticed John and Jane attempting to sell their tickets. She immediately confronted them and demanded that they turn over their tickets to her. John and Jane refused to do so, and a nearby police officer was called over to the scene. John and Jane denied that they were attempting to sell at a profit the tickets they had in their possession. The club employee then pointed out the terms on the back of the tickets to the police officer; after reading the notice, the police officer suggested to John and Jane Doe that it might be advisable for them to surrender their tickets. John and Jane did so, but only on the condition that the police officer hold the tickets until they could obtain legal advice. The officer agreed to do so. Advise John and Jane Doe. In your answer clearly identify the legal principles that would be applied in this case to determine the rights of the parties. Answer: Students should consider the terms and conditions of the contract imposed upon buyers and holders. The issuer of the tickets changed the nature of the agreement to a revocable license, and added restrictions on resale, and the right to confiscate the ticket without compensation if a person attempts to resell the ticket. These restrictions were on the back of the ticket and not brought to the attention of buyers. If notice is not given, would the conditions be enforceable as a part of the contract? Could a condition such as confiscation without compensation be enforceable, or would it be contrary to public policy? The facts of the case are those in Toronto Blue Jays Baseball Club v. John Doe, Jane Doe, et al. (1992) 9 O.R. 3d 622 with a minor change. In that case the court held that where the ticket conditions are changed to include onerous terms, the terms must be brought to the attention of buyers to be enforceable. Since they were not, the terms were not a part of the contract, and unenforceable. The court also held that the right to revoke the license without compensation to the ticket holder had no basis in the case law. Case 6 Community Clipper Airlines Ltd. was a small airline that operated a scheduled service to a number of remote northern communities in the province. In addition, it operated a charter service that consisted for the most part of flying hunting and fishing enthusiasts to tourist camps located on otherwise inaccessible northern lakes. On a day in late September, the dispatcher received a radio telephone request from the operator of a remote tourist camp, requesting an aircraft to fly in and pick up two late-season fishermen who had to return to their offices for work the next day. The dispatcher passed the flight instructions to one of the charter pilots, ―Red Baron.‖ The pilot checked the aircraft, a four-passenger, single-engine, wheel- and float-equipped craft, then called the weather office for a weather briefing. The weather office reported marginal flying weather until 4:00 p.m. that day. The forecast for the period after 4:00 p.m. indicated rain and fog conditions in the area of Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-152

the airport, and in the area generally. The weather was expected to close all of the neighbouring airports as well, but remain clear in the area of the tourist camp. The tourist camp was approximately two hours flying time from the airport, and given that the time was then 11:00 a.m., Red Baron decided to make the flight. She arrived at the tourist camp at approximately 1:00 p.m., but the fishermen had not yet packed their bags and fishing tackle for the trip. Red Baron warned the two fishermen that the weather was deteriorating, and that they must leave immediately, otherwise they would be unable to land at the airport. One of the fishermen was particularly slow at getting his equipment and clothes packed, and in spite of the pilot‘s urging, the fisherman was not ready to leave until almost 2:00 p.m. At 2:05 p.m., the plane flew from the camp with the two fishermen and their gear. The weather, which was still appropriate for flying, held until the aircraft was within approximately 20 minutes‘ flying time of the airport. At that point the aircraft encountered rain and deteriorating visibility. The pilot advised the two passengers that she might not be able to proceed to the airport if the weather became worse. Undaunted, the passengers urged her to proceed on rather than fly back to the camp, as they were obliged to make flight connections at the airport in order to be at their offices the next morning. With some misgivings and warnings about the weather, Red Baron continued on. She contacted the airport and was informed that rain and fog had closed the runways, but that the lake approach might still be possible since a very slight on-shore breeze was keeping the lake from being totally closed in. Red Baron elected to try the lake approach rather than turn back. Visibility was poor in the rain, and fog patches obscured parts of the lake. Due to the weather, she decided to land some distance out in the lake, then taxi to the dock area. She made a careful approach, but after successfully landing on the water, collided with a floating log. The log damaged the aircraft and caused it to flip forward and begin to sink. A rescue boat was dispatched to the aircraft immediately, and the pilot and passengers were rescued from the cold water. While not seriously injured, the passengers suffered bruises, some minor lacerations, and exposure. After being kept in hospital overnight, they were released the next day to return home. If the passengers instituted legal proceedings against the airline, discuss the possible arguments and legal principles each side would raise. Render, with reasons, a decision. Answer: The issues raised in this case include terms and conditions, alteration of terms, and performance. The case also includes a number of other issues such as voluntary assumption of risk, and negligent performance of a contract. Students should determine the performance of the contract required by Red Baron. Was the contract frustrated by the deterioration of the weather? Was it a force majeure? Act of God? An implied term in the contract would be that she could safely land at the base airport. Was this term changed when the passengers insisted that she attempt the landing? Did this alter her obligation under the contract to deliver them safely to the airport? Given the facts of the case, Red Baron may have been negligent in attempting to land on the lake when poor visibility prevented her from examining the lake for floating objects such as the log. A preferable course for her might have been to turn back to the lodge and wait for the weather to clear, as the contract could be considered frustrated by the weather. However, she did not avail herself of the right. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-153

Case 7 Taylor owned and operated a large gravel truck. He entered into a contract with Road Construction Contractors to haul gravel for them at a fixed price per load for a period of six months, commencing May 1st. On April 24th, he appeared at the construction site with his truck. When he examined the distance he would be required to haul the gravel, he realized that he had made a contract that he could only perform at a substantial loss. He approached one of the partners of the firm with which he had contracted, to inform him that he could not perform the agreement. The partner persuaded Taylor not to be hasty in his decision, but to wait until the next day, when he could discuss the matter with the other partners. Taylor agreed to wait and left his truck in the contractor‘s garage overnight. During the night, a fire at the garage destroyed Taylor‘s truck and some of the contractor‘s equipment that had also been stored in the garage. Analyze the events that occurred in this case and discuss the legal position of both parties. Answer: The first issue raised in the case is the issue of express repudiation of the contract by Taylor. The repudiation by Taylor would entitle the contractor to treat the contract as being at an end, but from the facts of the case, the partner in the firm did not accept Taylor's repudiation, but instead urged him to reconsider, and this might be taken as a decision to keep the contract alive pending performance by Taylor. This is due to the fact that Taylor was not required to perform until May 1st. The events that followed the attempted repudiation, however, altered the rights of the parties substantially. The fire at the garage, which destroyed Taylor's truck, might release Taylor from performance on the basis of frustration. This might raise the question: Should Taylor be expected to replace the truck (if it is insured) and be ready to perform by May 1st? Does the event constitute frustration if performance is really not rendered impossible on this basis? How far does the doctrine extend? In the cases dealing with this type of problem, the courts have generally treated destruction of equipment by fire as a frustrating event, since it is something not usually contemplated by the parties at the time the contract was made. See: Reid v. Hoskins (1856), 6 E.R. & B.L. 953; 119 E.R. 1119 where the repudiation was not accepted, and the contract subsequently ended by operation of law, and in Cromwell v. Morris (1917), 34 D.L.R. 305, which also dealt with a refusal to accept repudiation, where the court decided that the refusal to accept repudiation kept the contract alive for the benefit of both parties. Case 8 A shipment of liquid milk in refrigerated tank cars was sent by rail from Toronto to Edmonton. At Winnipeg, an electrical connection from the locomotive‘s generator to the tank car‘s cooling equipment was found to be faulty. Three of six tank cars of milk had spoiled, and the remainder was sold by the railway company to a creamery in Edmonton. Discuss the legal positions of the Toronto seller, the Edmonton buyer, and the railway company. Answer: In this case, the cause of the loss was the responsibility of the railway. The Toronto seller may look to the railway for its loss on the tank cars of milk on the basis of carelessness on the part of the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-154

railway to ensure that the cooling equipment was operating properly. Note that the remaining three tank car loads were sold by the railway at their destination. This may raise the question: Did the recipient in Edmonton refuse to take the milk, since it consisted of only three tank car loads? If so, the railway may act to sell the milk in order to mitigate its loss. If this is the case, the Edmonton buyer would get a good title to the milk. The railway would not be able to argue frustration, since the faulty electrical connection would unlikely be classed as an unforeseen event, but rather a failure on the apart of the railway to ensure the proper operation of its equipment. Case 9 Francis Building Co. contracted in January with Lomas Warehousing Inc. to install a new steel roof in April on the Lomas structure. As matters turned out, the price of steel quadrupled within two months, and Francis advised that it would not proceed on the existing terms. Lomas answered that it would commence legal action against Francis. Discuss the law upon which each of Francis and Lomas base its argument. Answer: The issue in this case is the nature of the price increase in steel in the two month interval after the contract was made. Is the price increase a frustrating event sufficient to terminate the contract? Francis Building Co. was probably argue that it was. Lomas Warehousing Inc. would probably argue that it was not, on the basis that the price of steel may very well drop over the remaining two months before the contract was to be performed. Lomas might also argue the price of steel should not be a factor to consider, as Francis was in a position to buy the steel in January when the contract was made. If the four times increase in the price of steel is such an exceeding large increase that has been unknown to take place in the past, the event may constitute a frustration of the contract. However, in a similar case where the price of steel doubled in a short period of time after the contract was made, the court held that the contract was not frustrated, as the contractor could have purchased the steel for the roof shortly after the contract was made, and thereby avoided any increase in the cost of the roofing material.

CHAPTER CHART

CHAPTER 14. BREACH OF CONTRACT AND REMEDIES Chapter Topics The Nature of Breach of Contract Remedies Remedies for Particular Situations Enforcement of Judgements Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Chapter Objectives After study of this chapter, students should be able to: • Distinguish between the types of breach of contract. • Explain the principles of compensation for loss. • Describe the remedies available at law to an injured party.  Describe the means for enforcement of those remedies.

YOUR BUSINESS AT RISK Not every contract will have a happy ending. Business persons must understand the elements of breach and the extent to which they may recover or be liable, as the case may be. This is essential in order to be able to know whether you can walk away from your remaining responsibilities. It is also essential to know these elements in order to assess the cost of pursuing or settling a lawsuit. If you do not understand the remedies the court has available you may overestimate or underestimate the power of your opponent, or you may miss out on options if your lawyer fails to set them out clearly. CHAPTER COMMENTARY Chapter 14 is perhaps one of the most important chapters on the law of contract in the sense that it brings together the various remedies available to a party to a contract when breach occurs. Some of these remedies have been dealt with briefly in preceding chapters, but many are introduced in chapter 14 or the first time. The chapter lay-out, which deals first with express repudiation, includes the concept of anticipatory breach and the doctrine of substantial performance, with the latter doctrine further explained by way of judicial comment in the case of Bolton v. Mahadeva. Implied repudiation, which is by far the most difficult to determine, is outlined in the text. Fundamental breach, and the attendant problem of exemption clauses deserve particular emphasis, since most purchase agreements contain clauses of this nature, and their implications to the buyer should be fully understood. Because the courts employ the doctrine of fundamental breach to provide relief from onerous exemption clauses, the Tercon Contractors Court Decision might be used to review these clauses and the doctrine itself. Of particular note is the clarity of the Supreme Court of Canada on exemption clauses where fundamental breach exists: is the exemption clause inapplicable to the facts? Is it unconscionable to apply? Does it otherwise offend public policy? A heavy burden of proof lies upon the party seeking to avoid its application. The concept of compensation for loss as a result of breach of contract, and the determination of the limits of liability are also discussed in the Court Decision of Hadley v. Baxendale. This should, however, be considered in connection with the duty imposed on the injured party to mitigate his loss, and the various remedies available. Judicial comment on the duty to mitigate loss and liquidated damages are also covered in Case excerpts in the chapter. In the case quote from Asamera Oil Corp. Ltd. v. Sea Oil & General Corp. et al. the judge examined the limits on the duty to mitigate when a breach occurred, and concluded that the standard to be applied would normally be that of the "reasonable and prudent man" in similar circumstances. The Hadley et al. v. Baxendale et al. Court Decision represents the classic statement of the quantum of damages that flow from a breach of contract. The case is short, in the sense that the judge moves directly to the rule. Here, the judge considered the special circumstances surrounding the delivery of the part, and the fact that the carrier was unaware of the urgency associated with it. He then suggested that the jury ought to be guided by this information in the determination of the damages which resulted from the carrier's neglect. Many losing parties in a court action will voluntarily pay up the award of damages and costs for which they have been found liable. Regrettably though, getting a judgement of the court for damages and costs is not a guarantee of actual payment. Some judgement debtors refuse to pay unless forced to do so, and enforcement measures must be brought to bear upon them. Most frequently, a return to court is required to obtain a judge‘s order (a writ), instructing the local Sheriff to seize goods, money or land belonging to the judgement debtor, or a garnishment against future income from a specific payor or employer. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-158

Review Questions 1. What tests are applied by the courts to determine the remoteness of a damage claim for breach of contract? Answer: The principal test may be stated as one which provides that the party in breach would be liable for any damages actually caused by a breach of contract, provided that when the contract was made, such damage was reasonably foreseeable as liable to result from the breach.

2. What are the rights of one party to a contract when informed by the other party to the contract that performance will not be made? Answer: The party informed of the express repudiation may treat the contract as at an end and sue for damages, or may refuse to accept the repudiation, then wait until the date for performance and take action for non-performance.

3. In a situation where a contract is expressly repudiated, what are the dangers associated with waiting for the time for performance to determine if breach will actually occur? Answer: By waiting until the date for performance, some event may take place that will discharge the agreement. E.g.: an Act of God, etc.

4. Explain why mitigation of loss by the injured party is important where a breach of contract occurs. Answer: Mitigation of loss is necessary by the injured party, because as a reasonable person, an injured party would be expected to take all necessary action to limit the loss once breach occurs. A failure to do may result in the defendant avoiding responsibility for the loss which could have been avoided if the plaintiff acted to mitigate it.

5. Explain the doctrine of fundamental breach as it applies to a contract situation. Answer: Where the performance of a party is so far below that required by the terms of the contract, the performance may be treated as a fundamental breach, and will release the injured party from the agreement.

6. Does repudiation of a subordinate promise permit the party affected by the repudiation to avoid the obligation to perform contract itself? Answer: The breach of a subsidiary promise does not permit the party injured by the breach to avoid the agreement. The party must perform, but a deduction may be made for the cost of the breach by the other party.

Answer: The concept of damages in contract law means that the court will attempt to put the injured party in the same position following a breach as he or she would have been had the contract been fully performed.

8. What does restitutio in integrum mean? Answer: "Restitutio in integrum" means (to-day) "to make the party whole" or compensate for the loss suffered.

9. Explain the difference between express and implied repudiation of a contract, and give an example of each. Answer: Express repudiation occurs where one party informs the other that he/she will definitely not perform the contract at the required time. E.g.: where A writes B informing her that he will not perform his obligations under the agreement. Implied repudiation occurs where one party, by his or her actions gives the other the impression that performance will not take place at the original time. E.g.: where a person contracts to haul goods for another, then just before the date for performance, sells his only truck.

10. Apart from money damages, what other remedies are available from the courts in cases which involve a breach of contract? Under what circumstances would these remedies be granted? Answer: Other remedies include: specific performance (to enforce contracts concerning land) injunction (to enforce negative covenants) and quantum meruit (in quasi-contract situations, where a reasonable price may be awarded for services rendered).

11. How does the doctrine of substantial performance affect the rights of a party injured by repudiation when the contract is not fully performed? Answer: The doctrine of substantial performance does not permit a party injured by the failure to complete the contract to avoid payment. The injured party must pay the contract price less the cost of having some third party complete the work.

12. Under what circumstances would a contractor be entitled to partial payment where the work was not fully performed? Answer: Under the doctrine of substantial performance, if the work is substantially completed, then the other party may not avoid paying for the benefit actually received.

13.

Describe the main types of writ available for the enforcement of judgements, indicating circumstances where each would be used appropriately. Answer: Judgements are most frequently enforced through writs of seizure and sale (against land and personal property), sequestration (against income-producing property), possession (land), or Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-160

delivery (personal property other than money), or by notice of garnishment (debt owing from a third party to the judgement debtor.

Mini-Case Problems

1. X engaged Y to repair his lawn mower. Y dismantled the machine. However, before Y had time to carry out the repairs, X informed him that he had purchased a new mower and did not require the repairs on the old machine Discuss the rights and duties of the parties. Answer: X expressly repudiated the contract he had with Y. Since Y has not fully performed, he may treat the contract as at an end, and take action quantum meruit for his services.

2. D agreed to make certain alterations to an expensive dress that E had purchased. A violent storm caused the roof of D‘s shop to leak, and the dress was stained by the rain entering the building. D offered to have the dress professionally cleaned to remove the water stains, but E refused and attempted to remove the stains herself. Her attempt was unsuccessful, and the dress was ruined. Advise D and E. Answer: D may have been liable for the damage to the dress initially, provided that the leak in the roof was due to D's neglect to repair. If the storm damaged the roof, D might avoid liability on the basis of an "act of God." If dry cleaning would remove the stains, D would be liable for the cost of cleaning. E's attempt to clean the dress herself ruined the dress, and D would not be responsible for the loss which resulted from her actions. 3. Eduard purchases an expensive coffee-maker from a store, advertised as an ―end-of line,‖ ―all sales final‖ special. The coffee-maker leaks constantly, sending most of the coffee to the countertop. What kind of breach of contract does this represent? Answer: This would probably be a fundamental breach of the contract, as the coffeemaker would be unfit for the use intended. If ‗all sales final‘ and end-of-lease special sale are considered exemption clauses, they would not protect the seller. The seller would be obliged to return the purchase price paid to Edward. 4. James is contracted to build a cedar deck and fencing around Albert‘s newly installed pool. James completes the carpentry but fails to finish applying a coat of weather-protecting varnish as per the agreement. How would a dispute of payment owing to James be resolved by the court?

Answer: Since most of the contract work was completed by James, James could argue the doctrine of substantial performance. He would be entitled to payment of the contract price, less the expense Albert incurred to have the coat of varnish applied by some other person.

5. Robyn is an elderly man living entirely on social assistance. One night, his careless smoking burned down the rooming house he lived in. Do you have cautionary advice to provide to the property owner that wants to sue Robyn? Answer: Since Robyn has little or no money or other assets, it may prove impossible to meaningfully recover any sum. While the action may be undertaken to establish facts and liability, the high probability of no recovery raises the question of whether the action should even be commenced.

Case Problems for Discussion Case 1 Megamalls Inc. is known for its ability to create ―retail experiences‖ for customers visiting any one of its six malls in major Canadian cities, with each mall being in the 80-120 store range. To further its reputation, Megamalls specially selects its qualifying tenant stores for a very particular mix of goods and services it feels will create the greatest customer draw. Moreover, it draws up tenant contracts to ensure that retail offerings are in accordance with its wishes. Recently one chain of stores with tenancies in each of the six Megamalls began changing its own retail image by altering its line of goods and marketing tactics. Megamalls feels that this is in contravention of the tenant contract. What remedy or remedies should Megamalls seek and why? Answer: This case concerns the performance of contractual obligations by the tenant. If the lease specifically describes the particular mix of goods and services, including the marketing approach permitted, then the tenant would have an obligation to comply with the terms of the lease agreement. If the proposed changes represent a substantial charge, the changes may constitute a breach of the lease, and entitles the landlord to obtain an injunction to prevent the tenant from making the changes, as damages would not represent a satisfactory remedy. As an alternative, Megamalls Inc. may seek termination of the lease as a remedy for the breach in order to protect its marketing image, and the interests of its other tenants. Case 2 Ms. Field listed her home for sale with a local real-estate agent. The agent introduced Mr. Smith to Ms. Field as a prospective purchaser. After Mr. Smith had inspected the house, the agent obtained a written offer to purchase from him. The offer provided that he would purchase the house for $460,000 if Ms. Field could give him vacant possession of the premises on September 1st, some three weeks hence. The offer was accompanied by a deposit in the amount of $1,000. Ms. Field accepted the offer in writing, then proceeded to lease an apartment under a two-year lease. She moved her furniture to the new premises immediately and vacated her home in preparation for closing. A few days before the date fixed for delivery of the deed, Ms. Field was informed by one of her new neighbours (who was a friend of Mr. Smith) that Mr. Smith‘s employer intended to transfer him to a new position in another city some distance away. Discuss the rights and obligations (if any) of the parties in this case. Suggest a course of action that Mrs. Field might follow. Answer: The problem which Ms. Field faces in this case is related to the uncertainty associated with performance of the contract by the purchaser. After she moved out of her house and leased an apartment, she was informed that the purchaser might not proceed with the transaction. Should, she accept the word of a third party to this effect? Probably not, as there is nothing to indicate that he might not proceed with the purchase. Related to the problem of possible repudiation is the question of the money paid by the purchaser. Does it represent a deposit? - or is it part payment for the house? If the purchaser should repudiate, would Mrs. Field be entitled to keep the $1,000 paid? Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-163

Only if it represented an honest estimate of her loss. (See: Stevenson v. Colonial Homes Ltd., [1961] O.R. 407). Another remedy available might be specified performance, since the contract involves the sale of land, but to obtain this remedy Mrs. Field must show that she was ready, willing, and able to perform her part of the contract on the date fixed for closing. (See for example: Blanco v. Nugent, [1949] 1 W.W.R. 721.) Case 3 Trebic was a skilled cabinetmaker of European ancestry. Moldeva, who had emigrated to Canada from the same country, requested him to build a set of kitchen cupboards ―in the old-country style.‖ The two men discussed the general appearance desired, then Trebic drew up a list of materials that he required to construct the cupboards. Moldeva obtained the necessary lumber and supplies for Trebic, then took his family on a vacation. On his return, Moldeva found the work completed, and admired the craftsmanship and design that Trebic had exhibited in the making of the cabinets. Trebic had carefully carved the ―old-country designs‖ on the trim boards. He had skillfully constructed the drawers and cabinets using wooden dowels, rather than nails, again in accordance with ―old-country‖ tradition. In the execution of this skill he had used only hand tools, and then only the tools used by ―old-country‖ craftsmen in the cabinet-making trade. In every detail, the cabinets were ―old-country style.‖ When Moldeva indicated that he was completely satisfied with the cabinets, Trebic submitted his account in the amount of $154,000. The sum represented 200 hours work at $75 per hour, the normal rate charged by skilled cabinetmakers in the area. Moldeva, who was a building contractor himself, objected to the amount of Trebic‘s account. He stated that carpenters in his shop could manufacture kitchen cabinets of the general size and shape of those made by Trebic in only a few days‘ time. He offered Trebic $3000 as payment in full. Trebic refused to accept the $3000 offer and brought an action against Moldeva on the $15,000 account. Discuss the possible arguments of the parties. Render a decision. Answer: The case, on the surface, appears to be one of quantum meruit in which Trebic would be entitled to a reasonable price for his services. This would appear to be the $15,000, the normal rate charged by skilled cabinetmakers in the area. The argument raised by Moldeva, however, would appear to be an indication that the parties had failed to fully agree upon the meaning of the words "old country style". Trebic interpreted the phrase to mean construction detail, while Moldeva interpreted it to mean appearance only. Is it a case of mistake? Should Moldeva, who was a building contractor, have been aware from the material list that Trebic was building the cupboards in the old country style? No nails or other modern fasteners were ordered on the material list. The decision facing the judge is clearly a difficult one - and the question should be posed: How should the judge decide and on what basis should the decision be made? The facts of the case are based upon an unreported case in which one of the authors acted as counsel for the plaintiff. The judge decided on the basis of quantum meruit, but concluded that some consideration should be given to the defendant's argument Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-164

that modern tools and fasteners could reasonably be contemplated by the parties, and the plaintiff's claim was partially reduced to reflect the time that would have been saved had some tools, such as power drills, etc. been used in the basic construction of the cabinets. Case 4 Awwad, a skilled carpenter, agreed to construct a garage for Henderson for a contract price of $12,000. Henderson was to supply the plans, foundation, and materials. Awwad constructed the garage according to the plans. When the building had been framed, he discovered that the siding boards that Henderson had purchased were of poor-grade lumber. The boards could only be made to fit with a great deal of hand labour and cutting. Awwad complained to Henderson and de-manded that he provide siding boards that were of ―construction-grade‖ lumber. Henderson refused to do so. An argument followed in which Awwad refused to complete the work until Henderson provided suitable materials. At the time of the argument, the foundation, the roof, and the walls had been erected. The work that remained included the installation of the wall siding, the doors and windows, and the trim. Discuss the rights of the parties, and the nature of the claims and defences of each. Indicate the possible outcome, if the case should come before the courts. Answer: This case raises the question of responsibility for breach, and the rights and obligations which flow from it. Does the failure on the part of Henderson to provide suitable materials constitute a breach of the contract on his part? Does this entitle Awwad to refuse to complete his part of the agreement? Is it a custom of the trade to use "construction grade" lumber for all new construction? Could this term be implied in the agreement? If the obligation on Henderson to supply "construction grade" lumber can be implied, then his breach of the term might entitle Awwad to cease work, and take action against him on the basis of quantum meruit for work done, since Henderson's actions may have rendered performance impossible for Awwad. Awwad, however, would only be entitled to a reasonable price for his services, and he would not be entitled to the full $12,000, as the latter amount would represent payment for the completed contract. Case 5 The 18 Wheel Trucking Co. purchased a new truck from C.K. Motors Ltd., a firm that specialized in the sale of large tractor-trailer vehicles. In the six months following delivery, 18 Wheel Trucking found the new truck to be the subject of numerous breakdowns, both major and minor. The truck was out of service on 18 occasions, usually for minor problems such as headlight or brake light failures. On five occasions, the breakdown was serious and required major parts replacement, causing the vehicle to be out of service for several days. All of the repair work was done under warranty by the manufacturer‘s dealer, at no cost to 18 Wheel Trucking Co. At the end of the six months, on the 19th breakdown, 18 Wheel Trucking Co. left the vehicle with the dealer and demanded that the purchase price be returned. C.K. Motors Ltd. refused, and 18 Wheel Trucking Co. decided to take legal action against C.K. Motors Ltd. for a return of the purchase price.

Indicate the nature of the claim of 18 Wheel Trucking Co. and the defences (if any) of C.K. Motors Ltd. Render a decision. Answer: Students should recognize that the numerous break-downs of the truck raise the issue of fundamental breach of the contract. Did the purchaser get what was contracted for? Is a reliable vehicle an implied term in the contract? The repairs were done under warranty and cost the purchaser nothing. Would this preclude the purchaser from taking legal action? Students should recognize that the time lost while the vehicle was out of service may well result in lost business and revenue for the purchaser. The case problem is based upon the case of Rosseway v. Canada Kenworth Ltd. (1978) 6 Alta L.R. (2d) 177. In that case the court found fundamental breach of the contract as the purchaser received something other than what was bargained for, and entitled to a return of the purchase price. The judge did not grant compensation for time lost while the truck was out of service, because the purchaser had use of the truck prior to the date of rescission of the contract. Case 6 Valentino entered into a contract with TV Production Co. to perform the leading role in a television play the company wished to produce. The contract called for the actor to devote his time exclusively to the play until taping was complete, a period of some four weeks. His compensation was to be $20,000. Three days after the contract was signed, Valentino notified the company that he did not intend to perform the role, and that the company should find a new leading actor for the production. The company attempted to find a substitute for Valentino, but after an exhaustive search could find no one suitable. As a consequence, they were obliged to abandon their plans for the production. During the three-day period after signing Valentino, the company incurred liability of $36,500, under contracts they had entered into for services and commitments made in anticipation of his starring in the production. They also incurred the sum of $2,500 in expenses paid to find a substitute, when Valentino refused to perform. The company instituted legal proceedings against Valentino to recover the total expenses incurred as a result of his repudiation. In response, Valentino offered a settlement of $2,500 to cover expenses incurred in their search for a substitute actor. Discuss the arguments of the parties and render a decision. Answer: This case raises the question of damages where express repudiation of a contract takes place. Note in the case that the contract was one for personal service and Valentino should have been aware at the time that he would be difficult to replace in the role in the play. Valentino could argue that his liability should only be for the $2,500 expended to find a replacement for the part in the play. However, his repudiation caused the company to abandon the project when a substitute could not be found. The question should be asked: Was this a reasonably foreseeable result of the breach? Was it something which could reasonably be contemplated at the time the contract was entered into? According to the case of Anglin Television Ltd. v. Reed [1972] 1 Q.B. 60, the plaintiff succeeded in claiming the full costs of the abandoned production. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-166

Case 7 Kenja Marshall wished to purchase an automobile that would not only provide her with basic transportation to and from her home to her place of employment, but would have a sporty appearance. She also wanted a vehicle with sufficient power to enable her to engage in rally racing. She visited a local dealer in imported automobiles and enquired about a sports sedan displayed on the premises. The salesman on duty informed her that the vehicle was a used car that had been driven only 12,000 kilometres. It had been purchased the year before as a new car by a customer who then traded it in for a similar model of the current year‘s production. To the salesman‘s knowledge, it was a ―good car.‖ Since it had a turbo-charged engine, the policy of the company was to sell it ―as is,‖ without a warranty of any kind. After a careful inspection of the car, Kenja asked the salesman to start the engine, in order for her to determine the condition of the turbo-charger. The salesman did so, and, after running the engine for a few moments at various engine speeds, he shut it down. He offered Kenja a test drive, but at that point she noticed a coolant leak at the engine water pump. The salesman examined the pump. He then stated that the water pump would be repaired or replaced if necessary, if she wished to buy the car. Kenja said she would think about the purchase overnight and contact the salesman the next day if she was still interested. Kenja returned the next day. She informed the salesman that she was prepared to purchase the automobile if the dealer would repair the water pump and take $500 less than the advertised price of $24,000. With some reluctance, the dealer agreed to sell the car to her, and a written agreement of sale was prepared that contained the following terms:

It is expressly agreed that used goods are not warranted by the dealer as to year, make, model, or otherwise, unless so stated in writing.

10. The dealer agrees to make the following repairs to the vehicle as a part of this sale: (1) repair or replace water pump, as necessary.

Kenja was anxious to use the car in a local car rally the following day. She enquired if she might take the car immediately, then return it early the next week to have the water pump dealt with at that time. The dealer agreed, but cautioned her not to drive the car too hard until the pump was fixed. He also told her not to worry if she heard a slight ―popping‖ noise from the pump. Kenja paid for the car, then drove it home, a distance of some 16 kilometres. Along the way she heard what she described as a ―clangy‖ or ―tinny‖ noise from the engine. However, she was not concerned about it, believing it to be the noise the dealer had described to her. The next morning, when she attempted to start the car, the engine made a number of ―clangy‖ sounds, then stopped. A mechanic who came to her home in response to her call examined the engine and informed her that the noise came from the engine bearings. He indicated that the engine had been seriously damaged and could cost up to $2,000 to repair.

Kenja immediately informed the automobile dealer that she wished to have her money back. When the dealer refused, she brought an action for rescission of the agreement. At the trial, an expert testified that the problem was indeed a breakdown of the engine bearings, something that could occur in only a few minutes if insufficient oil was supplied to them. There was no evidence to indicate that the damage was in any way related to the water pump. Discuss the nature of Kenja‘s claim, as well as the possible defences to it. Render a decision.

Answer: The facts of this case are essentially those of Gafco Enterprises Ltd. v. Schofield (1983) 25 Alberta L.R. (2d) 238. In the case, the purchaser agreed to purchase the car in an "as is" condition. However, the purchaser might raise fundamental breach, since the car engine was defective. Was this defect sufficient to amount to a breach going to the root of the contract? The court held that it was not, since the damage was repairable (although expensive). As a result, the court held that the contract was binding on the purchaser, and she was bound by the exclusionary clause and her acceptance of the vehicle "as is". Caveat emptor. Note that this case was chosen because it appears to at variance with many other prior cases which have held that serious defects in goods constitute fundamental breach. However, the Alberta Court of Appeal in this instance felt that the purchaser was fully aware that she was purchasing a vehicle that was not warranted as to fitness, etc. Compare this decision with the Court Decision Borg-Warner Acceptance Canada Ltd. v. Wyonzek in the text. Case 8 On September 1st, Rothwell entered into an agreement to purchase Andrea‘s Restaurant. The purchase price was $375,000, with a down payment of $75,000. The balance was payable December 1st, when Rothwell was to take possession of the business. In anticipation of his start in the restaurant business, Rothwell quit his job and enrolled in a three-month community-college course on restaurant management. On November 1st, the owner of the restaurant notified Rothwell that she had received another offer to purchase the restaurant for $450,000, and she intended to sell the business to the offeror. Rothwell objected to the restaurant owner‘s actions and threatened to take legal action against her if she proceeded with the proposed sale. A few days later, the restaurant owner did in fact enter into an agreement to sell the business to Polonek, the new purchaser, for the purchase price of $450,000. The closing date of the transaction was to be December 1st. She then mailed a cheque to Rothwell for the $75,000 she had received from him previously as his deposit. Rothwell immediately returned the cheque and insisted that the restaurant owner proceed with the sale of the restaurant to him in accordance with their agreement. On November 28th, the local newspaper contained an announcement of the opening of a new restaurant in a large office building across the street from Andrea‘s Restaurant. The office building housed most of the customers of Andrea‘s Restaurant, and the new restaurant could be expected to take about 70 percent of the lunch customers and 40 percent of the dinner customers from Andrea‘s Restaurant.

The announcement came as a surprise to all parties. Polonek immediately wrote a letter to the owner of Andrea‘s Restaurant, in which he indicated that he did not intend to proceed with the transaction unless the owner reduced the purchase price to $150,000. Rothwell was out of town on other business on November 28th, and he did not become aware of the new competitor until December 1st, the proposed closing date for his purchase of the restaurant. Advise each of the parties of their legal position in this case. Assuming that each party exercised their rights at law, indicate how the issues raised in the case would be resolved by a court. Answer: The actions of the parties in this case raise issues of breach, alleged damages, and performance. Students should note that a binding contract was established between Rothwell and Andrea‘s restaurant on September 1st. The restaurant owner then sold the restaurant to Polenek, and advised Rothwell of the sale. At this point Rothwell would be entitled to treat his contract as at an end and sue the restaurant owner for damages. He did not do so, and insisted that the transaction proceed in accordance with the agreement. The second role to Polenek was repudiated by Polenek on November 28th, when the new competitor was discovered. This would allow the restaurant owner to treat the contract at an end, and complete the transaction with Rothwell on December 1st, as provided in the agreement. Rothwell under the circumstances would be obliged to complete the purchase on that date as he lost the opportunity to avoid the agreement earlier. For a case with different issues and varied facts, See: Williams and Gnettler v. Copperfields Hotels Ltd. and Ward (1992) 6 O.R. (3d) 557. Case 9 A commercial vegetable grower decided to grow a variety of open-pollinated cabbage as a market garden crop, based upon the success that his relative (who was also a commercial grower) had had with the variety several years before. He purchased seeds for the cabbage variety from the catalogue of a commercial seed supplier. The seeds were planted according to proper planting instructions and cultivated in accordance with accepted agricultural practices. Weather conditions were ―normal‖ throughout the growing season, but, in spite of this, the seeds produced a very poor crop. The grower informed the seed supplier that the crop had failed, even though he had used proper growing techniques. He demanded that the seed company compensate him for his loss. The seed company rejected his complaint and noted the seed purchase contract term which stated: The vendor warrants seeds only as to variety named and makes no warranty express or implied as to quality or quantity of crop produced from the seed supplied. Any responsibility of the vendor is limited to the price paid for the seed by the purchaser. When the seed company refused to entertain his complaint, the grower decided to take legal action to recover his loss. Discuss the basis for the grower‘s action and the defence, if any, of the seed company. Render a decision.

Answer: The facts of this case are essentially those in Kordas v. Stokes Seeds Ltd. (1992) 11 O.R. (3d) 129. The case concerns the application of an exculpatory clause and the doctrine of fundamental breach, when the seeds failed to provide the crop results the buyer expected. The buyer alleged fundamental breach when the crop was unsatisfactory, but the court held that the buyer did not receive seed that was fundamentally different than what he had ordered, and the defendant seed company was entitled to rely on the exculpatory clause. Case 10 Complex Software Corporation produced sophisticated software programs for computer-assisted product development. Complex Software was engaged by Turbine Engines Ltd. to develop software that would enable its engineers to develop the most efficient blade design and angles for its large turbines, which were used in hydro-electric power generators. Turbine Engines provided the engineering data necessary to develop the program, and Complex Software prepared the software. The software was tested by both Complex Software and Turbine Engines using a simple turbine with known design and performance characteristics as a model. The software appeared to work properly, and Turbine Engines used the program to design a new multi-stage turbine engine. Unknown to Turbine Engines, the striking of certain computer keys in a particular sequence had the effect of cancelling out the safety factor to be built into the turbine blades. The key sequence was not the sequence used in the test, but a technician used the particular key sequence in designing the new model turbine blades. As a result, when the new turbine was tested in a high-speed operational mode, the blades disintegrated and destroyed the engine. Turbine Engines brought a legal action against Complex Software claiming $850,000 in damages as its loss in the construction of the faulty prototype turbine. Discuss the various arguments that may be raised by the parties in this case, and prepare a decision as if you were the judge. Outline your reasoning in reaching your decision. Answer: The issue raised in this case concerns the alleged breach of an agreement to produce a software program for the development of turbine blades. Questions that might be raised include: Would a skilled software producer be aware of the problems the key stroke sequence would produce? Did it have a duty to warn the user? Given the facts of the case, the Complex Software Corporation should have forseen the possibility of the key stroke sequence, and its failure to do so would perhaps constitute breach of contract. The damages that would flow from the breach would be those damages reasonably forseeable at the time the agreement was entered into, and might include the full value of the turbine and engine.

Case 11 The Canada Tea Co. entered into a contract to purchase 400 wooden chests of tea from an off-shore tea merchant. On receipt, it was discovered that some of the tea chests had insects in the wood, but not in the tea, which was enclosed in sealed plastic bags inside the chests. Canada Tea Co. warned the supplier that it would refuse acceptance of any future shipments that were infested with insects. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-170

A second order for 400 wooden chests of tea was placed. On arrival, the tea chests were examined. Evidence that insects had been in the wood was revealed, but no insects were found in the shipment. Canada Tea Co. rejected the shipment. The off-shore tea merchant then took legal action against Canada Tea Co. for the value of the shipment. Discuss the nature of defence (if any) that Canada Tea Co. might raise. Indicate the possible outcome of the case. Answer: Students in this case should identify the issue raised by the plaintiff as a basis for rejection of the shipment of tea. Was it based on the warning concerning insects in the wooden container? If so, could this justify rejection? Since no insects were found in the second shipment, the warning would not be applicable. This case problem is based upon the case of General Commodities Ltd. v. Murchie's Tea & Coffee Ltd., a 1988 decision of the B.C. Count of Appeal. (see: Doc. No. CA007800). In that case the Court of Appeal held that fundamental breach of the contract had not occurred, and the Defendant was not entitled to reject the shipment. Case 12 Hatfield owned a large farm on which he grew grain. His combine was inadequate in relation to the acreage of grain that he harvested annually. As a result, on several occasions his crops had been adversely affected by rain and poor weather conditions. He reasoned that a larger machine could reduce the time spent harvesting by as much as two-thirds and, thereby, reduce the chances of bad weather affecting his harvest. At an agricultural exhibition, he examined a new self-propelled combine that was advertised as capable of harvesting grain at three times the speed of his old equipment. The machine was much larger and more powerful than his old combine and appeared to be of the correct size for his farm. On his return home, he contacted the local dealer for the combine. After explaining his needs, he was assured by the dealer that the size he was considering would be capable of harvesting his crop in one-third of the time taken by his older model. He placed an order for the combine, with delivery to be made in early July, well before he would require the equipment. The machine did not arrive until the beginning of the harvest, and Hatfield immediately put the machine into service. Unfortunately, the machine was out of adjustment, and Hatfield was obliged to call the dealer to put it in order. The equipment continued to break down each time Hatfield operated it at the recommended speed. In spite of numerous attempts by the dealer to correct the problem, the equipment could not be operated at anything more than a very slow speed without a breakdown. Hatfield found that despite the large size of the equipment, his harvest time was no faster. When the harvest was completed, he returned the machine and demanded his money back. The equipment dealer refused to return his money. He pointed to a clause in the purchase agreement that Hatfield had signed, which read: ―No warranty or condition, express or implied, shall apply to this agreement with respect of fitness for the use intended or as to performance, except those specifically stated herein.‖ The only reference in the agreement to the equipment stated that it was to be a ―new model XVX selfWilles, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-171

propelled combine.‖ Advise Hatfield of his rights (if any). Answer: This case is based upon the facts of Murray v. Sperry Rand Corporation (1979), 5 B.L.R. 284, in which the court determined that the failure on the part of the manufacturer to provide a machine that would perform at its rated capacity constituted a fundamental breach of the agreement, notwithstanding the exemption clause which referred to performance. A number of other cases also deal with similar situations where the equipment fails to perform as expected. See for example: Cain v. Bird Chevrolet Oldsmobile Ltd. (1976), 12 O.R. (2d) 532. The questions which might be raised with respect to the fact situation should perhaps include those related to the representations made by the seller with regard to performance, and the need for frequent adjustment or service by the dealer in an attempt to meet the performance warranted. Some of these might be: What are the implications of the assurance given by the dealer that the size of the combine selected would harvest at three times the speed of the farmer's existing model? How important was the delivery date? Was it a warranty or condition? What effect does the exemption clause have on the purchaser's rights? What effect, if any, would the delay in the return of the equipment have on the purchaser's right to a return of his money? Would your answer be any different if he had not notified the dealer promptly, but attempted repairs himself? Case 13 One summer, Gianni visits an All-Terrain-Vehicle dealer, and, thinking about the autumn hunting season, signs a contract to purchase a $7,500 ATV, not putting the slightest effort to reading or understanding the terms of the deal. He puts down the requested 10% deposit of $750 and sets about to finding the balance, which is due a week prior to hunting season. As the date approaches, Gianni admits financial failure to the dealer, who tells him, ―You had better keep trying to find the money. Your deposit will be forfeit as liquidated damages if you do not come up with the balance. Did you not read your copy of the contract?‖ Advise Gianni, and explain the likely outcome of the situation. What facts would have to change to reverse your opinion of the outcome? Answer: Gianni in this case is in breach of contract, as he is unable to pay for the ATV as provided in the contract. Students should discuss the amount of the $750 deposit paid, and decide if it represents a part payment or a reasonable estimate of the damages that would flow from a breach of the contract by Gianni. If it is a reasonable estimate of liquidated damage, then the ATV dealer would be entitled to keep the deposit. Change of outcome: The $750 is perhaps a reasonable estimate, and in order to change the outcome, the ‗deposit‘ would probably need to be much larger, in which case Gianni would be entitled to a return of the excess over the actual damages the seller suffered as a result of the breach. As a second change of outcome, Gianni would be obliged to pay the balance of the purchase price in order to change the basic outcome of the case.

Case 14 Roland Exploration and Drilling Co. purchased mobile two-way radios for use by its crews at outlying natural gas wells. One day a small fire broke out in a storage shed near one such well, and the crew called Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-172

for help on its radio. The radio failed internally, and made no transmission. As a result, what was a small fire burned continuously and grew until it enveloped the wellhead, while a member of the crew drove forty kilometres to the nearest telephone. Once the call got through to an aerial fire crew, it was only ten minutes before a firebomber dropped chemical smothering powder onto the well and extinguished the flames. Damage to the shed amounted to $2,000. Damage to the wellhead amounted to $1.5 million. The purchase agreement between Roland and the radio dealer stated: ―Damages limited to cost of replacement radio. Not responsible for consequential damages of any kind, regardless whether caused by defect in materials or manufacturing.‖ The same terms appeared on a card inside the packing box in which the radio was originally delivered. Advise Roland. Answer: The contract for the purchaser of the mobile two-way radios contain in exemption clause, limiting the liability of the radio dealer. Students should consider this limitation on liability. Is it effective in limiting liability to the replacement cost of the defective radio? Was the fire loss foreseeable when the contract was made? Was the purpose of the radios stated when the purchase was made? Was the limitation on liability reasonable? Contracts made between business persons are more likely to be interpreted more strictly than consumer agreements, and the courts are willing in many cases to enforce exemption clauses in agreements of this nature. In the case, Roland might argue that the total failure of the radio represents a fundamental breach, but given that this is only one of the many radios purchased under the contract, the court may reject this argument, and let the exemption clause stand, limiting damages to the replacement cost of the unit. Roland may be unsuccessful in its claim for the $1.5 million and $2,000 damages to its property. According to Borg-Warner Acceptance Canada Ltd. v. Wyonzck (1981) 4 W.W.R. 193, these would be considered consequential damages, and excluded in the contract as a result of the breach.

CHAPTER CHARTS

CHAPTER 15. LAW OF AGENCY Chapter Topics The Role of an Agent Historical Development of the Law of Agency The Nature of the Relationship Ratification of Contracts by a Principal Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-174

Third Parties and the Agency Relationship Liability of Principal and Agent to Third Parties in Tort Termination of the Principal–Agent Relationship Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion

Chapter Objectives After study of this chapter, students should be able to: • Understand the nature of the agency relationship. • Know the duties of an agent. • Explain the relationship between agents and third parties. • Recognize the liability of all parties in tort. YOUR BUSINESS AT RISK An agent may be useful and even essential for certain jobs, but when an agent acts on your behalf, you become responsible for the actions of that agent. Aside from just good outcomes, an agent can bind you or your business to impossible promises, create huge financial liabilities, or tarnish your reputation. Proceed with caution in using agents! CHAPTER COMMENTARY The agency concept is very important, for apart from the extensive use of agents to carry out specific activities for principals, (such as real estate agents, manufacturer's agents, etc.) the concept represents an essential part of many other business relationships. For example, in a partnership, which is covered in Chapter 16 (Law of Sole Proprietorship and Partnership), every partner is the agent of every other partner, and can bind the partnership in contract where the contract falls within the ordinary scope of partnership business. Similarly, in the case of corporations covered in Chapter 17 (Corporation Law) the corporation can only act through the concept of agency. Agency, consequently, must be fully understood by students before moving on to the next two chapters in the text. An approach to the topic might be to spend some time on the duties of the agent, with special emphasis on the duty of the agent to act in good faith, and always in the best interests of the principal. This is desirable, since the type of agent that most mature students are familiar with is the real estate agent. Real estate agents, and their particular duties are covered in Chapter 25 (Commercial and Residential Real-Estate Transactions), but if the instructor so desires, the duties of this type of agent may be examined in conjunction with this chapter. The ability of a principal to ratify the act of an agent is also a matter for classroom review. The law in this area, unfortunately, is not as clear as it might be, as explained in the text, but apart from the particular issue as outlined, the principles for ratification are relatively well established.

The entire area of third parties and agency should be clearly examined to establish the position of the parties in those situations where an agent acts for a disclosed and an undisclosed principal. Since students sometimes find it difficult to imagine a third party would contract with the agent for an undisclosed principal, the topic should be fully examined. Termination of the agency relationship is relatively clear, but the effect of failure to notify customers of termination, and the question of apparent authority are worth examining in class. The Freeman & Lockyer v. Buckhurst Park Properties Court Decision might be used to illustrate the concept of apparent authority, although the case was not one which concerned an agency relationship terminated before the contract was made.

Review Questions 1. List the various ways that an agency relationship may be terminated. Answer: Agency may be terminated by: (1) death of agent or principal, (2) by agreement, (3) completion of the task, (4) incapacity, (5) bankruptcy of the principal, (6) on notice.

2. What types of agency relationships may arise or be formed? Answer: Agency relationships may be established by: express agreement, by conduct, by operation of law, and by necessity.

3. If an agent exceeds his or her authority in negotiating a contract, under what circumstances would the agent alone be liable? Answer: If the agent acted alone without disclosing that he was acting as an agent, the agent alone would be liable.

4. Why do the courts sometimes recognize the existence of an agency relationship based upon the conduct of parties?

Answer: Where a person by words or conduct gives others the impression that another is the agent of that person, the courts will consider that an agency is created by estoppel.

5. How does the implied authority of an agent differ from express authority? Give examples of each. Answer: Implied authority may arise where the principal has expressly withheld certain authority of the agent which agents of that type normally possess. E.g.: leaving goods with a selling agent but denying the agent authority to sell. Since agents of this type normally have authority to sell, if a third party buys the goods, the principal would be bound by the contract. The principal, however, would have a right of action against the agent for breach of the agency agreement.

6. Define an "agent of necessity," and explain how the agency might arise. Answer: An "agent of necessity" arises where there is a pre-existing contractual relationship between the parties, and an emergency arises which requires the agent to do something to prevent total loss of goods, etc. of the principal. E.g.: a carrier may be an agent of necessity for the sale of goods if delivery cannot be made and the goods are perishable.

7. Describe briefly the duties of an agent to his or her principal. Answer: An agent's duties are: act in best interests of his/her principal, obey all lawful instructions or directives of principal, keep confidential information given by the principal, report all information to the principal, account for funds received, and maintain the standard of the skill he possesses.

8. Explain "agency by estoppel". Answer: Agency by estoppel arises where the principal by words or conduct gives a third party the impression that a person is his or her agent. If the third party enters into a contract with the person as agent, the principal is estopped from denying that the agency exists.

9. Under what circumstances would a principal be entitled to ratify a contract made by an agent? Answer: A principal may ratify a contract if the principal was capable of making the contract at both the time it was made by the agent and when it was ratified, if it is ratified with a reasonable time.

10. Is a written document setting out the terms of an agency relationship always necessary? If not, why not? Answer: A written agency agreement is not necessary unless the relationship cannot be carried out within the space of one year.

11. When would a principal be liable for the acts of an agent who exceeded his authority? Answer: A principal would be liable for the act of an agent in this case where the agent had apparent authority to bind the principal.

12. What is the role of an agent? Answer: An agent is usually used to bind his or her principal in contract with a third party.

13. Is a principal liable for the torts of his or her agent? Under what circumstances would the principal not be liable? Answer: A principal is liable for the torts of an agent if the tort is committed during the course of the agency work. A principal would not be liable if the tort committed by the agent was outside the scope of the agency business of the principal.

Mini-Case Problems 1. Alice engaged Kelly as her agent to negotiate a contract for the purchase of a large quantity of china for her shop. Before Kelly completed his negotiations, Alice became insolvent and was declared bankrupt. Kelly completed the transaction for the purchase of the supplies some days later. What are the supplier‘s rights? Answer: An agent is obliged to keep in constant touch with the principal. Kelly failed to do so, and when Alice was declared bankrupt the agency terminated. Kelly had no authority to negotiate the purchase, and would be liable to the supplier personally on the basis of breach of warranty of authority. 2. The Acme Co. frequently sold goods through B Co., as its agent. The Acme Co. terminated the agency agreement, but failed to pick up goods at B Co.‘s warehouse. B Co. later sold the goods to D Co. However, before D Co. took delivery, Acme Co. demanded return of the goods from B Co. Discuss. Answer: Company has placed itself in a difficult position. Knowing the agency agreement to be at an end, it has still behaved as though it was Acme‘s agent. Acme, as first mover, may be successful in recovering its goods from B Company, but will face a challenge from D Company. D Company will argue that it is entitled to rely on the former agent‘s apparent authority to enforce delivery of the goods from either B Company or Acme. Aside from an Acme action against B Company for breach of warranty of authority, if D Company is successful against Acme, Acme may maintain an action against B Company for any loss it suffers. Presumably Acme wants return of the goods because they are unique, have increased in value, or D Company has paid or would pay only part of their worth. In any event, B Company would be required to account to Acme for any funds it receives from D Company. The Acme action against B Company would be better Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-178

framed as a tort action for conversion (the taking of the goods) than as a breach of contract (having been terminated). Finally, if the price obtained from D Company is actually advantageous, Acme may also simply consider ratifying this contract rather than demanding return of the goods.

3. Realty Limited employed Louis as a salesman. Martine listed a building lot with Realty Limited for sale at $178,000. Louis found a buyer, Jeanne, but Jeanne could not raise the full purchase price. Louis and Jeanne agreed that Louis would purchase the lot personally and to sell it to Jeanne once Jeanne had finally raised the necessary $178,000. Louis then purchased the lot from Martine for $170,000 and six months later resold it to Jeanne for $178,000. Discuss. Answer: Whatever the motives of Louis (even if originally well-intentioned to create an early sale) the arrangements with Jeanne, if undisclosed to Martine, are a breach of the agent‘s duty of utmost good faith owed to his principal. The damages would include the $8,000 secret profit, a refund of commission paid, and any punitive damages. Realty Limited will further be vicariously liable for the tort of its employee.

4. Chantal held herself out as a principal while negotiating the purchase of a large stock of cosmetics and perfume from Radiance, a retailer that had run into financial difficulty. In fact, Chantal was making the purchase on behalf of her employer, Salon. Radiance was unaware that Chantal was employed by its competitor Salon; however, Chantal gave the Salon address as the delivery address. Upon delivery, Salon changed its mind about buying the goods and refused to pay and rejected the goods. Advise Radiance. Answer: Chantal is acting on behalf of an undisclosed principal, and has not disclosed even the fact that she is an agent. As a result, Radiance is entitled to hold either Chantal (agent) or Salon (principal) liable for payment under the contract. In all probability, Salon is in a better position to pay for the goods, and Radiance will make its election accordingly.

Case Problems For Discussion Case 1 Custom Conveyor Ltd. was a manufacturer of conveyor systems for use in warehouses and shipping facilities. Most systems were custom designed to customer specifications, but used standard components or units manufactured by the company. Conveyor systems were sold locally by authorized dealers, who assisted the customer in the design of the system for the customer‘s needs. Custom Conveyor Ltd. advertising brochures stated: ―The design of the conveyor system is a team effort between us and our local dealer to ensure that the conveyor system will perform efficiently and trouble-free in your facility.‖ Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-179

Max Warehouse Ltd. contacted Ace Conveyor Installations Ltd., a local dealer for Custom Conveyor Ltd. systems with a view to replacing its existing conveyor system with a new system. Ace Conveyor examined the warehouse facility, and designed a new conveyor system for the warehouse. Ace Conveyor advised the president of Max Warehouse Ltd. that the proposed system would be 50% more efficient than its existing system and would be trouble-free. The cost was $175,000, and included installation. Max Warehouse Ltd. signed an Ace Conveyor Ltd. purchase order form for the conveyor system which contained a banner across the top of the order form that read: ―We work for you to ensure your success.‖ The conveyor system was eventually delivered and installed in the warehouse by Ace Conveyor Ltd., but failed to work in a satisfactory manner. Break-downs were frequent, and the system required constant servicing to operate as was intended. Discuss the nature of the relationships established by the parties. If Max Warehouse Ltd. should decide to take legal action, speculate as to the arguments of the parties, and the possible outcome of the case. Answer: Although there are suggestions of a relationship and teamwork between Custom Conveyor and Ace Conveyor, the latter remains a dealer, and not an agent of Custom Conveyor. The order form was an Ace form, and the contractual dealings were between Max and Ace as a reseller. The law relating to the sale of goods is dealt with in later chapters; however students should sense the responsibility for goods to perform in accordance with representations made at the time of sale. Thus Max Warehouse will make much of the statement of ―team effort‖ to imply the existence of some form of agency relationship between Ace and Custom, to tie responsibility of Custom Conveyor (and its presumable deep pockets) to statements made by Ace. Case 2 Alex was the agent for a number of professional dancers. As agent for the dancers, he would seek out work in local musical stage, television and movie productions. For his efforts, Alex received a percentage of the earnings that the dancers received for their performances. During a particularly slow season, a local theatre owner approached Alex, and suggested that they organize a special ‗theatre night‘ to promote local talent in the municipality. Alex and the theatre owner agreed that admission would be charged to the public, but the performers would donate their services, since it would be a mixed amateur/professional event to promote local theatre and local talent. Alex and the theatre owner would share the proceeds from the ticket sales as payment for their efforts in the promotion of the event. Alex arranged for his clients to perform at the event, but did not tell them that he would be sharing in the ticket sales. Alex and the theatre owner worked very hard to promote the special theatre night, and it was a success. Alex and the theatre owner shared ticket sales of $20,000. Some time later, one of Alex‘s dancers discovered that Alex had shared in the proceeds from the special theatre night. Advise the dancers. Answer: Alex is liable to his clients, having taken a secret profit. The transaction is perhaps one-off and out of the ordinary for both Alex and the dancers, however it is entirely of the genre in which Alex routinely acts as Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-180

agent for the dancers. Thus, though he might even be making his own sacrifice to promote an event and receive only his share of $20,000 he is obligated to have disclosed this fact to his principals, who may have then seen the event (and their own contributions) in a different light.

Case 3 Amin was interested in the purchase of the shares of Holt Manufacturing Ltd., which was in financial difficulties due to a high debt load. He contacted Jones, a business consultant, to provide him with an assessment of the firm. Jones was to negotiate the purchase on Amin‘s behalf if his investigation indicated that the purchase of the shares represented a good investment. Jones suggested that Brown, a consulting engineer, be engaged to assess the condition and value of the manufacturing equipment. Brown was also to provide some advice on what might be done to improve the profitability of the operation. Amin agreed, so Jones and Brown proceeded with their assessment of the firm. During their examination, Jones and Brown realized that the firm represented a good investment if the equity-to-debt ratio could be altered and some manufacturing processes changed to improve efficiency. The two then established a corporation. They indicated to the present owners of the manufacturing firm (whom they had met through Amin) that they also represented a corporation that might be interested in the purchase if Amin should decide against the investment. Jones and Brown completed their assessment of the business that in their written opinion to Amin was worth approximately $1.1 million. They submitted accounts of $3,000 and $3,500 respectively, which Amin promptly paid. A few days later, Amin presented the owners of the manufacturing firm with an offer to purchase the shares for $1 million. The offer was promptly rejected. Before Amin could submit a new offer, the corporation that Jones and Brown had incorporated made an offer of $1.1 million for the business. The second offer was accepted, and the shares transferred to the corporation for the $1.1 million. When Amin discovered that Jones and Brown were the principal shareholders of the corporation that had made the $1.1 million offer, he brought an action against them for damages. Describe the nature of Amin‘s action. Discuss the possible arguments that might be raised by both the plaintiff and the defendants. Identify the main issues and render a decision. Answer: The issues raised in this case concern the duties of an agent to his principal. The first involves the duty of Jones to Amin. What was his duty in this case? When did the duty end? Was Jones free to use the information gained as Amin's agent for his own benefit? The same questions may be raised with respect to Brown. Further questions raised by the case might include: Would Jones and Brown be obliged to reveal the incorporation of their company for the purpose of competing with Amin? Did they have the right to suggest to the owner of the manufacturing firm that they were interested in a possible purchase if Amin should decide against the purchase? Amin's action would probably be based upon the failure of both Jones and Brown to act in good faith and in his interest in their dealings with the owner of the firm. In the case of Sinclair v. Ridout and Moran, [1955] O.R. 167, which was, in part, a similar situation, the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-181

court held that the agents had violated their duty to their principal not only by the use of their position as agent, but by competing with their principal through the corporation without revealing their conflict of interest to their principal. Case 4 Chelsea Pets Ltd. engaged Kent to act as its agent in the sale of 3,000 live rabbits. Without disclosing the fact that he was only an agent, Kent offered the rabbits to Somerset Pet Shops Ltd. at $7 each. Somerset agreed to purchase the lot, but at the conclusion of the discussion, reminded Kent that he owed them $5,000. Kent responded, ―When this sale is completed you will get your $5,000.‖ Kent advised Chelsea Pets Ltd. of the sale. Chelsea Pets Ltd. delivered the rabbits to Somerset‘s Pet Shops Ltd. and informed them that it was delivering the rabbits in accordance with the sale that Kent had negotiated on its behalf. Somerset Pet Shops Ltd. took delivery and transferred $16,000 to Chelsea. Chelsea demanded the full $21,000. Chelsea Pets Ltd. threatened to sue Somerset if it did not pay the purchase price in full. Advise Chelsea Pets Ltd. and Somerset Pet Shops Ltd. in this case. Offer a possible outcome if Chelsea Pets Ltd. should carry out its intention to institute legal proceedings against Somerset Pet Shops Ltd. Answer: This case illustrates the rights of the third party that deals with the agent for an undisclosed principal where the agent has failed to disclose that he is acting only as an agent. Here, the third party may have assumed that Kent was acting as a principal in the sale, and did not discover the agency until Chelsea came forward with the goods under the contract. In an action for breach of the contract, the third party would be obliged to select the party to sue, and if Chelsea refused to deliver the rabbits, Somerset could treat the refusal to deliver as a breach. The undisclosed principal, unfortunately, is in a difficult position here, as adoption of the contract may mean that he took it as it stood between Kent and Somerset, in which case Somerset might set off the debt owing by Kent (See: Campbellville Gravel Supply Ltd. v. Cook Paving Co., [1968] 2 O.R. 679). Chelsea in that case would be obliged to look to Kent for the remaining $5,000. Case 5 Johnson used Birkett as his stockbroker for most of his investments. Occasionally, when Johnson had spare funds, he would seek the advice of Birkett as to investments he should make. On one such occasion, Birkett recommended two companies as investments with potential for profit. At the time, Birkett indicated that he personally preferred stock B over stock A and intended to purchase some shares on his own account. Johnson ignored his advice, however, and purchased stock A. During the next few weeks, stock A dropped in value as a result of unexpected political upheaval in an unstable country where the company had extensive holdings. Stock B, on the other hand, gradually increased in value during the same period. It had reached a price approximately 20 percent above what its value had been when Birkett recommended it as a possible investment. Johnson discussed his investment with Birkett, and Birkett suggested he sell stock A. Johnson did so and requested Birkett to invest the proceeds in stock B. Birkett cautioned Johnson that the stock had Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-182

already climbed in price and might not be as attractive an investment as it was some weeks earlier. Johnson, nevertheless, insisted that he buy the shares. Birkett then transferred some of his own shares to Johnson at the current market price, without disclosing the fact to Johnson. The shares almost immediately declined in value for reasons unknown to both Johnson and Birkett. A month later, Johnson discovered that the shares that he had acquired had been transferred to him by Birkett. He immediately brought an action against Birkett for the amount of his loss. Explain the nature of the claim that Johnson might make against Birkett. Indicate how the case might be decided. Answer: This case raises the duty of an agent to disclose to the principal all information which might affect the principal. Did Birkett comply with this duty when he cautioned Johnson not to buy stock "B" because it had already increased in value? At what point would his duty be complete? Did it matter what the source of the shares would be once Johnson decided that he wanted the shares? Did Birkett violate his duty when he failed to disclose that he would be selling Johnson his own shares? The onus is on the agent to prove good faith and full disclosure of all material facts to the principal in cases where a principal suffers a loss. The failure to make a full disclosure generally constitutes a breach of duty by the agent, and Birkett failed to do so in this case. See: Johnson v. Birkett (1910), 21 O.L.R. 319. Case 6 John Rowe had been a successful businessman during his lifetime. When he died, he left his business to his son and daughter and, under the terms of his will, left his widow, Florence, a life annuity that paid her $40,000 per year. Florence was quite elderly at the time of her husband‘s death. Her son and daughter concluded that the $40,000 annuity might not be sufficient for her to maintain her home and cover her living expenses, since she required a housekeeper to look after the premises. To provide her with additional income, the two children placed $400,000 in the hands of the family stockbroker in their mother‘s name. The funds were placed with Margaret Lawson, an investment advisor with the brokerage firm. She was instructed to invest the money in the shares of Canadian corporations only, in order to provide Florence with income and dividend tax credits. No part of the funds was to be placed in bonds or the securities of foreign corporations. Florence had no investment experience, and so advised Margaret. She informed Margaret that she intended to leave the choice of investment with her, as she did not wish to have ―the worry of making investment decisions.‖ During the next two years, Margaret invested the funds in the shares of Canadian corporations. The investment income was approximately $40,000 per year. Florence was pleased with the results and, at the end of the second year, wrote a note to Margaret that read: ―Many thanks for your hard work and success to date. Invest as you see fit, until further notice from me.‖ During the third year, Margaret switched most of the Canadian shares to bonds, foreign currency holdings, and speculative issues, at a very high investment turnover rate. The high trading activity resulted in very high sales commissions for Margaret, but very little in earnings for Florence. By the end of the third year, Florence‘s income was down to $15,000, and the net worth of her investment fund had Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-183

diminished to $220,000. At the end of the third year, Florence notified her son that ―something seemed to be wrong‖ with her investment income. Her son immediately contacted the investment firm. At that point, Margaret‘s trading practices were discovered, and the value of the investment fund was determined. On the advice of her son, Florence brought an action against the stockbroker and Margaret, an employee of the firm. Discuss the nature of the action that Florence might bring, and the issues involved. Render a decision. Answer: The brokerage firm was engaged to buy and sell securities on behalf of the principal, Florence. Margaret was an employee of the firm, and the firm would be liable for any breach of her duty towards the firm's principal. Margaret's instructions were clear initially: to invest only in shares of Canadian corporations in order to provide dividend income eligible for dividend tax credits. Due to Florence's lack of knowledge of investments, should Margaret have followed these instructions? Did Margaret put her own interests before those of Florence in her choice of investments? From the facts of the case, Margaret began trading in securities on behalf of Florence in speculative issues which could not provide the type of income required. Since it was made known to Margaret by both Florence (and her children) that she had no knowledge of investments or the stock market, her comments to Margaret could not be taken as instructions concerning investments to make. Margaret (and her employer) were consequently in breach of their duty to (1) carry out the principal's directives and (2) to put the principal's interests above their own. The facts of this case are based upon the facts in the case of Ryder v. Osler, Wills, Bickle Ltd. et al. (1985) 49 O.R. (3d) 609 where the court held the brokerage firm liable for the losses suffered due to the employee's breach of her duty. Case 7 The Rockland Corporation carried on business as a representative for investor groups that wished to acquire active business firms. Peter Rockland, the President of Rockland Corporation, met with a group of business people who had recently established a small brewery, and who wished to purchase some of the assets of another brewery business, the Best Brewery Ltd. At the direction of the investor group, Peter Rockland met with the president of the Best Brewery Ltd. and negotiated a purchase price of $4.5 million for the assets. Peter Rockland then prepared a ―letter of intent,‖ which set out the purchase price of the assets and the terms of payment. The letter called for the payment of a deposit of $450,000 within 48 hours of the signed acceptance of the offer by Best Brewery Ltd. The ―letter of intent‖ was signed: ―Rockland Corporation on behalf of an investor group. per Peter Rockland.‖ Peter Rockland delivered the letter to the president of Best Brewery Ltd. On receipt of the letter, the president inquired as to the identity of the group of investors, and Peter Rockland arranged for Graham, a member of the investor group, to telephone the president and assure him that Rockland Corporation had authority to sign the letter on the investor group‘s behalf. Graham telephoned the president of Best Brewery Ltd. to assure him, but did not reveal the fact that he was a principal in the group that had established the competitor brewery. The president then wrote to Peter Rockland advising him that the company would accept the offer. The investor group was unable to arrange financing and decided to abandon the purchase. When the investor group did not pay the deposit within the 48-hour period, Best Brewery Ltd. delivered a written Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-184

notice of termination of the agreement to Rockland Corporation. Peter Rockland felt, however, that he could assemble another group of investors to acquire the assets, so he decided to enforce the agreement. Rockland Corporation then instituted legal proceedings against Best Brewery Ltd., claiming for breach of the agreement and damages. Explain the basis upon which Rockland Corporation might bring the claim; indicate the defences, if any, that the Best Brewery Ltd. might raise. Render a decision. Answer: The facts of this case are drawn from the case of Rothwell Corporation v. Amstel Brewery Canada Limited (1991) 6 O.R. (3d) 651. The case raises the matter of the undisclosed principal (agent contracting on behalf of the undisclosed parties) and the rights/duties/liability between an agent and a third party. As the case indicates, the agent entered into an agreement with a third party on behalf of a group of investors who were undisclosed principals. Assurance was given by one of the undisclosed principals that the agent had authority to act on their behalf, and an agreement was made between the agent and the third party. When the transaction was terminated, the agent attempted to 'revive' the agreement with a view to finding a new group of investors and brought an action in court. The question raised here is: Could the agent do so? The court held that the agent could not do so, because as an agent, the agent had no contractual standing between the principal and the third party. He had no rights under the contract as he was only an agent, and not a party to the agreement.

Case 8 The Clear Cut Lumber Company engaged the services of Timber Harvesters Ltd. to selectively cut certain hardwood species of trees on an extensive acreage that it owned. The contract provided that Timber Harvesters Ltd. was free to cut any access roads required, and it was required to remove and stack the cut timber at certain collection points in the area. Timber Harvesters Ltd. was provided with survey maps of the lands owned by Clear Cut Lumber Company, and the boundaries of the property were shown to Timber Harvesters Ltd. supervisors. Timber Harvesters Ltd. began cutting logging roads immediately thereafter, in order to gain access to the particular stands of hardwood required by Clear Cut Lumber. In doing so, Timber Harvesters Ltd. inadvertently entered into neighbouring lands with its road, and cut a stand of trees that belonged to the property owner. The property owner immediately took legal action against Clear Cut Lumber Company for trespass and the cutting of the trees. Clear Cut Lumber denied liability on the basis that it had informed the contractor of the boundaries of the property, and it was not responsible for the actions of the contractor. Discuss the arguments that may be raised in this case, and discuss the possible outcome if the court is required to determine the issue. Answer: In this case, students should first determine the relationship between Clear Cut Lumber Company and Timber Harvesters Ltd. Students should conclude from the facts that the relationship is one of agency. A second issue should be the acts of the agent vis-a-vis the property owner. When the agent entered on the property was it carrying out its duties as agent? Clearly it was in breach of the directive of the principal not to trespass Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-185

on the lands of the adjacent landowner. A trespass occurred by the agent, and since it was carrying out its duties for the principal, the principal is liable. The principal, however, would have a right of action against the agent for a breach of their agency agreement. See: Harris v. Brunette (1893) 3 B.C.R. 172 for a similar case. Case 9 A property owner listed her property for sale. She provided the agent with authority to sell the property on her behalf if the terms of any offer received met the terms set out in the listing agreement. A prospective buyer inspected the property during the period of time that the property was listed for sale, but did not make an offer to purchase. After the agency agreement had expired, the prospective buyer made an offer to purchase the property that corresponded with the terms of the listing agreement. The agent accepted the offer on behalf of the property owner. When the buyer discovered that the agency agreement had expired, he brought an action against the agent. Explain the nature of the buyer‘s action and indicate how the case may be decided. Could the property owner ratify the agreement? What factors would affect the ratification? Answer: One cause of the action would be against the agent for breach of warranty of authority to sell the property. The case, however, concerns the question of the seller's ability to ratify the contract, and this issue should be discussed as well, since the buyer's action would only arise if the principal refused to proceed with the transaction. For the latter, the "rules" for ratification should be reviewed, and the question of whether the principal could satisfy them should be determined. In particular, the question should be asked: Does an action against the agent for breach of warranty of authority constitute repudiation of the agreement, and if so, would it at that point be too late for the principal to ratify? If the case is viewed as a situation where the principal has refused to ratify the agreement, then the question of the agent's authority becomes a key issue. If the agent had the authority to sell the property at the time of first negotiation with the buyer, then the buyer would be aware of the agent's authority. Later, however, the authority would not be present, but the question which might be raised here is: If the authority was for a specified time, was the buyer aware of the expiry date? Was it incumbent upon him to determine if the authority had been extended? The authority to sell, and the authority to convey are two distinct authorizations under real property law. While an agent may bind a principal in contract under ostensible authority, the expiry of authority to convey the property would terminate the agent's authority to convey, and any conveyance given after the expiry of the authority would not convey the principal's interest. See: Taylor v. Wallbridge (1879), 2 S.C.R. 616 at 678-679. If the agent lacks the authority to bind the principal, then an action by a third party for breach of warranty of authority might lie against the agent. See: Wickberg v. Shatsky (1969), 4 D.L.R. (3d) 540. Case 10 The Acme Company, which frequently acted as agents for sea food processors and buyers, was contacted by the Gourmet Fish Company to find a supply of a particular fish for its new product line. Under the terms of the agreement, the Acme Company was entitled to a flat commission rate based upon the quantity of fish purchased. The Acme Company contacted several fish-processing plants and arranged for each to supply a quantity of the fish species required by the Gourmet Fish Company. In each case, the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-186

Acme Company charged the processing plant a $3,000 fee for arranging the supply contract. In due course, the fish were delivered to Gourmet Fish Company, and the agreed-upon commission was paid to the Acme Company, based upon the quantity of fish supplied. Some time later, when the Gourmet Fish Company discovered that the Acme Company also charged a fee to the processing plant for arranging the supply contracts, it took legal action against the Acme Company. Discuss the nature of the claim that would be made by the Gourmet Fish Company and the defences, if any, of the Acme Company. Render a decision. Answer: The claim that Gourmet Fish Company would make would be based upon the agent's failure to make a full disclosure to the principal of the contract arrangements it had made with the processing plant. The collection of a commission on the supply contracts by the agent would be a breach of the agent's fiduciary duty to its principal Gourmet Food Company, and would entitle Gourmet Fish Company to receive from the agent the secret commissions made on the transactions. For a similar case: See: Moores v. Sequeira (1983) 41 Nfld. & P.E.I.L.R. 129, affirmed (1985) 55 Nfld. & P.E.I.L.R. 128 (Nfld. C.A.).

CHAPTER CHARTS

Additional Charts for Instructor Use (not appearing in text)

CHAPTER 16. LAW OF SOLE PROPRIETORSHIP AND PARTNERSHIP Chapter Topics Forms of Business Organization Historical Development of Partnership Nature of a Partnership Liability of a Partnership for the Acts of a Partner Liability of a Partnership for the Acts of its Employees Rights and Duties of Partners to One Another Dissolution of a Partnership Limited Partnership Limited Liability Partnerships Advanced Business Applications for Partnerships Registration of Partnerships Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion

Chapter Objectives After study of this chapter, students should be able to: • Recognize a sole proprietorship. • Explain the nature of a partnership. • Understand the rights and duties of partners to one another. • Know how a partnership is dissolved. • Recognize special types of partnerships such as LLPs. • Understand the importance of registration of partnerships. YOUR BUSINESS AT RISK Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-189

Sole proprietors go it alone with absolute control but limited access to resources. Two partners have double the personal assets and skills, but the human factor of sharing responsibilities and rewards can introduce a minefield of potential problems. Be careful in choosing the partner you select in your commercial marriage! CHAPTER COMMENTARY The sole proprietorship is obviously one of the oldest forms of business organizations, and may be compared to the partnership as a means of examining the differences between the two entities. Students should note that while the sole proprietorship appears to be simple in form, it must nevertheless comply with the many regulatory requirements imposed by governments on businesses in general. The partnership relationship employs the law of agency in the determination of some of the rights and liabilities of partners with respect to each other, and to third parties. The chapter, as a result, will provide a good review and re-enforcement of agency law while the topic is still fresh in the minds of the students, as well as deal with the law of partnership. As the text indicates, the law relating to partnerships is for the most part settled, due to the age and maturity of the relationship. This was recognized almost a century ago in England, and permitted the clear codification of a large part of the law relating to partnerships. The result of this maturity has been limited change in the law since the introduction of the statute, excepting the more recent developments refining the rights and responsibilities of Limited Liability Partnerships. As with the agency relationship, some emphasis should be placed upon the "good faith" aspect of partnerships, and this should be explained in conjunction with the rule that each partner may bind the partnership in contract in the ordinary course of partnership business. The topic may also be included with a discussion of the conduct of business by a partner in competition with the partnership where no consent to do so is granted. The liability of partners in general, and in particular the liability of retiring partners, might be discussed along with the registration requirements, and the importance of giving notice of a change in a partnership to third parties. The Court Decision of Garner v. Murray might be a useful case to examine in detail. Garner v. Murray discusses the effect of the insolvency of one partner on the liability of the others when the partnership is dissolved. As the case indicates, the loss would not be borne on an equal basis, but distributed according to the ratio of their capital accounts at the time of dissolution. Students could work through Case 4 as an application of the rule in Garner v. Murray using the words of the Judge in that case as a guide to reaching a decision on the liability of each individual partner to the others.

Review Questions 1. Why is registration of a partnership important in some provinces? Answer: Registration is important to inform the public of the identity of the partners and to provide information concerning the business.

2. If one partner should become personally bankrupt, and the partnership is dissolved, how is the liability of each remaining partner for the debts of the partnership determined?

Answer: If one partner should be personally bankrupt, the remaining partners are liable for the debts of the partnership in accordance with the ratio of their capital accounts at the time of dissolution. (See: Garner v. Murray).

3. Why is a simple sharing of gross profits not conclusive as a determinant of the existence of a partnership relationship? Answer: Sharing of gross profits is often a method of compensating employees. Such sharing does not indicate whether a loss is shared as well.

4. How does a partnership differ from co-ownership? Answer: Partnership differs from co-ownership in a number of ways: each is subject to a different statute; a share of co-ownership may be reality or personality, while a partner's share is always personality; a partner may bind other partners in contract, a co-owner may not; a co-ownership share may be sold or pass to others by will, while a partner may not transfer the interest without the consent of other partners to the admission of the new partner.

5. Under what circumstances may a minor be a member of a partnership? What is the extent of the minor's liability? Answer: A minor may be a member of a partnership, but the agreement is voidable at the option of the minor. If the minor repudiates the agreement, the minor may not recover his/her share until the creditors have been paid.

6. Explain how agency and partnership are related in terms of the operation of a partnership. Answer: In a partnership, every person is an agent of the partnership, and may bind it in contract.

7. Under what circumstances would a partnership be liable for a tort committed by a partner? Answer: The partnership would be liable in tort for the act, provided that the partner committed the tort in the course of partnership business.

8. What is the extent of the liability of the partners for the tort of a partner, or for contracts entered into by a partner? Answer: All general partners have unlimited liability to third parties.

9. Under what circumstances may a partnership be dissolved?

Answer: A partnership may be dissolved on the death of a partner, on notice, at the end of the project (if for a profit), at the end of a term, if for a specific term, if for an unlawful purpose, if a partner becomes mentally incompetent, or by the courts for a number of reasons.

10. Is it possible for a partner to sell his or her interest to another person? What is the status of the purchaser of the interest if it should be sold? Answer: Yes. The person does not become a partner, however, but only acquires the partner's share, which is determined on the dissolution of the partnership. The purchaser may not participate in the business.

11. Explain the rights of creditors of a partnership when the partnership is dissolved. Answer: The creditors are entitled to payment of these debts from the assets, then any surplus is divided between the partners. If the assets are insufficient to pay the creditors, the partners must pay the creditors from their personal funds.

12. How is a partnership formed? Answer: A partnership may be formed by two or more persons entering into an agreement to carry on business for profit, on the understanding that they would share losses as well, and would participate in its management.

13. What essential characteristic distinguishes a partnership from other associations of individuals? Answer: A partnership is a relationship which carries on business with a view to profit.

14. What is a retiring partner obliged to do in order to avoid liability for future debts incurred by a partnership? Answer: A retiring partner is obliged to notify all customers and suppliers at the time of his retirement and also notify the public-at-large through an advertisement in the Provincial Gazette. A dissolution of partnership document should also be filed to correct the registration of the partnership.

Mini-Case Problems

1. A and B purchase a sailboat (which is in poor condition) with the intention of refurbishing it together and selling it when the work is completed. Are A and B partners? Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-192

Answer: Close, but still likely not partners. As either individual‘s interest is freely alienable (absent any other contractual agreement), the relationship is co-ownership rather than a partnership, despite being conducted with a view to profit.

2. X, Y, and Z agree to carry on business in partnership under the firm name XY Plumbing. Y, in the course of partnership business, carelessly injures T. T intends to take legal action against the partnership for the injury, but is unaware that Z is a partner, since his name is not included in the partnership name. Is Z liable if T sues only X and Y? Answer: If T sues only X and Y as individuals, only X and Y would be liable to T. However, X and Y would be able to recover from Z for his share of the claim against the partnership.

3. Albert, Charles and Emily carry on business under the name ACE as a registered partnership. Emily wishes to retire from the partnership and allow Albert and Charles to carry on the business. What advice would you give Emily? Answer: Emily should notify all customers and suppliers at the time of her retirement and also notify the public-at-large through an advertisement in the Provincial Gazette. A dissolution of partnership document should also be filed to correct the registration of the partnership.

4. Alexander and Betty carry on a partnership business. Carter is an employee of Alexander and Betty. Alexander informs Delbert, a supplier of the business, that Carter is authorized to purchase goods on credit for the partnership. Carter is later discharged by the partnership, but purchases personal goods on credit from Delbert, as Delbert is unaware that Carter is no longer employed by the partnership. Is the partnership liable for payment for the goods purchased by Carter? Explain. Answer: Yes, the partnership would be liable. Carter‘s explicit authority to make purchases on behalf of the partnership was communicated by a partner (Alexander) to Delbert. The termination of that authority should have been communicated as well, the failure leaving Carter cloaked with apparent authority. The act of the partner Alexander in creation of the authority and the inaction of all partners in rescinding it binds the partnership.

Earl, Louise, and Erik carried on business in partnership for many years under the firm name ELE Sales. The partnership was registered under the provincial partnership registration legislation. Earl and Louise were the two partners that dealt with customers and suppliers, and Erik worked for the most part out of sight of everyone in a back office where he did the bookkeeping for the business. Erik eventually retired, leaving the business without informing either customers or suppliers. Earl and Louise carried on the business for another few years, but without the management skills of Erik, the business ran into financial difficulties. Earl and Louise decided to close the business, and paid most of the creditors. The remaining creditors now wish to take action to recover their debts. Advise the creditors. Answer: The creditors may look to Erik as a general partner for settlement of their debts just as they may look to Earl and Louise. Erik‘s out-of-sight contribution while active in the business does nothing to save him from liability, and he took no steps upon his retirement to terminate his liability. Even if he had originally been a limited partner, his active participation in the business renders him as a general partner. Case 2 Granite Gold Mine Ltd. and Diamond Drilling Ltd. entered into an agreement whereby Granite Gold Mine Ltd. would provide its mining claims for exploration, and Diamond Drilling would provide drilling services at no cost to Granite Gold Mine Ltd. in an effort to determine the extent of an ore body within the claims area. The two companies agreed to form a third corporation that would operate the mine once the quantity of ore was determined. The third company, to be called Mine Operators Inc. would be jointly owned by Granite Gold Mine Ltd. and Diamond Drilling Ltd. Each would own 50% of the shares of the corporation, each corporation would pay 50% of the start-up cost of the mine. The two corporations agreed that ownership of the mining claims would remain with Granite Gold Mine Ltd., but all gold mined by Mine Operators Inc. would be owned by Mine Operators Inc. subject to a royalty to Granite Gold Mine Ltd. of 10%. Exploration by Diamond Drilling Ltd. revealed a large ore body, but before a mine was started, Diamond Drilling Ltd. ran into financial difficulties. Several of its creditors who had supplied services and goods to the mine exploration project decided to take legal action against both Granite Gold Mine Ltd. and Diamond Drilling Ltd. to recover their debts. Discuss the issue raised in this case, and the arguments each party might raise. Render a decision. Answer: As is often the case in issues such as this, the public face that was put on the operation will carry some weight in its resolution. If the parties (Granite and Diamond) held out Mine Operators as a partnership, then they risk it being treated as such, much to the detriment of Granite who will be liable for debts incurred by its partner. It is just for reasons such as this that there should be complete administrative separation of ventures like this from the parent enterprises. If the parties were careful to display Mine Operators as a separate corporation (more on this in the next chapter) then only Mine Operators will be liable for the goods supplied to it, and neither of its owners (Granite and Diamond) would be liable for the debts. This arrangement is coownership, not partnership, and the debts properly belong to the subsidiary enterprise.

Case 3 Harold Green and Herbert Green, who were unrelated persons with the same surname, carried on parcel delivery businesses in the same city. Each operated as a sole proprietor, under the name Green Delivery, and carried on business from the same warehouse building. The two men were good friends. They frequently assisted each other by carrying parcels for the other in deliveries in outlying parts of the city. To complicate matters further, the two proprietors would sometimes use the spare truck owned by the other when their own vehicles had breakdowns or required service. Apart from the fact that each had a different telephone number, it was impossible to distinguish between the two firms. Over time, regular customers often referred to the two firms collectively as ―Green Brothers Delivery,‖ even though the two men were not related to each other. Fiona, an antique dealer who frequently used the delivery services of both men, requested Harold Green to deliver an expensive antique chair to her country home. Harold Green, at the time of the request for pickup, advised Fiona that he would send his truck out to pick up the chair. However, Herbert Green picked up the chair at Fiona‘s place of business and took it to the warehouse for delivery. That day a fire of unknown origin destroyed the warehouse and its contents. The charred remains of the chair were found in the jointly used part of the warehouse after the fire. The chair had a value of $3,000. Each of the sole proprietors denied liability for the loss. Advise Fiona as to how she might proceed in this case. Answer: This case provides a review of agency as well as partnership, and might be examined in that light for the purpose of determining the liability of the parties. The particular issue to be explored, however, is the creation of an apparent partnership by the two businessmen as a result of their actions. Did the constant assistance that each provided the other create some sort of partnership by holding out? Did they have an obligation to the public and their customers to clarify their business relationship? Why? An important point to decide is the knowledge of Fiona. If she knew that the two men were not partners, then she would probably be obliged to view the pick-up of the chair by Herbert as the act of an agent on behalf of the principal, since the contract was made with Harold Green. On the other hand, if she did not know that the two men carried on separate businesses, she would be obliged to tie the two men together in order to establish their liability as partners. This might be done by establishing the existence of a partnership by holding out, even though the partnership in fact did not exist. If a partnership by holding out could be established, then Herbert Green might also be liable for the loss. For a case on this point see: Rush & Tompkins Construction Ltd. v. Vieweger Construction Co. Ltd. (1964), 45 D.L.R. (2d) 1.22.

Case 4 Williams, Oxford, Ogilvie, and Lennox carried on business in partnership for many years as wool merchants. The widespread use of synthetic materials, however, adversely affected the fortunes of the business. Eventually the partners found that the business could no longer be carried on at a profit. Before anything could be done to sell the business, Lennox became insolvent. It was then necessary to wind up the business in accordance with the partnership agreement. The partnership agreement provided that the parties share losses and profits equally. On dissolution, Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-195

the capital accounts of the partners were as follows: Williams Oxford Ogilvie Lennox

$50,000 $30,000 $20,000 —

Creditors‘ claims at dissolution amounted to $350,000, whereas the total assets of the firm were $250,000. Explain the nature of the liability of the firm. Calculate the liability of each of the partners as between themselves with respect to creditor claims. Answer: This case is based upon the facts in Garner v. Murray. The case raises the question: How are losses to be dealt with where one of the partners becomes insolvent, and partnership debts exceed assets? The partners are liable to the creditors for the full amount of the claims, and the creditors are free to look to any one partner to satisfy their claims. That partner, in turn, may look to the other partners to contribute their share of the creditors' claims. In this case, the partners have agreed to share profits and losses equally. Lennox, unfortunately, cannot make any contribution towards the $100,000 loss suffered by the firm ($250,000 assets, but $350,000 creditors' claims). The three remaining partners must therefore bear the loss. Should this be shared equally? Each partner would ordinarily be liable for one-quarter of the loss, or $25,000. Lennox, however, has no funds. Garner v. Murray indicates that the solvent partners bear the loss of the insolvent partner in the ratio of their capital accounts at dissolution. This would mean that the share of the loss which Lennox would be expected to pay ($25,000) would be paid by the other three partners (in addition to the $25,000 that each must pay) in the ratio of their capital accounts, viz: Williams 5/10, Oxford 3/10, and Ogilvie 2/10 ($12,500, $7,500 and $5,000 respectively). Case 5 Baker, Felice, and Toby carried on business for many years as clothing retailers under the firm name of Family Clothing Market. The store premises were large and consisted of three separate smaller shops located side by side in the downtown shopping district of a large city. Different clothing lines were sold in each shop, and each shop was managed exclusively by one of the partners. Baker managed the children‘s clothing shop; Felice, the women‘s clothing store; and Toby, the men‘s clothing store. Each shop had its own distinctive name displayed on its shop window and entrance door. Toby eventually grew tired of the business and decided to retire. He did so on March 1st. The two remaining partners purchased Toby‘s interest in the partnership and placed an employee (who had previously been the buyer for men‘s clothing) as manager in charge of the men‘s clothing store. This employee continued to act as the buyer for men‘s clothing and to deal with the clothing suppliers, without informing them of the change in the partnership. Nor was any notice of change in the makeup of the partnership filed under the provincial partnership registration legislation. On April 1st, Baker died. Following his death, the auditors discovered that he had been systematically concealing the true state of the children‘s clothing operation from the other partners by creating fictitious Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-196

assets to offset the losses. When the overall loss was calculated, the business was determined to be in serious financial straits. News of the discovery soon leaked to the suppliers. When all of the creditors‘ claims were presented, the liabilities of the business exceeded its assets by some $250,000. Rogers, a supplier, brought an action against the partnership for payment of his account in the amount of $15,000. Discuss the status and liability of the partners, indicate any defences that might be raised, and render a decision. Answer: The remaining partner, Felice, would clearly be liable to Rogers on the partnership debt. Baker's estate would also be liable, but from the facts of the case it would appear that Baker may have few if any assets, due to his actions. Since partners have unlimited liability for the debts of the partnership, any assets which Baker had at the time of his death might be subject to his liability for his share of the partnership debt, and perhaps more, due to his act of concealing the true state of the business from the other partners. Toby may also be liable for the creditor's claim, since the creditor, Rogers, was unaware of Toby's retirement. To protect himself, Toby should have informed all suppliers directly and the public at large (by advertisement) of his retirement. His failure to do so may entitle Rogers to claim against him for the debt.

Case 6 Sandra is a successful real-estate agent with HomeBase Realty Inc. (HBRI). She acts for, among many other people, a struggling small contractor, Herbert Homes Limited (HHL). HHL buys land, builds a home on it in the hope of attracting a buyer, and uses Sandra and HBRI as its agent to list the property and make the sale. HHL was short on cash when a desirable, vacant acre of land came on the market. Sandra was to loan HHL $130,000 (the full price of the lot). Rather than take a mortgage on the land for security, as that could interfere with HHL‘s ability to borrow bank funds to finance construction, Sandra and HHL agreed that her name would go on the deed as well as that of HHL. They further agreed that when the property was sold with a house on it, she would get her usual 6 percent commission on the sale, together with her original $130,000 loan, plus interest of 12 percent to the sale date. The property was purchased, Sandra carried on with her other commitments, and HHL built a house, which two months after completion was sold for $400,000. On the sale, Sandra and HHL signed off on the deed to the new owners, and payment was made directly to the lawyer for the vendors. The lawyer for the vendors split up the money: $24,000 to HBRI, $137,800 to Sandra, and the balance to HHL. As matters turned out, HHL had not built the house up to standard. The roof leaked, costing the purchasers $22,000 in damages. The purchasers sued HHL and Sandra as the vendors. Conclusive evidence was presented that they received a faulty house from the vendors. The Provincial Government New Home Warranty Board was advised of the matter, and its investigation showed that while HHL was a registered builder, as one must be under the law to sell a new home, Sandra was not. She has now been charged with a violation of the law. Such an offence usually results in a $500 fine for a first offence. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-197

Consider the aspects of partnership law as they may apply, and advise Sandra as to how she should proceed. Consider how she is exposed to risk, and what defences or claims she may raise in civil court against HHL or the purchasers, and against the Crown in Provincial Offences Court. If you were in a position to advise the judge in Provincial Offences Court, what would you do? Answer: The liability of Sandra hinges to some extent on how her relationship to Herbert Homes Limited (H.H.L.) and HomeBase Realty Inc. (H.B.R.I) may be characterized. Students should note that Sandra in reality is employed by HomeBase Reality Inc. (H.B.R.I) and HomeBase Reality Inc. (H.B.R.I.) is the "agent" that sells the property, even though Sandra is described as an agent. Sandra's involvement with Herbert Homes Limited (H.H.L.) is a different matter, as she would appear to be a co-owner of the property when her name is placed on the deed with Herbert Homes Limited (H.H.L.). When the property was sold, HomeBase Reality Inc. (H.B.R.I.) received the commission on the sale ($24,000) and Sandra received $137,000 as her part of the proceeds of the sale. The purchaser would be unaware of the agreement between Herbert Homes Limited (H.H.L.) and Sandra and consider the two parties to be co-owners. On this basis the purchaser could look to Sandra for damages for the poor construction of the house. Sandra, would argue that the property was not held as partnership property. While partnership would not affect her liability to the purchaser (as both Herbert Homes Limited (H.H.L.) and Sandra would still remain liable as partners) it might help her in the Provincial Offenses case. There, she could argue that her name was on the deed only to secure her loan, and she was accordingly not an 'owner' or builder that required registration under the Act. Case 7 Sarah, aged 17 years, and Jane, aged 19 years, had been shopping in a large shopping mall. Jane wished to purchase a lottery ticket, but had only $1 in her purse. She turned to Sarah and said, ―Do you have $4? They are selling lottery tickets here.‖ Without a word, Sarah took the money from her pocket and gave it to Jane. Jane purchased a ticket that she and Sarah agreed bore a lucky number. The next week, the ticket that Jane had purchased was the winner of $75,000. When news of the win reached Jane, she immediately visited her friend Sarah and attempted to pay her the $4 that she said she had borrowed. Sarah, who had also heard the good news, refused to accept the $4 and demanded her share of the winnings. If the above dispute should be brought before a court, describe the arguments that might be raised by each of the parties in support of their respective positions. Indicate how the case might be decided. Answer: The purchase of the lottery ticket in this case raises a number of issues associated with the partnership relationship. An initial approach might be to determine the nature of the relationship which the two young ladies established by their words and actions. Did the fact that Jane asked Sarah to contribute $4 represent a loan or a contribution of capital to a proposed partnership relationship? What would the significance of the discussion and joint selection of the ticket have on the determination of the type of relationship? Could Sarah, a minor, age 17, be a partner? What effect, if any, does her minority have on the business relationship? What is the significance of the fact that June held the ticket? Was there an intention on the part of the two parties to establish a legal relationship? This latter question is clearly one of the key determinants of the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-198

nature of the relationship. While most of the cases dealing with lottery tickets do not specifically treat the relationship as that of partnership, they place considerable emphasis on the intention of the parties at the time of the purchase: See for example, Re: Wozney and Wozney et al. (1974), 44 D.L.R. (3d) 637; and Simpkins v. Pays, [1955] 3 All E.R. 10, where the court in each case decided that where the intention of the parties was to share the proceeds, the proceeds of the win were subject to the agreement. It should also be noted that while the agreement was one which might be voidable at the option of Sarah, Jane was not in a position to avoid the agreement, since she was of the age of majority. Case 8 In 2014, Tareq, who operated a business under the name Downtown Grocery, employed Marcus as a clerk in his store at a weekly salary of $450. Marcus received regular annual salary increases in the years 2015 to 2019. By 2019, he was earning $700 per week. Early in 2019, Marcus approached Tareq with a request for a further increase in his wages. Tareq refused on the basis that low business profits limited his ability to pay more than $700 per week. A lengthy discussion followed and the two parties reached the following agreement. Marcus would receive $700 per week and, in addition, would receive 20 percent of the net profits. He would continue to perform the duties of clerk, but would also assume responsibility for the meat department. He would make all management decisions concerning meat purchases and pricing. Tareq would continue to handle the general management of the business. He would draw the amount of $1,000 per week and would be entitled to 80 percent of the net profits. Marcus would be permitted to examine the business account books, and he would be consulted in all major business decisions by Tareq. A few weeks after the agreement was reached, Tareq discovered that Marcus was purchasing groceries (for his personal use) at a competitor‘s store. In a rage, he barred Marcus from entering the store and told him that he would send him his severance pay by mail. Shortly thereafter, Marcus instituted legal proceedings for a declaration that he was a partner in Downtown Grocery. Discuss the merits of the action taken by Marcus and discuss the arguments that might be raised by the parties. How would you expect the matter to be decided? Answer: The facts of this case may be used to review the requirements for the establishment of a partnership. Since a partnership relationship usually requires something more than the mere sharing of profits, questions asked should attempt to identify these additional requirements. Would responsibility for the Meat Department in the store be enough participation in the management decision-making process to make Marcus a partner? What about the right to examine the account books? What significance would you attach to Tareq's promise to "consult" Marcus on all major business decisions? Is this the same as participating in the decision- making? Would Tareq be obliged to agree with Marcus (or vice versa) before a decision could be made? Is only Tareq responsible for losses? Could a sharing of losses be inferred? What was the intention Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-199

of the parties in entering into such an agreement? The intention of the parties is obviously of importance in this case. However, an agreement to share profits in itself would not make Marcus a partner. If the parties intended by the agreement to give Marcus full rights to participate in all major decisions concerning the business, and that the consent of Marcus was necessary before a major decision was made, then the relationship could be that of a partnership, and Tareq would not be entitled to bar Marcus from the store. The arguments raised by the parties would, of course, be related to the purpose of the agreement, with Tareq arguing that it merely gave Marcus greater responsibility in his job, along with additional compensation for assuming the additional responsibility. An important part of Tareq's argument would be based upon the reservation of general management, and his limited obligation to "consult" with Marcus on major decisions. The fact that only profits, and not losses, would be shared would be strong evidence of an employment relationship, and an important part of Tareq's argument. Marcus, on the other hand, would argue that the agreement established a partnership in that it gave him a share of profits and the participation in the management of the business. The question of the purchase of groceries elsewhere by Marcus should be raised as a part of the discussion of the nature of the relationship. Would such a purchase violate the obligation on Marcus to act in good faith? Does his duty in this regard extend to personal purchases? The sharing of profits and not losses, if this should be the case, would tend to indicate an employment relationship rather than a partnership. See: Bussieres v. Canadian Exploration Ltd., [1938] 1 D.L.R. 257.

CHAPTER CHART Additional Chart for Instructor’s use (not appearing in text)

CHAPTER 17. CORPORATION LAW Chapter Topics Introduction Historical Development of the Corporation The Nature of a Corporation Methods of Incorporation The Incorporation Process Shareholders‘ Agreements Corporate Securities The Taxation of Corporations Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-201

Division of Corporate Powers Considerations in the Purchase and Sale of a Corporation Factors Relevant to Choosing the Corporate Form Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion

Chapter Objectives After study of this chapter, students should be able to: • Understand the nature of a corporation and its formation. • Recognize the different forms of incorporation. • Explain the duties and responsibilities of directors. • Explain how corporations may be sold or dissolved.

YOUR BUSINESS AT RISK Conducting business through a corporation is common, and you will probably find yourself doing business with a corporation in future, or investing in one. Even so, it is not the best form for all purposes. It has significantly different operating mechanisms and you must properly manage its responsibilities toward its owners, managers, customers and regulators.

CHAPTER COMMENTARY The corporation, as the text points out, is a very different type of legal entity when compared to the partnership. The various forms of incorporation (General Act, Special Act, Letters Patent, and Royal Charter) are worthwhile topics to review. In addition, the separate legal existence of the corporation and its powers should be examined, perhaps by way of comparison to the partnership. Since a partnership is a relationship subject to the "utmost good faith" duty for partners, an approach to the rights and duties of shareholders and directors might be to chart each as a part of classroom discussion. For example:

ACTIVITY 

Personal interest in contract with firm

Interest in competing business entity

DUTY Director

Partner



full disclosure

full disclosure and consent required



full disclosure refrain from discussion and vote on matter  full disclosure



Shareholder (public company) no duty to disclose



no duty to disclose

The duties which might be charted in this manner are found in this and the next chapter for directors, and for partners in Chapter 16 (Law of Sole Proprietorship and Partnership). Corporation law includes a number of doctrines, principles, and rules which should also be reviewed. In particular, the doctrine of corporate ultra vires, constructive notice, corporate opportunity, and the indoor management rule should be covered in classroom discussion. The Court Decisions included in the chapter represent two important aspects of corporation law. The Salomon case established the nature of the corporation at law, and its existence as an entity separate and apart from its shareholders. The case is interesting in that the court dealt with the corporation-shareholder relationship from the "agency" point of view, the "trustee" point of view, and the corporation as an "instrument of fraud on creditors". It rejected all of these views in favour of the separate legal existence of the corporation, and the consequences which flow from it. The Gluckstein v. Barnes Court Decision provides an analysis of the duty of disclosure on the part of promoters and directors of a corporation, and the consequences of a failure to make a complete disclosure. An analysis of this case and the Salomon case should provide students with a relatively clear idea of some of the most important fundamental concepts of corporation law.

Review Questions 1. Describe briefly the relationship between a corporation and its shareholders. How does a shareholder's relationship with the corporation change if the shareholder should become a director? Answer: A shareholder may not bind the corporation in contract. A shareholder may engage in activities in competition with the corporation, such as own shares in a competing corporation. If a shareholder becomes a director, then the shareholder becomes liable for certain acts (such as improper declaration of dividends) and must act in good faith and put the best interests of the corporation before his/her own.

2. What "drawbacks" commonly associated with partnerships are overcome by the use of the corporate form? Answer: Shareholders of a corporation have limited liability, share interests are easily transferred, and control is limited to elected directors.

3. What is a Special Act corporation? For what purpose would it be formed? Give two examples. Answer: Special Act corporations are created by the state to do specific things, usually of a public nature. For example: A provincial hydro-electric corporation, or the Canadian Broadcasting Corporation.

4. Explain the term letters patent. In what way or ways would a letters patent corporation differ from a general act corporation?

Answer: Letters patent is a government document which grants special rights or privileges. In the case of a corporation, the letters patent create it, and confer upon it powers. A General Act corporation is created by filing proper documents pursuant to a statute.

5. Define corporate ultra vires, and explain why most provinces have attempted to eliminate the doctrine as it applies to third parties dealing with a corporation. Answer: Corporate ultra vires refers to an act by a corporation which is beyond its powers to perform, and consequently, a nullity. To avoid this, most provinces have given corporations all of the powers of a natural person in their dealings with third parties.

6. How does a corporation differ from a partnership? Answer: A corporation differs from a partnership in a number of significant ways: (a) It has a separate existence. (b) Shareholders have limited liability. (c) The shareholders do not actively manage the corporation. (The directors manage). (d) Share interests are readily and easily transferred. (e) Corporations have a theoretical unlimited term of existence.

7. What is the legal nature of a corporation? Answer: A corporation is created by the state and possesses a legal existence separate from those who from time to time possess shares in it, or who are responsible for its direction and control.

8. Explain the doctrine of corporate opportunity. Answer: The doctrine of corporate opportunity arises when a director becomes aware of an opportunity to acquire property through his position as a director. He may not use the opportunity for his own benefit because the opportunity to acquire must be given to the corporation.

9. Define the indoor management rule, and by way of example, explain how it is applied. Answer: The indoor management rule is a rule that provides that a third party in dealing with a corporation need not inquire into the internal operation of the corporation to determine the authority of the corporation officer with whom the third party is dealing. Authority to enter into the contract may be Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-204

presumed. For example: A person entering into a contract to purchase goods may presume that the officer of the corporation selling the goods has the authority to bind the corporation in the contract.

10. What are the obligations of a director of a corporation in an instance where the director has a financial interest in the firm with which the corporation wishes to do business? Answer: The director must reveal the interest in the other corporation, must not take part in the discussion, and not vote on the proposal.

11. Indicate how the principle of "majority rule" is applied in the decision-making process of a corporation. What protection is available to a dissenting minority shareholder where a fundamental change in the corporation's objects is proposed? Answer: "Majority rule" applies for most decisions, but for some, which involve a fundamental change in the corporation, a larger majority is required (usually 2/3). A dissenting minority of shareholders may apply to the courts for relief, and the corporation may be obliged to purchase the shareholders interest.

12. Distinguish a "public" corporation from a "private" corporation. Why is this distinction made? What other terms are used for each of these types of corporations? Answer: A public corporation is a corporation which offers its shares or securities for sale to the public. A "private" corporation is a corporation which does not offer its shares or securities to the public. "Private corporations" are sometimes called "Closely-Held Corporations."

13. If a corporation wishes to sell its securities to the public, what requirements are imposed upon the promoters, directors, and others associated with the sale and distribution of the securities? Answer: Promoters, directors, etc. involved in the sale of a corporation's shares to the public are subject to the securities legislation of the jurisdiction. Under this legislation they must issue a prospectus to potential customers before any sale of securities is made. They must also certify that the information contained in the prospectus is correct. The prospectus must be approved by the regulating body before it is issued. 14. In what circumstances would a management buyout be a good option for ownership change of a corporation? Discuss the considerations and options in this type of transfer. Answer: A management buy-out will be an attractive option for shareholders of a private, closely held corporation who wish to transfer the business to individuals with proven interest and aptitude for running that business. These individuals could include managers and key employees. Often when family members have neither the interest nor skill to carry on the business, a MBO will be considered. The transfer of business interests can be completed through an asset or share sale. The timing of the payments will also be critical. If the employees can get financing an immediate cash buy-out is possible. More likely, the purchase of the business interests will need to be paid out over time, either through stock options or installments to the vendor. If the payments will be spread out over time, the continued success

of the business is critical for the selling shareholders to receive their payments. A MBO may be ideal for this purpose by maintaining stability and continuity of the business in all areas.

Mini-Case Problems 1. A, B, and C are the directors of ABC Corporation. At a directors‘ meeting, B suggests that the corporation consider the purchase of a block of land owned by the RST Corporation. C is a principal shareholder in the RST Corporation. What are C‘s obligations to B, A, and the ABC Corporation? Answer: C, has an obligation to reveal his or her interest in RST Corporation, refrain from taking part in the discussion of the purchase, and not vote on any motion related to it. 2. X, a director of the DC Corporation, is informed by the corporation‘s accountant that the decline in the corporation‘s sales has resulted in a large fourth-quarter loss. Before the corporation‘s financial results for the year are announced to the public, X sells a large block of his shareholding in the corporation. When the news of the corporation‘s loss is announced, the price of the shares on the stock exchange falls by $10 per share. What are the rights of Z, who purchased 1,000 shares from X at the higher price? Answer: X was using "insider" information when he made the sale to Z. Z may take action against X for the loss in the share price if he can prove that X knew of the Corporation‘s loss and used it to sell the shares.

3. Continuing from the facts in (2), would your answer be different if director X had not sold his shares, but had informed shareholder Y of the expected loss, and shareholder Y (who owned 15% of the corporation‘s shares) sold his entire shareholding just before the news was released? Answer: This topic is fully explored as part of insider trading in the next chapter, however students should recognize that while the director is not profiting personally, his or her disclosure still represents an abuse of the office, to the detriment of Z. For these purposes, the fact that Y is also an insider is irrelevant; however this will take on greater significance in the next chapter. 4. The directors of B Corporation wished to purchase a vacant property adjacent to their office building. An offer to purchase was made at a price of $4120,000. The offer was rejected by the property owner. Director D of the corporation then immediately made a personal offer to purchase the lot for $125,000430,000, and the offer was accepted. What is the position of D? What is the position of B Corporation? If Director D is willing to sell it to B Corporation should the position change if she demands $430,000 or $435,000 or $735,000? Answer: Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-206

Director D will argue that the doctrine of corporate opportunity should not apply as she refrained from offering until the corporate offer had been rejected. Corporation B may well see this differently, as D now owns the property. Perhaps such a plan may even have tainted D‘s input into the board deliberations which resulted in the $420,000 offer. In all probability this still represents the appropriation of a corporate opportunity as B Corporation might have been interested in continuing the bidding process, which is now derailed and redirected toward a director who would certainly now, if not prior, be in a conflict of interest. The simple resolution which would prove the bona fides of the director in securing the property would be for her to offer to sell it to B Corporation at $430,000 proving that D‘s intent was simply to ensure that the property did not slip away. Selling at $435,000 might recognize some direct personal expenses in the purchase. Demanding $735,000 would clearly be an attempt to extort based on corporate foreknowledge of the utility of the property in the eyes of the corporation: a conflict of interest.

Case Problems for Discussion Case 1 The Board of Directors of Speedy Roofing Ltd. directed the corporation president to draw up and enforce site safety rules for the performance of work at the various kinds of construction sites where the corporation would likely bid for roofing work. In accordance with the directive, the president set out job equipment requirements for three types of projects: small residential home roofing work, apartment and commercial building roofing work, and large industrial and high rise building roofing work. In each case, the Site Manager was expected to select the proper equipment to perform the work (scaffolding, portable elevators, material handling equipment, etc.) and enforce the safety rules dictated by provincial government work safety regulations. The directors made no further inquiries after the president advised them what rules were in place. Site managers at small residential roofing jobs frequently used only ladders and minimal scaffolding on the job, and most roofing materials were moved to the roof by manual labour. The reasoning here was that the roofing work was usually completed in only a day or two; and the roof surfaces were usually gentle slopes or relatively flat. Safety equipment was considered unnecessary, and only a rope safety harness was used on the steeper roof surfaces. On a small residential roof repair project on a two-storey home, a worker slipped on some loose shingles and fell over the side of the roof.His safety harness arrested his fall, but in the process he was thrown against the brick wall of the house and suffered a serious head injury. Provincial workplace safety inspectors investigated the accident, and may charge the corporation and management with a violation of the provincial workplace safety legislation. Advise the directors of the corporation and consider the possible outcome, if the corporation was charged with a violation of the Act. Answer: While the directors recognized their responsibility to have site safety rules created, they may have failed to exercise sufficient due diligence as to implementation to avoid being held liable under the workplace safety legislation. To their further credit, the directors did receive a report on the rules implemented and they are entitled to place some reliance on this. However, the fact would presumably also have been reported that safety equipment was considered unnecessary for residential work. This may be enough to call into question whether the president‘s report had really been considered by the board, or simply accepted and rubberWilles, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-207

stamped. If the position is justified that a harness was sufficient, based on ―reasonable reliance‖ and industry standards, this was an unforeseeable accident and the corporation and board may escape liability. However, if due consideration of the report would have revealed deficient rules, or the industry would find such practice clearly deficient, the corporation and the board can expect to be found liable. The board would have failed to fulfill its due diligence requirements as imposed by the legislation. Case 2 Ludwig carried on a machine shop business for many years under the name Ludwig‘s Machine Shop. On advice from his accountant, he transferred the shop and all of its equipment to a corporation that he incorporated with himself as the sole shareholder. As payment for the shop and equipment, the corporation issued Ludwig 10,000 common shares, and a debenture in the amount of $250,000. The corporation carried on the business as Ludwig‘s Machine Shop Ltd., with Ludwig as the corporation‘s president. The large advertising sign on the front of the shop, however, was not changed, and continued to read: Ludwig‘s Machine Shop. Ludwig continued to operate the business as he had done prior to incorporation, and did not inform his customers or suppliers of the change of ownership of the business. Business invoices nevertheless were issued in the corporation‘s name and all correspondence was on corporation letterhead. Several years later, the corporation experienced a loss of business to new competitors, and was soon in financial difficulty. When the corporation found that it could no longer carry on profitably, the corporation ceased operations. Business assets were liquidated for the amount of $175,000. Ludwig, who held the $250,000 debenture, claimed payment in priority over the creditors‘ claims of $100,000. The creditors claimed priority of payment over Ludwig on the basis that they were unaware of the change of ownership. Discuss the issues raised in this case, and how the dispute might be resolved. Answer: As a number of years have passed between the issuance of the debenture and the creditor‘s claims, we can reasonably assume that the debenture transaction was not designed to defeat creditors, but to pay for the assets that were in fact transferred to the company. This and other aspects of bankruptcy law are considered in later chapters. Ludwig has a reasonable claim to priority, which could be strengthened had he changed the sign and advised the suppliers of the change of ownership. Despite this, as he did change the corporate stationary (which presumably included his orders and payments), most if not all of his creditors would have had quite some time to become familiar with his true status. Since they were willing to carry on business with him under these circumstances without inquiry as to who his secured creditors may be (if any, and including Ludwig himself), there seems to be little basis to give any greater priority to unsecured creditors over Ludwig. One wonders whether to even give credence to the notion that they did not know of the change to a corporation, or understand its significance. Case 3 A corporation owned a parcel of vacant land on which it stored its construction equipment. The land was not large enough for the requirements of the company. When the adjoining landowner expressed a desire to purchase the property from the company, the directors informally considered the offer and agreed to sell the land for $150,000. No directors‘ meeting was held to formally deal with the matter. However, the secretary-treasurer, on the basis of the informal agreement amongst the directors, contacted the offeror Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-208

and advised him of the price. The price was acceptable to the purchaser, so the secretary-treasurer then drew up a written purchase agreement that he signed on behalf of the corporation in his capacity as secretary-treasurer. The purchaser also signed the document. The directors later decided not to carry through with the sale, and the purchaser brought an action against the corporation for specific performance of the contract. What defences might be raised by the corporation in this case? What legal principles are involved? Render a decision.

Answer: One of the most important points to deal with in this case is the ability of the corporation's secretary-treasurer to bind the corporation in contract. The question might be asked: Does the purchaser in this case have an obligation or duty to enquire in order to determine if the directors have given the secretary- treasurer authority to act? At this point the indoor management rule might be discussed. The normal process would clearly be for the directors to meet and discuss the proposed sale, then on a motion duly made, seconded, and given majority support, authorize the secretary- treasurer to enter into the agreement on behalf of the corporation. This would clothe the officer with authority, and enable him to bind the corporation. Since the directors did not do so, the next question might be: Did the secretary- treasurer have apparent or ostensible authority to bind the corporation? In McKnight Construction Co. v. Vansickler (1915), 24 D.L.R. 298, which was decided on a similar fact situation, the court held that where the particular officer of the corporation has apparent authority to transact business on behalf of the corporation, it is not necessary for the purchaser to ascertain if the proper steps have been taken to clothe the officer with authority. The secretary-treasurer, however, may be liable to the corporation where he acts without authority, and this aspect of the case might also be discussed. Case 4 Juana owned 13 shares of the Vermilion Mining Co. Three other shareholders held four shares each. The remainder of the 2,400 shares of capital stock was held by the three directors of the company. The company owned certain mining claims on which some preliminary exploration work had been done, but that required the investment of a large amount of capital in order to establish a mine. Because the company had not been in a position to proceed with the development of the properties, the company faced the prospect in the near future of forfeiture of the mining claims as a result of their forced inaction. The directors, who were shareholders in another mining company, entered into an agreement to sell the mining claims to that company in exchange for shares in the second company. The share exchange for the mining claims would give Vermilion a 10 percent interest in the other company. A meeting of shareholders was called to approve the transaction. At that time the directors declared their interest in the other mining company. The directors explained that, in their opinion, the transfer represented fair market value for the claims and they urged approval of the transaction. The directors voted in favour of the sale over the objections of Juana, who was the only dissenting shareholder. She accused the directors of attempting to confer a benefit on a company in which they had an interest, to the detriment of the company in which they were directors. She eventually brought an action to restrain the directors from completing the sale of the mining claims to the other company. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-209

Discuss the issues raised in this case and render a decision. Answer: This case deals with the duty of directors to act in the best interests of the corporation in their dealings with assets of the corporation. It also raises the question of the proper procedure for the resolution of matters where the directors have a personal interest in a contract which involves the disposition of corporate assets. The possibility of forfeiture of the claims if the corporation did not proceed with the development of the properties was the reason for the director's decision to have the shareholders consider the sale of the claims in return for the 10% interest in the other company. Placing the decision in the hands of the shareholders was the correct approach, since all of the directors had an interest in the other corporation. This was also the case with the declaration of their interest at the meeting of shareholders. The matter, however, should have been left with the shareholders to decide, and the directors may be considered in breach of their duty by urging the agreement on the shareholders, and by voting on the motion. Juana may be successful in his action as a result of the actions of the directors. See: Ritchie v. Vermillion Mining Company (1902), 4 O.L.R. 588. Case 5 Cinema Ltd. owned a theatre that it wished to sell. To make the property more attractive to a prospective purchaser, the directors decided to acquire a second theatre in the same city and offer the two properties as a ―package deal.‖ Some inquiries were made as to the purchase price of a second theatre, and a price of $3,000,000 was determined for the property. A subsidiary company was incorporated to acquire the second theatre, with the intention that the shares in the subsidiary would be wholly owned by Cinema Ltd. Unfortunately, the lending institutions would only advance Cinema Ltd. $1,800,000 on its assets. In order to effect the purchase of the second theatre, the three directors of the corporation and a lawyer (who frequently acted for the corporation) each agreed to invest $300,000 to make up the necessary $1,200,000. The subsidiary corporation issued 3,000,000 shares valued at $1 each to the parent company and the four investors in return for the $3,000,000 in cash. It then proceeded with the purchase of the second theatre. Some time later, a purchaser was found for the two theatres, and a purchase agreement completed. The purchaser, however, insisted on acquiring the second theatre by way of a purchase of the shares in the subsidiary company. The share price was determined at $1.25. This netted Cinema Ltd. a profit on the sale of $450,000, and each of the four investors a profit of $7,5,000. When details of the sale were revealed to the shareholders, one shareholder demanded that the four individuals pay over their profits to the corporation. When the three directors and the lawyer refused to do so, the shareholders instituted legal proceedings to have the funds paid to the corporation. Discuss the various legal arguments that might be raised in this case by the parties. Indicate how the case might be decided. Answer: The facts of this case were adapted from the facts in the case of Regal (Hastings) Ltd. v. Gulliver and others, [1942] All E.R. 378. The case raises the important issue of the duty of directors towards the corporation, and the question of whether the directors should be permitted to make a personal profit as a Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-210

result of a transaction negotiated in their capacity as directors. Since the directors used their own funds for the purchase of shares, are they entitled to the profit made on the transaction? Does their duty extend beyond their dealings with corporation's assets to deliver up any profits earned by the use of their own funds? Was the profit made by virtue of the fact that they were directors (i.e., the doctrine of corporate opportunity)? It is perhaps best to deal with the position of the lawyer in the case first. He is not a director, and hence, he has no duty to the corporation as such. In the Regal (Hastings) Ltd. case, he was permitted to keep his profit. The directors, unfortunately, were obliged to pay over to the corporation their profits on the basis that they were in a fiduciary relationship with the corporation. It should be noted here that had the directors obtained the sanction of the shareholders for the scheme beforehand, the situation might have been different. Had they received prior approval, they probably would have been entitled to keep the profits earned. Case 6 High Rise Apartments Ltd. expressed an interest in the purchase of a large block of land suitable for development as an apartment site. The board of directors asked Sheldon Harris, one of the directors who was also a real-estate broker, to investigate the possibility of the corporation purchasing the land for a reasonable price. Harris, without revealing that he was a director of High Rise Apartments Ltd., contacted the president of Land Assembly Ltd., the corporation that owned the land. He inquired as to the price the corporation was asking for the property. The president replied that the price was $500,000. Harris then offered to sell the land for Land Assembly Ltd. for his ―usual commission‖ as a real-estate broker. The president of the corporation agreed to have Harris attempt to sell the property on its behalf, so Harris reported back to the board of directors at High Rise Apartments Ltd. that the land was for sale at $525,000. Unknown to the remaining members of the board of directors, the following events occurred before discussion took place as to whether the corporation should purchase the land at the price of $525,000. (1) Jeremiah Black and Rodney Jones, both directors of High Rise Apartments Ltd., became interested in the land as a site for a shopping centre. They had incorporated a company for the purpose of buying the land if High Rise Apartments Ltd. should decide not to purchase the property.

(2) Nyssa Green, a director of High Rise Apartments Ltd., was urged by her spouse, who was a minority shareholder in Land Assembly Ltd., to speak and vote against the purchase because he felt that Land Assembly Ltd. was selling the land for less than its true worth. (3) Sonya Patel, a director of High Rise Apartments Ltd., who was also a principal shareholder in Condominium Construction Company (a corporation interested in the parcel of land as a condominium site), was busy attempting to make an offer to purchase the property. When she heard of the offer from the president of Land Assembly Ltd. to sell the property for $525,000, Patel slipped out of the directors‘ meeting and telephoned the president of Condominium Construction Company, urging him to call Land Assembly Ltd. with a higher offer. A meeting of the Board of Directors of High Rise Apartments Ltd. was called for the purpose of considering the purchase of the property at a price of $525,000. Isaac Davis, the Chairman of the Board, called for a vote on the purchase. Only Davis and Harris voted in favour. The remaining members of the board (Patel, Green, Black, and Jones) voted against the motion. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-211

After the purchase was rejected by the Board of Directors at High Rise Apartments Ltd., both the company incorporated by Black and Jones and Condominium Construction Company attempted to purchase the land. When they contacted the president of Land Assembly Ltd., he advised them to contact Harris, who was the real-estate broker engaged to sell the property. Eventually, the property was sold to Condominium Construction Company for $560,000. Harris received a real-estate commission on the sale of $26,000, which was paid to him by Land Assembly Ltd. After the sale was completed, Davis discovered the facts surrounding the sale and the actions of the directors of High Rise Apartments Ltd. Advise Davis of the legal issues raised in this case and the course of action he might follow. Indicate the arguments that might be raised if the matter came before the court, and render a decision. Answer: The directors of High Rise Apartments Ltd., except for Davis, all had direct or indirect conflicts of interest due to their actions, relationship, or interests. Black and Jones had an interest in a corporation that was prepared to buy the land if High Rise did not. They, however, voted against the purchase - a clear conflict since they would benefit if High Rise did not purchase the land. Green, whose spouse was a shareholder in Land Assembly Ltd., the owner of the land, should have revealed her husband's interest in the vendor corporation. By concealing this fact she violated her duty to High Rise. She should not have voted on the motion. Olsen, a principal shareholder in a competitor corporation, used her information as a director in High Rise to benefit her interest in the competing corporation, and was in violation of her duty to High Rise. Harris used his position as a director in High Rise to confer a benefit upon himself by attempting to obtain (and later obtaining) a commission from Land Assembly for selling the property. He had a duty to disclose his position to Land Assembly, and High Rise. High Rise would probably be entitled to claim the commission he earned due to his actions. Davis, upon discovering these facts might be able to bring an action against the remaining directors for the loss the corporation suffered. Case 7 Henri Boucher and his son, Gaetan, lived in the same city, where Gaetan ran a small business, an unincorporated restaurant. Henri had operated a small strip plaza comprising a convenience store, a gas station, and a pizzeria/arcade. Under pressure from creditors, Henri had sold the plaza for the amount of his debts, and he began anew with his son‘s assistance. They formed a corporation to develop a roadside piece of land into a ten-unit commercial plaza near a residential area. Otherwise unemployed, and with Gaetan busy in his restaurant, Henri looked after contracting the majority of the work. This included considerable construction work to build the plaza. As construction progressed there were disturbing signs of discontent among the contractors who were building the plaza. On occasion, they would call the restaurant, asking Gaetan for payment. Gaetan would call his father, who would in turn pay them. Often, however, the calls persisted and Gaetan would find himself paying bills out of his own pocket and keeping a tally of the bills he had paid on behalf of the company. Eighteen months after incorporation, and 15 months after breaking ground on the project, the plaza had acquired a bad reputation in the town, and suppliers were unwilling to deliver materials. It quickly foundered when the bank called for repayment of the $290,000 that had been borrowed (on demand) by the company. The land had been bought with bank funds for $175,000. Invoices totalling $87,000 had Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-212

been paid, but the company had no more money in its account. Gaetan‘s tally showed that he had paid bills out of his own pocket totalling $11,000. Unfortunately, with a half-built plaza and a bad reputation, the only offers for purchase of the site were in the order of $145,000. Henri was despondent and soon left the province, leaving behind Gaetan with the restaurant. The company lawyer showed Gaetan a letter that had been sent to him a month before, in which Henri had resigned as an officer and director of the company, and had turned in his shares. This left Gaetan as sole officer, director, and shareholder. The lawyer thought Gaetan had known of his father‘s resignation. Advise Gaetan with respect to the issues that the company creditors will raise. Discuss Gaetan‘s rights and/or liabilities and explain any steps he could have taken to protect himself. Answer: Students should note that the development of the plaza and the money borrowed was in the name of the corporation. Students should also note that the construction contracts were probably with the corporation and not with the individuals concerned (Henri and Gaetan). On this basis, Gaetan may be able to maintain that the corporation was indebted, and he was personally not liable. He might also take the position that he was an unsecured creditor of the corporation. Gaetan would probably be successful in avoiding personal liability for the debts of the corporation (unless he had guaranteed them in some fashion, but the case does not indicate that he had done so). To avoid the loss of funds that he personally advanced, he would have been wise to seek reimbursement from the company as each account was paid rather than wait until the point in time when the bank called its loan and brought the project to a halt. Case 8 The directors of Claridge Supply Company Ltd. approached the Business Bank for a loan. One of the two directors of the corporation attended at the bank and, in the presence of the branch manager, signed the loan application. He then took the documents with him in order to have the corporate seal affixed and to obtain the signature of the other director on the documents. A few days later, the director returned with the signed loan application and documents that purported to be directors‘ resolutions authorizing the pledging of the corporation‘s assets as security for the loan. Attached to the resolutions were the secretary‘s certificates confirming that the resolutions were duly passed by the directors. Some months later, Claridge Supply Company Ltd. was declared bankrupt, and the trustee in bankruptcy refused to recognize the bank‘s secured loan on the basis that the corporation‘s minute books contained no record of any resolutions authorizing the pledging of securities for the loan. The bank then took legal action for a declaration that it was a secured creditor. Discuss the basis of the bank‘s claim and the likely outcome of the action. Answer: This case is based upon Toronto-Dominion Bank v. Coopers & Lybrand Ltd. (1982) 19 Alta. L.R. (2d) 387. The issue here is the application of the indoor management rule to the facts. In the case, the documentation appeared to be regular and proper, and neither the second director or the company objected to the transaction after its completion (and the company had received the funds from the bank). The court held the bank was entitled to rely on the documentation, and its security was valid. Case 9 Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-213

Acme Forwarding Company leased docking and warehouse facilities at a harbour. The lease gave the company exclusive use of the pier and the buildings, but held the company responsible for the maintenance and repair of the pier. Tyrone, a director of the Acme Forwarding Company, was responsible for the authorization of use of the pier by ships bringing cargo for off-loading at the company warehouse. The company policy was that only ships handling goods destined for the company warehouse were to use the pier. No authorization would be given unless the ship owners carried adequate insurance to cover any damage that might be done to the pier by careless docking. Tyrone also held an interest in a shipping firm that wished to off-load a small cargo at the city where the Acme Forwarding Company pier was located. The shipping company, however, wished to place the cargo directly onto two trucks, rather than use the facilities of Acme Forwarding Company. Tyrone, with the intention of accommodating the shipping company, authorized the docking of the ship at the pier. When the ship attempted to dock with its cargo, it collided with the pier, causing extensive damage to both the ship and the pier. Under the terms of the lease that Acme Forwarding Company had with the property owner, it was obliged to repair the pier. Acme Forwarding Company did so, at a cost of $120,000. Then it looked to the shipping company to recover the cost of the damage caused by the ship. The shipping company, which had suffered damage to its only ship, was unable to pay for the damage to the pier. Its insurance would cover only a part of the $120,000 cost of the pier repairs. When the directors of Acme Forwarding Company were informed of the shipping company‘s inability to pay for the damaged pier, they were also informed that Tyrone was a shareholder in the shipping company. Discuss the rights of the parties in this case and explain how these rights might be enforced. Answer: This case involves a director of a corporation that uses his position as a director in one corporation to confer a benefit upon another corporation in which he a financial interest. Tyrone had no authority to permit the shipping company to use the pier, and consequently, placed his own personal interest above that of the corporation. The shipping company was clearly liable for the damages which it caused, but when it cold not cover the total cost, the Acme Forwarding Company would be entitled to look to Tyrone for the balance, due to his breach of duty to the corporation. Tyrone would be liable for the balance. For a similar case see: Eastern Shipping Company Limited v. Quah Beng Kee [1924] A.C. 177. Case 10 Model T Motors Ltd. was indebted to Simple Finance for a substantial sum of money. The finance company held a number of mortgages on the corporation‘s assets, but pressed the corporation for a blanket demand chattel mortgage as additional security. Under pressure from the finance company, one of the principal shareholders, who was also one of the signing officers of the corporation, executed a blanket chattel mortgage to the creditor. The mortgage was not made under the corporation seal, and only one of the two signatures required by the corporation‘s by-laws was placed on the document. Some time later, the finance company obtained the corporate seal of Model T Motors for another purpose and affixed it to the chattel mortgage. A few weeks later, when a payment on the loan was overdue, Simple Finance seized the assets of Model T Motors under the blanket chattel mortgage. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-214

Advise Model T Motors of its position in this case. If the matter came before the courts, how would you expect the case to be decided? Answer: The facts of this case are essentially those set out in the case of West City Motors Ltd. and Leslie v. Delta Acceptance Corp. Ltd., [1963] 2 O.R. 683. The principal issue raised by the case relates to the execution of the blanket security document. The question might be asked: How valid is the document executed by only one of the two officers of the corporation? Does an outsider have constructive notice of the by-law which requires two signing officers? Is this a case where the indoor management rule might apply? Is the document enforceable without the corporate seal affixed? Was it given in the ordinary course of business? To be enforceable, the corporate seal would be required, as this, in effect, was a required part of the corporation's "signature." Since the seal was affixed without the consent of the corporation, the act of unauthorized sealing rendered the document void.

CHAPTER CHARTS Additional Charts for Instructor‘s use (not appearing in text).

Introduction Historical Development of Securities Regulation What is a Security? Purpose and Administration of Securities Regulation Mechanics of Regulation Registration Disclosure Conduct of Trading Insider Trading Proxy Voting and Proxy Solicitation Takeover Bids ―Going Private‖ Transactions Investigation and Enforcement Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion

Chapter Objectives After study of this chapter, students should be able to: • Explain the policy and structure underpinning securities regulation. • Describe the disclosure obligations imposed upon issuers of securities. • Identify situations involving illegal securities market activity. • Explain the use of proxies and the conduct of takeover bids.

YOUR BUSINESS AT RISK In creating and issuing securities you are giving away rights related to your business — up to and including complete ownership of it. These exceptionally powerful rights can be traded among strangers to your business who may have widely varying intentions in exercising their rights over your company. Keep in mind that security regulators expect a sophisticated understanding of your corporate legal obligations in this advanced field and will hold you to that standard. CHAPTER COMMENTARY After learning about forms of business organisations, most students will naturally consider the problem of financing the growth of a venture. This chapter relates to corporate finance (with a focus on equity) beyond the capital contributed by principals and that available through bank financing. Securities regulation governs the nature of securities, the method of their distribution and trading, and obligations to disclose information as to their riskiness, in order that investors may make informed purchase decisions. While the chapter clearly focuses on shares of a corporation, students must bear fully in mind that ―securities‖ are broadly defined and can include not only shares and debt instruments, but many ―nontraditional‖ investment vehicles as well. The definition of a security includes any document commonly Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-217

known as a security, typically evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company. The regulation of securities is, constitutionally, an area of provincial responsibility, and the paramount policy goal behind regulation is to balance the twin needs of capital market efficiency and market integrity. Students must understand that both policy objectives are important, and require balanced achievement. The consequence of failure is capital market failure; either a market that is not trusted, or one so encumbered by regulation that it has no liquidity. Disclosure requirements are the chief means of informing investors and are the chief responsibility of reporting issuers. With a few important exceptions, securities are subject to the obligations of true, full and plain disclosure within a prospectus, and to continuous disclosure thereafter on a timely basis. Students should recognise these measures as being the most straight-forward means to achieving the policy goals. By the same token, there are special times when increased protection for investors is required. These occur when owners of securities are solicited for their voting rights (proxies), in the case of take-over bids and issuer bids, and in cases of insider trading. Students should recognize that this is the first chapter where powerful administrative tribunals arise, in the form of the provincial securities administrators. The provincial securities administrators have considerable powers to act on specific matters and even more generally in the public interest, and the consequences of enforcement action can be extremely serious for those found in violation of the legislation, including imprisonment, fines and civil liability.

Review Questions 1.

Under what circumstances and on what condition would a take-over bidder not purchase all the shares tendered by a shareholder in response to a bid? Answer: In all cases where the bid was made for less than all of the outstanding issue, and more shares were tendered than the offeror wishes to purchase, what is taken up and paid for must be done so on a pro-rata basis from all those who tendered into the bid. No preference can be made to buy the shares of one shareholder over another.

What is meant by continuous disclosure? Answer: The timely release to the public of all material information that would significantly affect the valuation of a reporting issuer‘s securities.

To be registered as an Investment Advisor, what criteria must an individual meet? Answer: The individual must complete the Canadian Securities Course on market and investment knowledge, a Conduct and Practices course on ethical professionalism and account operation, and must work under close supervision for six months.

What is an SRO and what does it do?

Answer: SRO-Self Regulatory Organization(s). Non-governmental bodies engaged in industry and charged with the creation and execution of rules and discipline among constituent members. In the context of securities regulation, these are the Investment Dealers Association, each of Canada‘s stock exchanges and the Mutual Fund Dealer‘s Association.

Describe the two chief exemptions to the requirement of producing and filing a prospectus for a new issue of corporate shares. Answer: Choose two of the three below. A prospectus is not required where:

Accredited Investor - the purchaser belongs to one of the 15 designated classes of investors (for individuals, principally those with financial assets exceeding $1,000,000, or net assets of at least $5,000,000 or income in excess of $200,000).

Private Issuer - The issuer‘s securities have transfer restrictions and whose shares are not owned my more than 50 persons, which may then be issued to persons close to the issuer and to accredited investors.

Minimum Investment Amount of $150,000 per purchaser.

What are the twin policy goals of provincial securities legislation? Answer: To balance the twin needs of capital market efficiency and market integrity.

Describe what a proxy is, and why it is important. Answer: A ‗proxy‘ is a transfer of voting privilege by a shareholder to an agent on the basis of a trust, being either particular instructions to vote, or conversely, the right of the agent to vote as the agent sees fit. It is important because a block of solicited proxies, voted as one, can be very influential in the outcome of votes held at a meeting of shareholders, particularly in determining the directors of a corporation.

What is the expected standard of prospectus disclosure? Answer: True, full, and plain disclosure of all material facts relating to an issuer is the expected standard, mandated by both statute law and the Supreme Court of Canada.

Compared to other bodies of law, why is securities regulation so late in developing? Answer: At the beginning of 20th Century, few members of the general public had much concern with anything that would fit into the category of ‗securities‘, and the body of contract and tort law could serve their needs. Prosperity and the ‗Roaring Twenties‘ led to assets that were more broadly held across the social spectrum, much of which was later wiped out in the Great Depression. Only this eventuality gave rise to the need for reform and regulation of the financial sector. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-219

10. What is a tippee, and what are the consequences of being one?

Answer: A tippee is the recipient of a tip, such a tip being undisclosed material facts about a reporting issuer. A tippee therefore may liable for trading on that undisclosed information, and subject to imprisonment and/or fines of 1 million dollars or three times profit made or loss averted. 11. Under what circumstances might a reporting issuer enter into a going private transaction? In what

ways could it be structured? Answer: A reporting issuer might entertain a going private transaction when the cost and logistics of public reporting requirements become too onerous. Other reasons may include moving management decisions out of the public spotlight to focus on important long term objectives or merging capabilities with another corporation that is opposed to being a publicly listed company. A going private transaction may be structured as an amalgamation between one or more companies, a take-over bid or a plan of arrangement.

Mini-Case Problems

1. The senior management of Consolidated Moosepastures Mining has discovered errors in their geological reports for their principal mining-claim property. Corrected estimates indicate an ore-body quality revised downward from 9.7 grams of pure unobtainium per ton of rock to 3.5 grams per ton of rock. What should management do, in accordance with the law of securities regulation? Answer: This question requires an assumption before answering. To be subject to a requirement of doing anything at all, Consolidated Moose Pastures must first be a reporting issuer. If it is a reporting issuer, the management must consider whether the ore-body figures represent material information which would significantly affect the value of its securities. Given that this is the principal mining claim of the firm and the factor is diminished to almost one-third, the information almost certainly fits the definition. If CMM is a reporting issuer, management would therefore be required to file a Material Change Report and make a press release on a timely basis.

2. Victoria owns 7.5 percent of the shares of Harmony Publishing Corporation, a publicly listed company. On Wednesday, in the locker room of her country club, she overhears one woman telling another that ―We‘ve signed Angelica to three, and I‘ve just got to get a dress for Saturday‘s launch party.‖ Victoria is certain that the speaker is Fran Collins, wife of Harmony‘s managing editor, whom she had seen at a shareholders‘ meeting, and that ―Angelica‖ could only refer to Angelica ConstanceSmythe, the current diva of romance fiction. Would Victoria be in violation of the law if she bought more shares in Harmony between now and Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-220

Saturday? Have any laws been broken already?

Answer: Again, for the question to have any relevance, students must first assume that Harmony Publishers is a reporting issuer. Students should recognise that Victoria is not an insider of Harmony Publishers by virtue of her 7.5% shareholding; a 10% holding would be required. It is however possible to conclude that she may be in a ―special relationship‖ with the reporting issuer, as she has obtained information from someone (spouse of an insider) who she knows or ought to know is in an enumerated ―special relationship‖. Thus the question turns on whether the information is in fact material and undisclosed to the public. Student‘s interpretations and assumptions may well vary, that printed and distributed invitations constitute public disclosure, through a spectrum to a surprise party and announcement intended to catch the publishing world off-guard. Students must also address the materiality of the announcement, perhaps by making reference to thoughts of the relative scale of the notoriety of the author in relation to that of the publishing house itself. As long as students elaborate on these thoughts, they are answering correctly. Those who believe that both aspects of materiality and undisclosed nature are met would be correct in concluding that further purchases by Victoria would contravene the relevant securities act. As to whether an offence as already occurred, based on the above assumptions, the answer is yes, for the act of tipping does not need to be followed by dealing in the security. Disclosure before public disclosure is the essence of the offence.

3. Alex and Bohumir carried on business in partnership for several years, and on the advice of their accountant, decide to incorporate. To grow their business, however, they would require additional capital, and they decide to incorporate as a public company in order to attract investors. What steps must they take in order to offer their shares to the public? Answer: The pair will be obliged follow the steps necessary to become a reporting issuer offering securities for sale via prospectus (see Checklist) or otherwise Alex and Bohumir‘s company must ensure that it finds prospectus exemptions for each trade it proposes to make: Accredited Investor, Private Issuer, Minimum Investment amount of $150,000.

4. Alicia purchased 1000 shares of ABC Corporation on the basis of a prospectus issued by the corporation. A few months later, the corporation discovered an error in its reported sales and profits reported in the financial information in the prospectus. Following the corporation‘s announcement, share prices fell, and Alicia suffered a loss of $12,000. Discuss. Answer: On the assumption that the error is not a wilful fraud on the market (which would entail penalties of its own), the question remains whether the error is material. It appears to be material since its correction caused such a large loss, assuming Alicia is a small investor at a modest share price – her shares dropping $12,000 on the news. While redress for loss in the past may have been difficult, litigation surrounding Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-221

misstated financial statements is now much more probable given Canadian legislative and policy changes akin to the US Sarbanes–Oxley.

5. Carla, the president of a small corporation, wishes to raise $500,000 in new investment money for the firm. What are her options to do so without the requirement of filing a prospectus? Give examples. Answer: Carla must find any combination of: Accredited Investors – banks, investment dealers, or individuals with financial assets exceeding $1,000,000, or individuals with net assets of at least $5,000,000, or individuals with income in excess of $200,000 in this and the past two years. Private Issuer trades- Carla‘s firm‘s securities must have transfer restrictions and the firm‘s shares may not be owned my more than 50 persons, which may then be issued to persons close to the issuer (directors, officers, employees, relatives, close friends, founders and control persons, existing securities holders) as well as to accredited investors. Purchasers willing to purchase a minimum investment amount of $150,000 each.

Case Problems for Discussion Case 1 PR Plastics Inc. was a small publicly traded corporation that manufactured outdoor furniture. Brown and Smyth, a professional accounting firm was for many years their auditors. During most of this time, demand for outdoor furniture remained high, and the corporation experienced significant growth. Because of their knowledge of the corporation‘s operations, both Brown and Smyth purchased shares in the corporation in the names of their parents and family members. Neither Brown nor Smyth owned any shares in their personal capacity. During a recent audit, Brown noted a number of irregularities in the firm‘s invoicing practices and the recording of sales. The firm reported the irregularities in its audit report to the corporation, but prior to the delivery of the report, Brown advised his parents and family members to sell their shares in the corporation. The corporation in due course issued a news report concerning the accounting irregularities, only with a president‘s statement that the practices had been corrected on the advice of its auditors. The price of the shares nevertheless dropped by $10.00. An investigation revealed that Brown‘s parents and family members had sold their shares in the corporation prior to the announcement by the corporation. Discuss the issues raised in this case. Answer:

Brown is in a ―special relationship‖ with the issuer, as he is an auditor of the firm. Brown‘s family members are also in a ―special relationship‖ with the issuer as they are in a ―special relationship‖ with one whom they know or ought to know is in a ―special relationship‖ with the issuer. As a result, Brown is tipping and the family members are tippees, being Criminal Code offences. By not refraining from trading until the information had been made publicly available, the family has traded on the basis of undisclosed information, a further offence under the Securities Act. Case 2 Mammoth Corporation Ltd. set out a goal to become the dominant firm in the widgets market, and in an effort to reach this goal, decided to make a takeover bid for its principal rival, Widget Corporation Inc. Mammoth Corporation Ltd. expects that the directors of Widget Corporation Inc. may oppose the takeover bid. Discuss the steps that each party must take in order to comply with relevant securities legislation. Answer: The steps applicable to the execution of a contested takeover bid are listed in some detail in the text. These include the bid itself, the target‘s management circular, the deposit window for tender of shares, expiry of the bid, and takeup of the deposited shares. Case 3 Henrick Alfredsson was employed as an investment advisor with a stock brokerage. His wife, Jane Martine, was employed as a wholesale sales agent by a small Canadian private corporation engaged in the manufacture and distribution of automobile-care products, namely wax coatings and polishes. The private corporation engaged Alfredsson to place $200,000 worth of its shares among a small group of investors. To assist him, the corporation gave Alfredsson promotional documents containing its sales projections for the next three years, and advised him that the firm intended to ―go public‖ within another three years. Neither Alfredsson nor Martine had ever seen the manufacturing facility, which they were told was located in the United States, nor did Alfredsson make any further inquiries into the financial health of the company. He duly sold the shares to interested clients who were already customers of his brokerage house. As matters turned out, the Canadian firm did not own a U.S. factory and had only rights of distribution. Moreover, the sales projections were wildly optimistic and, in time, the rights to distribute in Canada were lost altogether. The shares in the Canadian company became worthless as a result, and the investors sought redress from Alfredsson personally, as well as his employer, the brokerage. Comment on the issues raised in this situation. If this was brought before you as the provincial securities regulator, which issues stand out the most, and what redress or penalty (if any) would you impose? Answer: This case is loosely based on a BC Securities Commission decision in settlement of In the matter of Brian Paul Kuhn, 2002 BCSECCOM 786 (BCSEC). The first issue raised is whether there is a duty upon an investment advisor to inform him or herself as to material facts relating to the proposed distribution of shares (exercising due diligence), particularly where these shares are in the capital of a private corporation. The answer is clearly yes, that such a duty of due diligence exists, requiring verification of the representations made by the corporation, particularly where the investor is unlikely to be able to Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-223

obtain information from any source other than the advisor. The issue of Alfredsson‘s wife Jane is largely a red herring, but certainly suggests that Alfredsson could well have had sources of information at hand, had he attempted to exercise due diligence. In terms of redress, the Kuhn case decision imposed, on similar facts, a fine of $10,000, costs of $5,000, and a prohibition for seven years from becoming or acting as a director or officer of any issuer and from engaging in investor relations activities in British Columbia for that period. Case 4 Julia, a registered investment advisor, was employed at a stock brokerage in a junior capacity as a telemarketer of unlisted shares, making cold sales calls to prospective clients. Once she had made a sale, she passed the client on to a more senior advisor, who finished the paperwork and collected the payments for the shares. Where these shares were sold from the brokerage‘s own holdings of unlisted shares, she received a commission of 20 percent, and the senior advisor received some further amount, but that percentage was unknown to her. Her firm directed her to verify that prospective clients had an income of at least $50,000 per year, and also that each client possessed a personal net worth of at least $50,000. Julia made this verification in every case. After three years, Julia moved to another brokerage house and applied to the provincial regulator for authorization to sell shares on behalf of the new employer. Imagine that you are the provincial regulator, and have been made aware of the circumstances of Julia‘s previous employment. Would you grant or refuse the application? Why? Answer: This case is loosely based on an Ontario Securities Commission decision In the matter of Chateram Ramdhani, an unreported decision dated March 29, 2002. The first issue raised is whether Julia is displaying an understanding of her responsibilities as a registered salesperson and of the ―Know-YourClient and Suitability‖ provisions that are the duty of an investment advisor. In her telemarketing efforts it appears that her selling from inventory did not involve real steps to inquire into the investment objectives of her clients. Merely working from two tests, income of $50,000 and net worth of $50,000, does not live up to her obligations as a registered salesperson. This failure in performing acceptable due diligence is sufficient to support a suspension of registration and a refusal to transfer an existing registration of the employee from one firm to another. Such a suspension is not likely to be for a fixed period, but rather confined to requiring her re-enrollment in and successful completion of the Canadian Securities Institute‘s Conduct & Practices Handbook Course, and then any other remedial conditions placed on her future registration.

CHAPTER 19. EMPLOYMENT AND LABOUR RELATIONS Chapter Topics Contract of Employment Nature of the Relationship Form of the Contract Duties of the Employer Duties of the Employee Termination of the Contract of Employment Dismissal for Just Cause and Wrongful Dismissal Cyber-Law Aspects of Employee Management Employer Misrepresentation (Wrongful Hiring) Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-224

Employer Liability to Third Parties Employer Liability for an Employee‘s Injuries Labour Relations Development of Labour Legislation in Canada Collective-Bargaining Legislation The Union-Member Relationship Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion

Chapter Objectives After study of this chapter, students should be able to: • Understand the nature of the employment relationship. • Explain how the relationship is established. • Identify the duties of the employer and employee. • Understand how employment may be terminated. • Understand the unionized employment relationship. • Explain how collective bargaining rights are established and maintained. YOUR BUSINESS AT RISK No relationship is more important to a business enterprise than its relationship with its employees. Without these individuals there is no production, management or service. They are entrusted with judgment, trade secrets and finances, yet so often this is the most neglected relationship. The majority of employment-related problems can be avoided or provided for early on — in recruiting, employment contracts, job descriptions and appropriate discipline programs. The consequence of management failure here goes directly to the firm‘s bottom line.

CHAPTER COMMENTARY The contract of employment at common law is now subject to a great deal of legislation in each province that dictates minimum wages, hours of work, notice of termination, and working conditions. Other legislation, at both the federal and provincial levels, mandates benefits, etc. for employees. This cannot be adequately covered for all provinces in an ordinary text, and consequently, the legislation of a particular province may be examined in class if the instructor has such material available. A helpful approach to the examination of the employment relationship might be to compare it to the agency and partnership relationships, and in this fashion, highlight its differences. An alternate approach would be to begin with the basic element of control, and then expand on this by reference to the excerpt in the text from the Montreal v. Montreal Locomotive Works Ltd. case. The organization test might then be examined to distinguish the employment relationship from the position of the independent contractor. The Mayer v. J. Conrad Lavigne Ltd. Court Decision may be reviewed as a part of the discussion of this topic. The rights and duties both of the employer and the employees may next be considered, together with Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-225

some additional emphasis placed upon the duties of employees, particularly where the employee signs a restrictive covenant concerning competition with the employer. This latter aspect of the employment contract was dealt with in Chapter 9 (Legal Capacity to Contract and the Requirement of Legality) but may be reviewed to place it in the context of the entire employment relationship. Dismissal and unjust dismissal have been subject to a certain amount of judicial re-thinking, particularly in recent years. This has been especially true with respect to the matter of reasonable notice. While in the past, notice of termination could be quite short (a day or two, or even a few hours in the case of an unskilled, hourly paid employee), this is no longer the case. It is not uncommon for long service, unskilled employees and persons in low level management positions to be entitled to lengthy periods as notice of termination. Recent cases have calculated the reasonable notice requirement for a long service senior management employee to be in the neighbourhood of a year, but notice periods of up to two years have been determined as "reasonable." The Pilon case footnote is a further example of this trend towards longer notice requirements on termination. The Bardal v.The Globe & Mail Ltd. Court decision explains the duty of the employee to mitigate loss in the case of wrongful dismissal, a requirement that should be discussed along with the topic of reasonable notice. The Court Decisions outline two important areas of employment law: The determination of the existence of the employment relationship, and the matter of wrongful dismissal. The case of Mayer v. J. Conrad Lavigne Ltd. provides an example of the test for the employment relationship, in which the judge outlines the four fold test, and how it has been applied in other cases. He then proceeds to discuss and examine the organization test. The Bardal v. The Globe & Mail Ltd. Court Decision illustrates the factors considered by the court in determining wrongful dismissal, and outlines the consideration given to the various factors that constitute reasonable notice in the particular circumstances. Each component of the employee's remuneration was considered, as well as the employee's attempt to mitigate his loss. The court then calculated the amount of the damages based upon the period of reasonable notice. One issue in termination of an employee is the difficult question of what constitutes ‗just cause‘ for dismissal. The general considerations are outlined in a very general way in the text, but it should be noted that trial judges or arbitrators must determine this issue based upon the information or evidence placed before them. The Supreme Court of Canada attempted to provide some direction in the case of McKinley v. B.C. Tel[2001]2 S.C.R. 161, where Justice Iacobucci set out some examples of situations where the employer could establish that the employment relationship was irrevocably damaged, but again, no absolute test was provided. The case is not mentioned in the text, but instructors may wish to look at the case for class discussion purposes. Students should be made aware of legislation which applies to the employment area. Class discussion should perhaps include an examination of Human Rights legislation, particularly the duty to accommodate employees with disabilities, age discrimination, and workplace discrimination, as well as workplace safety obligations of employers. The text also deals with the liability of an employer for the torts of an employee, and where the employee fails to properly perform the employer's contracts with third parties. The liability of the employer in tort is illustrated in the diagram in this chapter of the guide.

Review Questions

1. How is an employment relationship established? What elements of the relationship distinguish it from agency or partnership? Answer: The employment relationship is established by a person called an "employee" entering into an agreement with another called the "employer", whereby the employee agrees to perform services for the employer in return for the payment of a wage or other remuneration. The employment relationship is distinguishable from agency or partnership on the basis that the employer has the right to direct the work to be done and the manner in which it is done.

2. Explain the "four fold test" for employment. Why did the courts find it necessary to establish this test?

Answer: The four fold test was established because "control" as a test was inconclusive in the determination of the employment relationship, given the complex relationships which modern business developed for employment. The test involves not only "control" but also (2) ownership of tools, (3) risk of loss and (4) chance of profit.

3. Distinguish a contract of service from a contract for services. Answer: A contract of service relates to the employment relationship. A contract for services is usually a contract made of the services of an independent contractor.

4. If an employee is wrongfully dismissed, explain how a court would determine the money damages which should be paid by the employer for the wrongful act. Answer: Damages are determined on the basis of what the employee would have earned during a period of reasonable notice, had it been given, less any earnings of the employee during that time period.

5. Outline the general or implied duties of an employee under a contract of employment. Answer: An employee has the implied duty to carry out the reasonable orders of the employer, provided that they are made within the scope of the employment. The employee must use the employer's property in a reasonable manner, and must keep confidential any information given during the course of employment. There is also a duty to devote the required hours to the employer's work.

6. Why are employers under certain circumstances vicariously liable for the torts of their employees? Identify the circumstances under which vicarious liability would arise. Answer: Because employees are considered to be carrying out the orders of their employer, if a tort is committed during the course and scope of their employment, the tort is considered to be a tort of the employer, and the employer liable. For vicarious liability, the tort must be committed during the course of the employee's work. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-227

7. Identify the conditions or circumstances under which an employer would be justified in terminating a contract of employment without notice. Answer: An employer would be justified in terminating an employee without notice if the employee is incompetent, grossly negligent in the performance of his duties, or concurs in a crime against the employer. The right would also exist where the employee's actions constitute a serious breach of the employment contract.

8. What factors must be considered in determining reasonable notice if an employee or employer should decide to give notice of termination of a contract of indefinite hiring. Answer: Reasonable notice would take into consideration the employee's length of service, position within the firm (responsibility), opportunities for other employment, age, customs of the trade, and any representations made at the time of hiring concerning the employment.

9. Why must an employee mitigate his or her loss when wrongfully dismissed? Answer: The courts expect an employee to mitigate his or her loss on the basis that a reasonable person would attempt to find employment immediately to reduce the loss resulting from the breach.

10. Define a collective agreement. Answer: A collective agreement is a written agreement made between an employer and a union recognized or certified as the bargaining representative of the employees' employer, which establishes the terms and conditions of employment of the employees, and the rights and duties of the employer, the union, and the employees.

11. What effect does collective bargaining have on the Common Law employment relationship? Answer: The collective agreement would appear to override many aspects of the common law employment agreement and fix the terms and conditions of employment. 12. Explain how a union acquires bargaining rights. Answer: A union may acquire bargaining rights either by voluntary written recognition of the bargaining agent by the employer, or by certification of the union by a Labour Relations Board. 13. What is a bargaining unit? How is it determined? Answer: A bargaining unit is a group of employees determined to be appropriate for collective bargaining by a Labour Relations Board (or voluntarily determined by the employer and the union). 14. Outline the steps in the negotiation process and its purpose. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-228

Answer: The negotiation process begins with a notice to bargain given by one party (usually the union), following which the parties are obliged to meet and bargain. If they cannot reach an agreement, the next step is to follow through a conciliation process, whereby a third party conciliator (or board) assists the parties. If the conciliator (or board) fails, the parties are then free to strike or lock-out after a short "cooling-off" period. The purpose of this process is to postpone the use of a strike or lock-out until after all efforts (including third party assistance) have failed to produce an agreement. 15. Explain briefly the role of a union in collective bargaining. Answer: Labour unions act as bargaining agents for employees in their dealings with their employer on matters concerning working conditions and the employment relationship. 16. If a collective agreement is negotiated, what method may be used to resolve disputes that arise out of the collective agreement? Answer: Disputes which arise while a collective agreement is in effect must be resolved by way of compulsory arbitration. 17. Describe the legal obligations which a union has towards its members. Answer: A union has the duty to fairly represent its members, and to permit all persons that it represents to join the organization. It may not expel a member except in accordance with its constitution and the rules of natural justice. 18. How are disputes between the parties resolved during the negotiation process, if third party assistance fails? Answer: If third party assistance fails, the parties may use the force of a strike or lock-out. In the public sector, compulsory arbitration is sometimes imposed in lieu of a right to strike or lock-out.

Mini-Case Problems

1. Marie was employed by Rigney Construction Company as bookkeeper and office manager for over ten years. Without notice or explanation, Rigney informed Marie that her services were no longer required and requested her to leave the premises. At the time, Marie was earning an annual salary of $60,000. What additional information would you wish to know if Marie were to ask your advice as to whether she should take legal action against Rigney Construction for wrongful dismissal? Answer: Additional information: Opportunities for similar employment elsewhere, Marie's age, any customs of the business or trade as to notice, any representations as to her concerning the employment at the time of hiring, and any agreed upon notice period. You might also inquire if Rigney had any grounds for immediate dismissal.

2. Jones, who was earning an annual salary of $80,000, was summarily dismissed by Smith, his employer. A week later, Jones obtained a new position with another firm at an annual salary of $80,000. If Jones took legal action against Smith for wrongful dismissal, what would his damages be if he were able to prove his claim successfully? Answer: Since Jones found a new position and the same salary a week later, his loss would be equal to 1 week's wages ($1,538) unless benefits received at the new place of employment were less than before.

3. Helga was employed for many years as a material handler in an automobile parts warehouse. Her work involved filling orders from auto repair shops for parts weighing from a few grams to as much as 40 kilograms. In a non-work related accident, Helga was permanently injured and unable to walk without a cane. Her employer terminated her employment, giving her two month‘s wages in lieu of notice. What are Helga‘s rights in this case? Answer: Since Helga‘s injury was not work related, and she is no longer able to do her job, her employer may have grounds for termination of her employment. Students, however, should note that under Human Rights legislation, an employer has a duty to accommodate employee with a disability, and if she was capable of doing some other work, the employer may not be in a position to terminate her. As a long term employee, Helga may be entitled to a longer period of notice than the 2 months offered, but note that the fact that she cannot work may be a factor in the notice period. 4. Apex Company is a supplier of goods for the DYNO Company. A lawful strike takes place at the DYNO Company plant, and the picketing employees refuse to allow a truckload of goods sent by Apex Company to enter the DYNO Company plant gates. What are the rights of Apex Company? Answer: Pickets may not interfere with the Apex Company contract with Dyno Company. Apex would be entitled to an injunction to prevent the pickets from blocking entry to the Dyno plant. It might also be entitled to claim damages against the pickets if they caused any monetary loss to Apex Company.

5. Suppose that, the next day, the Apex Company finds striking employees of the DYNO Company picketing the Apex Company plant because it is a supplier of DYNO Company. What are the rights of Apex Company? Answer: This is a secondary picketing situation. Pickets may lawfully be there, but cannot interfere in any way with the Apex operations. The picketing constitutes freedom of expression, but the union is limited to that. See: RWDS Union Local 550 v. Pepsi Cola Canada (West) Ltd. [2002] 4 WWR 205 for details of limitations imposed by the court on picket activity. Note, however, that if the pickets cause any damage to the property Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-230

of Apex, the pickets may be liable for the damage. 6. A union was involved in a legal strike, and picketed the employer‘s plant. Archie, a union member, crossed the picket line and went to work. What might the union do? What are Archie‘s rights? Answer: Archie has the right to freely cross the picket line, and the union has no right to interfere with his entry to the workplace, The union, however, may discipline Archie for doing so, but may only do after a ‗fair hearing‘ where Archie may plead his case.

Case Problems for Discussion Case 1 Creative Advertising Ltd. employed Igor as a copy design editor for many years. The work was very stressful, but Igor enjoyed the work, as it required a great deal of originality and creativity on his part. In particular, he enjoyed the ‗presentation to clients‘ aspect of his job, as it gave him the opportunity to explain his work to clients, and the results he expected from it in terms of product sales. Unfortunately for Igor, at age 49 he suffered a stroke which left him with a serious speech defect, but otherwise unaffected. The stroke made verbal communication with clients impossible, but he was still able to carry on with his creative work. His employer, however, decided that Igor‘s services were no longer necessary, and gave Igor notice of termination along with a cheque equivalent to 6 months salary. Discuss the issues raised in this case, and advise Igor of his options. Answer: This case concerns the human rights issue of the duty of an employer to accommodate an employee with a disability. Igor developed a speech defect, but this did not affect his ability to do the creative aspects of his work, and his employer may be obliged to change his work assignment to accommodate his speech impediment. If the employer could make this accommodation, then Igor may insist that he be retained as an employee. How should this accommodation be addressed by the employer? Students should consider how this disability may affect Igor‘s ability to perform his work. Was the presentation to clients of critical importance? How should this be considered?

Case 2 CD Transport & Delivery Ltd. engaged the services of Lisa to assist with local delivery of packages to businesses and residents. Lisa was expected to provide her own delivery vehicle, and was paid on a per hour wage basis and a per mile basis for her truck. CD Transport provided magnetic signs that Lisa was expected to attach to the sides of her truck. Lisa was expected to work exclusively for CD Transport and for no other delivery service in the area. Lisa billed for her work hours and services on a monthly basis. After several years, CD Transport advised Lisa that they would no longer require her services. The notice of termination was to be effective in one month‘s time. Lisa objected to the short notice, and claimed that she was an employee of CD Transport.

Outline the position of each of the parties in this dispute, and the arguments each may raise if the case came before the court. Render a decision. Answer: The issue raised in this case is the relationship that exists between Lisa and CD Transport & Delivery Ltd. Is Lisa an independent contractor? CD Transport & Delivery would certainly argue that this was the case, since Lisa provided her own truck and billed for her services. Lisa, however, might argue that the restrictions placed on her created an employment relationship, since she could work for no other delivery service, and was expected to display CD Transport & Delivery Ltd. signs on her truck. She might also argue that CD Transport controlled her work in the sense that they directed where she was to deliver their goods. The fact that Lisa was restricted from working for any other business might tilt the relationship in favour of an employment relationship, and Lisa may be entitled to a longer period of notice. Case 3 McKenzie was a qualified and licensed driver of tractor trailers and other heavy types of trucks. He was first employed by FMP Company in 2003, and was steadily employed by the company as a truck driver until 2020. At that time he was voluntarily placed ―on loan‖ to Timber-Hall Trucking under an agreement that provided as follows: (1) Timber-Hall will provide and maintain trucks and equipment to haul logs from FMP Company logging sites to the FMP Mill. (2) FMP Company will provide any qualified truck drivers required by Timber-Hall. Drivers will continue to be paid their regular wage rates and benefits by FMP Company. (3) Timber-Hall will have the right to direct and supervise the work of the drivers, but will not have the right to discharge or discipline drivers provided by FMP Company. Timber-Hall operated a fleet of 36 trucks used for hauling timber from various logging sites to the FMP mill. Of the drivers, 32 were employees of Timber-Hall and four were ―on loan‖ from FMP Company. All drivers were under supervision of Timber-Hall management at both the loading and unloading points, and the drivers were directed to specific locations by Timber-Hall supervisors. McKenzie was directed to a particular loading area by Timber-Hall and told to deliver the load to the FMP Company mill some 100 kilometres away. McKenzie picked up the load of timber and set out for the FMP mill. En route, McKenzie encountered icy road conditions as he descended a long hill. Before he could bring the heavy truck under control, it careened from the road and collided with a road-side cabin owned by McGee. The cabin was demolished, and McGee brought an action against McKenzie, Timber-Hall, and FMP Company for damages. Both Timber-Hall and FMP Company alleged in their defence that they were not the employer of McKenzie. Discuss the arguments that may be put forward by the defendants and the issues raised by the case. Render a decision. Answer: Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-232

The facts of this case are adapted from the facts in the case of McKee et al. v. Dumas et al., Eddy Forest Products Ltd. et al. (1975), 8 O.R. (2d) 229. The case is concerned with the employment relationship in the sense that the party injured by the driver's negligence wished to recover from the driver's employer. The arguments of each corporation would be directed at the relationship which they had with McKenzie. Some of the points which they might raise can be obtained from the students by way of such questions as: Who has the right to direct the work which McKenzie is to perform? Who controls the manner in which it is performed? Who owns the tools? (i.e.: the truck?) etc. The case is complex in the sense that the ordinary rights of the employer are split between the two companies. For example, Timber-Hall has the right to direct the work of McKenzie, but not discharge or discipline him (two important rights of an employer). The two employers cannot both be vicariously liable for the acts of the employee, and while the general employer has the burden of proof, if it can establish that the temporary employer had complete control of the employee at the time of the accident, then the temporary employer will be vicariously liable. In the McKee case, the court expressed the above reasoning, and if it is applied to this case, Timber-Hall would be liable for the negligence of McKenzie.

Case 4 Lynne and Leroy were employed as commissioned salespersons by a large computer and electronic company. Each received a basic salary of $900 per week and a commission on gross sales they made on behalf of the company. In addition, the company paid their reasonable travel and living expenses on all authorized business trips involving travel of more than 25 kilometres from the head office building where their own offices were located. Both Lynne and Leroy were highly productive sales representatives, and earned substantial sales commissions that placed their average earnings close to the $100,000 mark each year. While each was responsible for a specific territory, the two of them took on a proposal of the company concerning a new, remote-community computerized communications system that a government agency had opened to tender. The particular tender required extensive research and preparation, as well as presentation of the proposal for review and approval by several related government agencies before it could be submitted. A number of companies were interested in the project, and Lynne and Leroy put in long hours at their offices to prepare their presentations to the various agencies. Eventually, after much work and effort, they managed to obtain approval for the company project from each agency. A tender on the project was then prepared for submission to senior management for approval. Both Lynne and Leroy were optimistic that their tender would be successful, in spite of the fact that four other manufacturers were preparing tenders as well. During the two weeks before Lynne and Leroy submitted the tender for senior management approval, the company initiated a minor reorganization of its marketing department. Then, several days after the submission was in the hands of senior management, both Lynne and Leroy were advised that they would each be promoted to the position of regional manager, a position carrying with it an annual salary of $100,000. Regional managers were responsible for a number of salespersons who reported to them and were also expected to negotiate some of the larger contracts with customers. However, they received no commissions, since their salaries were designed to cover their efforts as well as their responsibility. The two employees were initially delighted with the thought of promotion. However, on reflection, they decided that, by accepting it, they would perhaps deny themselves the large commission they would earn if their tender was accepted by the government agency. To clarify their position, they met with the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-233

vice-president of marketing, who informed them that the company intended to include their old sales territories with those of other salespersons and that, if they refused to accept the promotions, no sales territory would be open for them. The rationale was that, since, as a result of the reorganization, the sales force would consist of persons with greater service with the company, those salespersons with less service would be terminated or moved to positions of less responsibility and lower salary rates. The vicepresident urged both to accept the promotion, since they each had only three years‘ service with the company, and the company was anxious to retain them. The vice-president also stated that he believed that the two employees would likely have a bright future if they remained with the company. At this point in the discussion, Leroy demanded to know if they would be entitled to the commission on the government sale if the tender was accepted. The vice-president responded that they would not be entitled to commissions in their new positions. Both Lynne and Leroy then became angry and accused the company of robbing them of what was rightfully theirs. The discussion quickly degenerated into a shouting match, until Lynne ended it by striking the vice-president with her heavy handbag. Both employees were then told to leave the office and ―clean out their desks,‖ as they were terminated. Discuss the possible arguments of the two employees and the employer if the employees were to bring an action for wrongful dismissal. Render a decision, and in it consider the effect of the success or failure of the company to secure the government contract. Answer: This case raises a number of issues concerning employment relationships: Is the employer entitled to unilaterally change the employment relationship by promoting the employees against their will? Would a promotion constitute a breach of the employment relationship by the employer? Is the situation analogous to a "demotion" or constructive dismissal? Was the action of the employer in giving the promotion an attempt to avoid paying the employee the substantial commission if the sale was made? Did Lynne's action constitute ground for immediate dismissal? From the facts of the case, Leroy might successfully argue that the unilateral change in the employment relationship constituted breach on the employer's part if he was not prepared to accept the promotion. The employer's actions of placing him in the position where he was obliged to accept it or be terminated might be considered notice of termination if he chose not to accept the promotion. The argument between Leroy and the Vice-President would not constitute grounds for dismissal, and Leroy would probably succeed in an action of wrongful dismissal. Lynne, on the other hand, struck the Vice-President, and her actions, if treated as an assault, would perhaps entitle the company to terminate her without notice. The facts related to Leroy are similar in part to those set out in Prozak et al. v. Bell Telephone Co. of Canada (1984) 10 D.L.R. (4th) 382, where the court held the employer liable for wrongful dismissal, and established the notice period at eighteen months. The employee, however was a long-service employee in that case, and in this case Leroy had been employed for only a few years. The notice period would likely then be a much shorter period, and would perhaps include the commissions earned on the large contract if the bid was successful.

Case 5 Mall Merchandising Co. operates a department store in a shopping centre located near the outskirts of a large metropolitan city. The store employs a permanent and part-time staff of approximately 120 persons, and is open to the public from 10:00 a.m. to 10:00 p.m. on a six-day-per-week basis. The store is closed on Sundays. Full-time employees work on a shift basis that requires each employee to work on two Saturdays each month, with an equivalent day off during the week that a Saturday shift was scheduled. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-234

Mary K. was first employed by Mall Merchandising Co. in 2010. She was a good employee and had worked in the giftwares department since 2011. Her attendance record was above average, and she seldom lost time due to illness, until very recently, she willingly worked her Saturday shift. Some months ago, Mary K. joined a religious denomination that considered Saturdays as their holy day. Saturdays were devoted to religious activities at the denomination‘s place of worship, and Mary K. refused to work her scheduled Saturday shifts. The store manager was made aware of Mary K.‘s refusal to work, and she informed Mary that no employee could be excused from the Saturday work, as it would be unfair to all of the other employees who were required to work. When Mary K. refused to comply with the manager‘s direction to work on Saturdays, the manager discharged her for insubordination. Mary K. was paid her wages and benefit entitlement up to and including her last day of work. Advise Mary K. of her rights at law and the course of action (if any) that she might take. If she should decide to take action against her employer, what defences (if any) might the employer raise? How would you expect the case to be resolved? Answer: The issue in this case concerns human rights legislation. Most provinces prohibit employers from discriminating against employees for their religious beliefs. In this case the employee joined a religious sect which treated Saturdays as a holy day. The question here is: Must the employer change its work schedule to accommodate Mary K's new-found religious belief? Does her refusal to work on Saturday's constitute insubordination? These issues should be discussed. The broader issue of human rights and whether an employer should accommodate all employee rights of this sort should be considered. Does an employer have a right to expect accommodation on the part of the employee as well? In the case upon which this problem was based, the employer was held to have violated the employee's rights by discharging the employee. As a general rule, employers are expected to make reasonable efforts to accommodate an employee's religious belief. In this case it failed to do so.

Case 6 Jim and Emmanuel were engineers with a mining company that frequently sent employees to remote job sites for long periods of time while a new property was being developed. Because of the time during which employees were required to stay at the remote sites, the company paid its employees extremely well and attracted a large number of unmarried young men to both its professional and labouring positions. The company had discovered, however, that it had difficulty attracting and keeping more senior and experienced personnel at the job sites. These employees were always in demand for the supervisory tasks and inevitable problems that required the expertise of experienced professionals. After discovering that one of the main factors that discouraged senior employees from accepting such positions was their reluctance to be absent from their families, the company offered to pay all costs of a return flight home once each month for married staff at remote sites. When Jim and Emmanuel were interviewed for positions with the company they were told of this policy for married staff. Neither man was married and, when both were offered positions a short time later, they understood that they would not be eligible to receive the travel allowance.

One evening Jim and Emmanuel were talking with some of the other employees at the job site about the travel policy. A colleague said that he would like to be able to get home to see his ill father more often, but that he could not afford the cost of a commercial flight on a regular basis and, since he was not married, he was not entitled to the company allowance. Overhearing this, one of the more senior employees commented, ―I don‘t think that policy is very fair. Come to think of it, isn‘t there some law against that? You guys should go talk to management about it. They‘re pretty good guys and might make some changes.‖ Discuss the legal issues raised in this case and the arguments that the respective parties might raise. Explain the factors that a court would consider and what its decision might be. Answer: Students should recognize that this case raises a human right issue - discrimination between person on the basis of their marital status. While the employer might argue that the special benefit for married employees was necessary to attract them to the remote work site, the benefit was discriminatory on a basis prohibited by the legislation as it was not a bona fide qualification for the job, and not related to the discharge of their duties. The employer would accordingly be in violation, and obliged to offer the same benefit to all employees regardless of their martial status. See: Ontario Human Rights Commission v. London Monenco Consultants Ltd. et al. (1992) 9 O.R. (3d) 509 for a similar case.

Case 7 Calculators Inc. required the services of a bookkeeper for its operations. While it was a very small company, the president believed that the company would grow quickly, and the appropriate employee for the job would be someone who was a qualified professional accountant. He engaged the services of Headhunters Inc., an executive-placement firm, to find a suitable candidate for the position. In describing the position, however, he tended to describe the work and responsibility of the position in terms of what it might be in the near future, if his view of the firm‘s growth materialized.

Headhunters Inc. staff advertised the position as it was described to them. They received a response to the advertisement from Ms. Take, a chartered accountant, who was currently employed by a large public accounting firm located in a nearby city. The parties met in the nearby city and, following the interview, Ms. Take accepted the position with Calculators Inc. She resigned her position with the accounting firm, paid out the balance of her lease of her apartment, then moved the 90 kilometres to the city where Calculators Inc. was located. On arrival at her new job, Ms. Take discovered that Calculators Inc. had a workforce of only 40 employees, and her job as head of the accounting and finance department was essentially that of a bookkeeper, since she was the only employee in the department. Discuss the issues raised in this case and advise Ms. Take of her rights (if any) at law. If you would advise legal action, comment on the possible outcome of the case. Answer: The facts of this case are designed to raise the issues dealt with in Doug Queen v. Cognos Corp., a 1993 Supreme Court of Canada decision. The central point for discussion is the misrepresentation of the position to the potential employee. The employer here essentially committed a tort by deliberately misrepresenting the position, and if the applicant for the position relied on the misrepresentation to her detriment, then the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-236

employer may be liable for the loss she incurred. To be successful, however, Ms. Take must establish that the misrepresentation was fundamental to her decision to terminate her prior employment, and also that she incurred a loss in doing so. The payment of the balance of her old apartment lease and her costs incurred to move to the new city would be examples of the latter.

Case 8 Mario had been well known as a racing-car driver on the provincial stock-car circuit for many years. He had driven a number of different types of racing cars during his racing career, either under the sponsorship of auto parts stores or as an ―independent.‖ Following a spectacular race in which Mario had won first prize, a major auto parts distributor offered him a position in its organization as director of marketing. The offer included a starting salary of $80,000 per year, participation in a profit-sharing plan open only to senior management, a generous pension plan, and a variety of other benefits including the use of a company-owned car. The position also gave him a place on the board of directors of the company. As a part of his duties, Mario was expected to enter and drive stock-cars advertising the company in a number of highly publicized race events held each year. During his first year with the company, Mario won four of the five races that he had entered and worked hard at all other times to boost sales for the company. As a result of his efforts, sales increased by 20 percent. Mario received a year-end bonus of $10,000 in addition to his salary and share of profits, and was advised by the president of the company that his salary for the next year would be raised to $100,000. The second year of Mario‘s employment did not match the previous year. Mario won only two of the five races, and, in spite of spending extra time promoting the employer‘s brand, sales decreased by 3 percent. At a year-end directors‘ meeting, a bitter argument occurred between Mario and the company president over the poor sales performance of the company. The president blamed the drop in sales on Mario‘s poor showing on the race circuit, and Mario blamed the unreliability of the car he had been provided for his poor performance. The argument ended with the president dismissing Mario. The next day, Mario received a cheque from the company to cover his salary to that date, along with a formal notice of his termination. Prior to his dismissal, Mario had arranged for a two-week holiday in Europe. He decided to follow through with these plans, then look for other employment on his return. Mario searched diligently for a similar position when he returned from his holiday, but could find nothing. Eventually, some six months after his termination, he found a position as a staff writer for a sports car magazine at an annual salary of $50,000. Under the terms of his employment at the time of his dismissal, Mario was entitled to receive (in addition to his salary of $100,000 per year) pension contributions by the company on his behalf of $6,000 per year, director‘s fees of $5,000 per year, a profit-sharing plan payment of approximately $6,000, and the use of a company car.

He eventually brought an action for wrongful dismissal against the company and, in addition, alleged damage to his reputation as a professional driver as a result of his summary dismissal by his employer. He claimed $100,000 for damage to his reputation. Indicate the arguments that might be raised by the parties to this action. Discuss the factors that would be taken into consideration by the court. Render a decision. Answer: The case raises three issues concerning wrongful dismissal: (1) (2) (3)

What constitutes wrongful dismissal? How are damages determined in wrongful dismissal cases? What steps must a wrongfully dismissed employee take on dismissal?

Unless the employer has grounds for immediate dismissal, and no notice requirement is set out in the contract of employment, reasonable notice must be given of termination. Clearly, Mario did nothing wrong, as grounds for immediate dismissal would require something more than a mere disagreement over his poor performance on the race circuit. The damages which are granted for wrongful dismissal are usually limited to the earnings and benefits that the employee would have received had he been given reasonable notice of termination. See the Bardal v. The Globe & Mail Ltd. Judicial Decision for the method used to determine this amount. These figures might be identified or calculated by the students as responses to the question: What amounts would be included in the calculation of the damages? If a year, say, is considered reasonable notice (since Mario holds a fairly senior position in the firm) he would probably be entitled to a year's salary, pension contributions for the year, his share of profits, the value of the other benefits associated with his position (such as the use of the car), but not including the bonus if it is entirely discretionary. He would be obliged to immediately look for other work, and any earnings made in his new employment would be deducted from the amount of damages. Query: Would he be penalized for taking the two-week holiday? For cases on this topic: See: McNamara v. Price Wilson Limited (1979), 12 B.C.L.R. 300 and Delano v. Atlantic Trust Co. (1977), 24 N.S.R. (2d) 53.

Case 9 Import Cars Ltd. employs a work force made up of the following employee groups: 6 new car sales staff (New Car Department) 3 used car sales staff (Used Car Department) 3 customer service advisors (Service Department) 8 technicians (Service Department) 4 service employees, unskilled (Service Department) 2 maintenance employees (Building Maintenance Department) 4 collision repair technicians (Auto Body Shop Department) 3 office staff (Office Department) Each department has a manager, who along with the corporation‘s president and secretary-treasurer, make up the ‗management team.‘ All of the departments are located in and operate out of a main building except for the auto body shop, which is located in another part of the city about a kilometer distant from the main building.

Representatives from the Auto Technicians Union are currently attempting to interest the 8 technicians in joining a union, and an Auto Employees Union also wishes to organize all of the employees as a local union. Only 3 of the technicians and none of the auto body shop technicians or office staff are interested in joining a union. The new and used car staff, however, has expressed an interest in joining a union. Outline the steps that the unions must take if they wish to form a union at Import Cars Ltd. What opposition might each union encounter in its membership drive? What steps might the employer lawfully take? Discuss. Answer: This is essentially a discussion case concerning union organization campaign. The facts of this case also provide an opportunity for students to consider the make up of suitable bargaining unit for collective bargaining. Students should note that the body shop employees work in a distant location, and may not be interested in workplace issues at the main building. Note also the office/plant division of the workforce and the fact that the office employees are not interested in being a part of the union. Reference to the text material on employer rights and duties should also be discussed.

Case 10 Nigel was employed as a taxi driver by the Rapid Cab and Cartage Company. On May 23, 2011 while driving his taxi, he was involved in a serious collision with a train at a level crossing. The taxi was demolished as a result of the accident, and three passengers riding in the rear seat of the taxi were seriously injured. Nigel, by some miracle, escaped injury. An investigation of the accident revealed that Nigel had been racing the train to the level crossing and had collided with the side of the engine when the train and the vehicle reached the crossing at the same instant. As a result of the investigation, Nigel was charged with criminal negligence and released on bail pending his trial. The employees of the company worked under a collective agreement and were represented by a truck drivers‘ union. The company manager and the union representatives met on May 27 to discuss Nigel‘s accident. At the request of the union, the company agreed to allow Nigel to continue to drive until his trial. Nigel had been employed by the company for five years prior to the accident, and had an accident-free driving record until April of that year. During April, Nigel was involved in four minor accidents that were clearly his fault. On May 9 (only two weeks before the accident on May 23) he had crashed his vehicle into the side of the taxi garage, causing extensive damage to both the vehicle and the building. On that occasion, and the two previous occasions, he had been given verbal warnings by the supervisor that he would be dismissed if he continued to drive in a careless manner. Nigel‘s case came before the courts on June 10. He was convicted and given a six-month jail term. His driving privileges, however, would be reinstated on his release. Following his conviction, the union, on his behalf, arranged for a six-month leave of absence from the company, subject to the right of the company to review the matter on his return to work.

Before Nigel was released from jail, several large damage claims were made against the company as a result of the accident, and the insurer expressed concern over Nigel‘s accident-frequency rate. The company management thereupon notified the union of its intention to dismiss Nigel, and advised Nigel that his services would no longer be required on his release. Upon receipt of the notice of dismissal, Nigel immediately filed a grievance through the union, requesting reinstatement. The grievance was filed in accordance with the time period and procedure outlined in the collective agreement. The collective agreement contained the following clause: 12.01 The company shall have the right to establish reasonable rules of conduct for all employees, and shall have the right to discipline or discharge employees for just cause, subject to right of grievance as set out in this agreement. The company had posted the following rule on the office bulletin board in September 2010: Rule 6 Any failure on the part of a driver to place the comfort and safety of passengers before his (or her) own convenience shall be cause for discipline or dismissal. As the sole arbitrator in this case, how would you deal with this grievance? Prepare an award and give reasons for your decision. Answer: The role of an arbitrator in collective bargaining is essentially that of an interpreter of the collective agreement. Where a violation is alleged, the arbitrator is usually called upon to determine if the agreement has been violated or improperly interpreted by the accused party. In the case of dismissal, as is this situation, the arbitrator would be called upon to decide if the company had just cause to dismiss Smith. Under the terms of the collective agreement, the company has the right to make reasonable rules of conduct (clause 12.01). The company did so pursuant to this right, and posted Rule 6 in September of 2010. Arbitrators, however, generally assess the rules in terms of "fairness" and require the employer to prove that the rule is necessary, reasonable, brought to the attention of the employees before enforcement, consistently enforced, and the penalty appropriate for the violation. The employer is also expected to establish that the employee could reasonably expect the enforcement of the rule if the employee acted contrary to it. An arbitrator would require the employer to prove just cause for the dismissal, and if the employer is unable to do so, the arbitrator may re-instate the employee or (where permitted) vary the penalty to fit the violation. The students should carefully examine the actions of the employer, and in particular, the act of allowing Nigel to continue to drive after the accident, and in spite of his record of accidents. Is this consistent with the purpose and intent of Rule 6? If the employer was concerned for the safety of passengers, why was Nigel not dismissed immediately? Why did the company wait until after his trial? In what ways might these factors affect "just cause"? Students may reach the conclusion that the employer's actions were inconsistent with its rule and the serious consequences attached to its violation. If so, some lesser penalty might be substituted for the discharge.

Haden Manufacturing Ltd. was a large producer of automotive parts and supplies and employed a workforce of over 400 employees. The employees had been represented by the local of a large international union for several years. An unexpected upturn in consumer demand forced Haden to schedule additional production shifts to meet backlogged orders. This necessitated most employees working at least one overtime shift per week, on either Saturday or Sunday, for which the collective agreement provided that employees be paid timeand-a-half wage rates. When the new work schedule was posted, Susan, who was a parts painter, found herself scheduled to work the overtime shifts on Saturdays. Susan belonged to a religious order that observed Saturday as its day of worship and, as a result, Susan did not wish to work this particular shift. She went to see the production scheduler to explain her situation and to suggest that he schedule her for the Sunday shift but at the normal, non-overtime rate of pay. Susan felt that her offer was a fair compromise and would be accepted by management. Her suggestion was, in fact, quite acceptable to management, which promised to accommodate her request. The union shop steward was informed of Susan‘s request and the arrangement which she had made with management. Shortly thereafter the union sent a memo to management stating that it would not permit management to schedule Susan for the Sunday shift without paying her the time-and-a-half rate stipulated by the collective agreement. When management approached Susan about the memo, she stated that she knew nothing about it and that it had not been sent at her request. She also stated that her offer still stood since that arrangement worked out very well for her. Management took the position that if the union would not waive the overtime pay provision for Susan on Sunday, thereby effectively barring her from that shift, it would have no choice but to require her to work on the Saturday shift. Susan refused to do this and was subsequently dismissed by Haden. What recourse and rights, if any, does Susan have against the parties in this case? Discuss the arguments each might employ and what remedies might be imposed by a court or arbitrator. Answer: This case concerns the right of an employer and an employee to negotiate an employment arrangement that is outside the collective agreement, and in conflict with it. The agreement provides for time and one-half pay for Sunday as well as Saturday work hours, and the union must consent to any change in these provisions. The union was probably correct in objecting to the agreement between Susan and the employer as it represented a change in the collective agreement. Susan's unwillingness or refusal to work on Saturday was for religious reasons, and the employer was expected to make reasonable efforts to accommodate her (as required by Human Rights legislation). Her dismissal was similarly based upon her religious belief for not working the Saturday shift. Since Susan worked under a collective agreement at the time of her discharge, she could grieve the employer's actions, and an arbitrator (or Board) would hear the case. Given the facts, the arbitrator would probably re-instate Susan in her job and require the employer to schedule her overtime on Sunday.

Case 12 Gear Manufacturing Company carries on business in a part of a factory building in an industrial park located at the outskirts of a large municipality. The remainder of the building is leased by Gear Warehousing Company, a wholly owned subsidiary of Gear Manufacturing Company. Gear Warehousing Company is essentially the storage and marketing subsidiary of Gear Manufacturing Company. It

purchases and markets all standard types of gears manufactured by the parent company, even though it is a separate entity. The employees of Gear Manufacturing Company are represented by the Gear Makers‘ Union. In the previous year, the union negotiated a collective agreement that expired some months ago. Collective bargaining took place before the expiry of the old agreement, but Gear Manufacturing Company and the union could not agree on the terms of a new collective agreement. They requested conciliation services offered by the Ministry of Labour (which were required before a strike or lockout could take place), but the services failed to produce an agreement. Eventually, the employees went out on strike and set up picket lines at the entrances of the plant of Gear Manufacturing Company. They also set up picket lines at the entrance to Gear Warehousing Company to prevent the shipment of goods from the warehouse. A few days later, the employees set up a picket line at Transmission Manufacturing Company, an important customer of Gear Warehousing Company, even though the company‘s only connection with Gear Manufacturing and Gear Warehousing was as a purchaser of Gear products. The pickets prevented Transmission Manufacturing from shipping a large truckload of transmissions to another manufacturer. As a result, the company suffered a loss of $30,000 through its failure to make its delivery on time. Advise Gear Warehousing Company and Trans-mission Manufacturing Company of their rights (if any). Suggest a course of action that they might take. Answer: The facts of this case raise the issue of secondary picketing. Assuming that the employees may legally engage in a strike (i.e., the required "cooling off" period after conciliation has elapsed), picketing may take place at the employer's place of business. Since picketing is for information purposes only, the pickets may not block the entrances to the plant nor interfere in any way with the employer's property or persons entering or leaving the premises. Can the striking employees picket Gear Warehousing Company, a subsidiary of Gear Manufacturing Company? If the two corporations are closely related both in a functional and physical proximity to one another, then the picketing may not be prevented by an injunction. See: Canadian Pacific Ltd. v. Weatherbee et al. (1979), 26 O.R. (2d) 776. The picketing of the customer, however, is probably a different matter. Since the customer had no direct connection with the labour dispute, the picketing of the customer would be a secondary picketing instance, and subject to an injunction because of the interference by the pickets in the operation of the company. Note however, that had the picketing been peaceful and did not interfere with the operation of the company no action could be taken by the company to stop the picketing. Peaceful picketing is permitted of a customer, but any actions by pickets that cause damage are still subject to action in the courts. See: RHDS Union Local 550 v. Pepsi Cola Canada (West) Ltd. [2002] 4 W.W.R. 205.

CHAPTER CHART Additional Chart for Instructor‘s use (not appearing in text)

CHAPTER 20. THE LAW OF BAILMENT Chapter Topics Nature of Bailment Types of Bailment Innkeepers Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Chapter Objectives After study of this chapter, students should be able to: • Understand the nature of the bailment relationship. • Identify the various forms of bailment. • Describe the responsibilities of the parties to a bailment. • Explain the special status of carriers and storage facilities.

YOUR BUSINESS AT RISK The business world is filled with grey areas of uncertain responsibility — times when your Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-244

business owns assets held by someone else (goods given over to a carrier, or to a warehouse), or when you hold goods owned by others — for repair or storage or resale. Before you sell unclaimed items in your hands, or sue to recover goods that may no longer be yours, your business must understand the law of bailment. CHAPTER COMMENTARY The law of bailment generally raises considerable classroom discussion, since most students readily identify the concepts and their application. Everyone, on occasion, has either loaned a chattel, or placed his or her coat on a coat rack in a restaurant or other establishment, and, as a result, can identify personally with the activity. Because of this familiarity with the concept, a possible approach to the discussion of the topic might be to employ the restaurant coat rack situation as a means of determining the nature of a bailment, the actual and constructive possession of the chattel by the bailee, and the question of liability for loss. Case 9 of the case problems for discussion which resembles this situation, might be used in this regard. The diverse forms that a bailment might take frequently present problems for students in the determination of the standard of care required of the bailee. Statements of the courts to the effect that the bailee must care for the goods "as a skilled shopkeeper" or use "ordinary care" or "reasonable care," are often difficult for students to comprehend, unless concrete examples are used to illustrate the standard. The case excerpts from Longley v. Mitchell Fur Co. Ltd. might be of assistance to establish the procedure employed by the courts to determine the standard of care in particular sets of circumstances. At this point it might be useful to emphasize that the rules for determining the liability of a bailee are based upon the standard of care which the courts have established for the various kinds of bailment. As the text indicates, these tend to vary according to the benefit received by the bailee, with a higher standard normally applicable where the bailee receives a benefit from his or her possession of the goods. A high standard is also likely to apply where the bailor receives little or no benefit from the relationship. In certain cases, the bailee is virtually an insurer of the goods, but this is generally limited to cases where the bailee has complete control over the goods, and the goods are removed from the area where the bailor might inspect them from time to time. The common carrier is an example of this type of bailee. Carriers of goods and innkeepers are subject to standards of care that have developed over many years, and which have historical roots that date back to a time when both shippers and travellers were to some extent at the mercy of carriers and innkeepers. For both of these relationships, the historical basis for the liability should be stressed, and perhaps applied to the present by way of the question: Has the situation really changed over the years? In what way (if any)? The Court Decision in the chapter, Samuel Smith & Sons Ltd. v. Silverman deals with the storage of automobiles under the ordinary parking lot situation where the bailment is subject to the usual disclaimers of liability. Because bailees for reward are subject to a high standard of care, it is not uncommon for them to limit their liability by way of a disclaimer clause in the contract, or by fixing a specific standard of care limitation on the liability assumed. Except in cases where a statutory liability is established, a disclaimer or agreed standard will be enforced, provided that the limitation on the bailee's liability has been brought to the attention of the bailor and agreed upon at the time that the bailment was made. The Samuel Smith & Sons Ltd. v. Silverman Court Decision provides a discussion of the general liability of a bailee for reward, and the importance of providing notice of any limitation on the liability of the bailee before the bailment is made. As the court indicates, if the bailor is made aware of the circumstances under which the bailee is prepared to accept possession of the goods, and if the bailor is willing to enter into an agreement under those conditions, then the limitation on the liability of the bailee will apply. The notice to the bailor, however, is the key point, as the case turns on that question. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-245

The Court Decision, Bear Mountain Logging Ltd. v. K.A.T. Lowbed Service Ltd. may be a useful case for a discussion of the duty of care in a bailment situation where a transport service (a common carrier) was negligent in the carriage of the plaintiff‘s equipment. The Bexley v. Salmon’s Transfer Ltd., Court Decision provides an example of the duty of a warehouse operator to take all reasonable care to protect the bailor‘s goods from damage.

Review Questions 1. In what way or ways is the responsibility of an innkeeper for the safekeeping of the goods of guests similar to that of a bailee for reward? Answer: The responsibility would be the same where the guest places the goods in the hands of the innkeeper for safe-keeping.

2. Explain the term constructive bailment. Answer: A constructive bailment arises when goods are invited to be placed in the care of the bailor, but no physical transfer takes place between the parties.

3. Explain: (1) fungible (2) pawn (3) pledge (4) sub-bailment

Answer: (1) fungible:

An unidentifiable, interchangeable commodity (eg. grain).

(2) pawn:

A bailment of goods with a pawnbroker or security of a loan.

(3) pledge:

A bailment of securities, shares, etc. as security for a debt.

(4) sub-bailment: A further bailment of bailed goods by a bailee to another bailee.

4. What rights over a bailed chattel does a bailee possess? Why are these rights necessary? Answer: The bailee has a right to take legal proceedings against any third party who interferes with his/her possession of the goods.

5. Why should an innkeeper be responsible for the goods of a guest which are brought into the guest's hotel room? Answer: The purpose of the rule is to establish the innkeeper's responsibility to protect the guest's belonging while the guest is away from his or her room (such as in the hotel dining room).

6. Indicate the defences available to a common carrier in the event of loss or damage to goods in the carrier's possession. Answer: The major defences of a common carrier are: Act of God, goods packed by shipper, goods improperly described, goods of a type that self-destruct, damage caused by the Queen's enemies.

7. What standard of care is imposed on a bailor in a hire of a chattel? Answer: A bailor in the hire of chattel must provide the bailee with goods that are reasonably fit for the use intended.

8. What essential element distinguishes the rental of space in an automobile parking lot from a bailment of the vehicle? How does this affect the liability of the owner of the parking lot? Answer: The rental of space in a parking lot leaves the vehicle in the possession of the owner, as the owner has the keys. A bailment gives the bailee possession, and responsibility for the care of the vehicle, as the bailee parks it where he sees fit.

9. Define a bailment. Answer: A bailment is the delivery of possession of goods by the owner (bailor) to another person (a bailee) on the condition that the goods be returned or dealt with according to the bailor's instructions.

10. Why do the courts impose a greater responsibility for the care of goods on a common carrier than upon a gratuitous carrier? Answer: The common carrier is a carrier for reward and may make a sub-bailment of the goods to other carriers. The bailor loses possession and control of the goods once delivered to the carrier, and hence the carrier may be held responsible for any loss or damage.

11. Indicate the effectiveness of an exculpatory clause in a bailment contract for the storage of an automobile. How do the courts view these clauses? Answer: Exemption clauses limit or exclude liability of the bailee while the goods are in the bailee's possession. The clause would only be effective if made a part of the bailment contract and the bailor was made aware of the clause at the time that the bailment was made.

12. To what extent is a bailee for reward entitled to claim a lien for the storage costs against the goods? Answer: A bailee for storage does not have a common law right of lien, but this is provided by statute. If the storage is related to repair, a right of lien at common law exists for the repair costs. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-248

13. How is the standard of care of a gratuitous bailee determined? Answer: The standard of care of a gratuitous bailee ranges from taking reasonable care of protecting them from foreseeable harm (when the bailee receives no benefit from the bailment) to a very high standard (where the bailee receives a benefit from the bailment).

Mini-Case Problems

1. Simple took his power lawn mower to a repair shop to have it repaired. At the shop he signed an ―authorization to repair‖ sheet that directed the repair shop to ―repair the engine.‖ The shop did so, but apparently found it necessary to replace most of the internal parts of the engine. The repair bill was $450, almost the price of a new machine. Simple refused to pay the account when he realized the cost of the repairs, and the repair shop refused to release the mower to him. Discuss the rights of the parties. Answer: The repair shop would be entitled to a lien on the goods for the repair costs, provided that the costs were reasonable. If Simple fails to pay a reasonable price for the repairs, the shop may sell the mower to cover its repair bill.

2. Smith entered a clothing shop to purchase a new coat. The clerk was busy, and Smith placed her purse on a table located near the coat racks while she examined several coats for size and fit. Her purse was stolen while she was examining the coats. Discuss the question of liability for the stolen purse. Answer: The act of placing the purse on the table did not create a bailment, because there was no 'constructive possession' of the purse by the shop owner. Had a sales clerk told her to place her coat and purse on the table, a bailment may have been created, but from the facts of the case Smith acted without direction, and consequently the shopkeeper would have no liability because no bailment was created.

3. Carol checked into the City Hotel, left her suitcase and computer case in her room, and proceeded to the hotel restaurant for lunch. On her return to her room she discovered that her suitcase and computer had been stolen. Advise Carol and the hotel of their rights and responsibilities. How would this case likely be resolved? Answer: Under the innkeeper legislation of most provinces, the innkeeper may be liable for Carol‘s loss, but the statute Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-249

usually limits the loss payable to a relatively small amount ($40.00 -$200.00). If the goods were stolen by an employee or through employee negligence, the monetary limit may not apply. If the loss was due to Carol‘s negligence, the innkeeper may not be liable for her loss.

4. Daniel was obliged to go abroad on a 6-month work assignment, and arranged with his friend Harry to store his sports car in Harry‘s garage. One evening, thieves entered Harry‘s garage (which was never locked) and made off with the sports car. When Harry discovered the theft, he immediately notified the police. A week later, the police found the vehicle in a seriously damaged condition. Advise Daniel and Harry. Answer: This would be a gratuitous bailment. Harry would not be liable for the damage, as he was under no obligation to take special care of the sports car. The standard of care would probably be how Harry cared for his own goods.

Case Problems for Discussion Case 1 Sleeman had just purchased a new luxury automobile, and decided to use it that evening to drive his wife to a new theatre production in the city centre. As he approached the parking lot adjacent to the theatre, he noticed a long line of vehicles waiting to turn into the lot entrance. The exit lane, however, was clear, and he made the instant decision to enter the lot by the exit lane. Once inside the lot, he stopped his car in order to obtain a parking ticket. An irate lot attendant came over to him, complaining that he was not to enter the lot by the exit lane. Sleeman apologized, and attempted to back out into the street, but at that point, both he and the attendant realized that it would be impossible to do so, given the heavy road traffic. Exasperated, the attendant took Sleeman‘s money, obtained a parking ticket from the attendant in the office, and handed it to Sleeman without comment. He then slipped into the driver‘s seat in order to park the vehicle. The time of year was late winter, and patches of ice were on the paved lot. The attendant who was now annoyed with Sleeman, accelerated the vehicle down the lot, but was unable to stop the car on the ice. He collided with another vehicle parked on the lot, and seriously damaged Sleeman‘s vehicle. When the parking lot owner refused to accept responsibility for the damage, Sleeman instituted legal proceedings. At trial, the parking ticket was introduced as evidence. The ticket contained the following words printed on the back: NOT RESPONSIBLE FOR LOSS OR DAMAGE TO VEHICLES HOWEVER CAUSED. The lot owner also testified that on the side of the office where vehicles enter, a large metre square sign provided the same message. Discuss the arguments that each of the parties might raise in this case, and render a decision.

Answer: Sleeman would argue that a bailment for reward existed. He would also argue that the parking lot owner was responsible for the employee‘s negligence, and the damage to his vehicle. His evidence would be that he did not see the large disclaimer sign, and that the disclaimer on the ticket was not brought to his attention. See: Spooner v. Starkman [1937] 2 D.L.R. 582. The parking lot owner, would argue that Sleeman had an obligation to read the ticket (contract) and he should have been aware of the wording on the back. The owner might also argue that a reasonable person would not enter the lot as Sleeman did, and had he entered properly, he would have been aware of the disclaimer sign. The facts of this case are based upon a case where one of the authors acted as counsel. The court held in that instance that the parking lot operator had failed to notify the plaintiff of the limitation on liability, and was liable for the damage to the plaintiff‘s vehicle. Note, however, the Court Decision Samuel Smith & Sons Ltd. v. Silverman in the text which reaches a contrary conclusion on different facts. Case 2 Local Air Ltd. operated a charter airline service that specialized in flying small groups to specified locations. Their fleet consisted of three small eight passenger twin-engine aircraft. While on a charter to a nearby city, one of its aircraft developed a problem with one of its engines, and the pilot, on the authorization of the company, took it to an aircraft repair facility located at the airport. A second aircraft was dispatched to retrieve the passengers and the pilot when it appeared that the repair would require parts that had to be ordered from the aircraft manufacturer. The parts arrived in due course, but before the engine was repaired, a government air worthiness directive was received by the repair facility that required aircraft owners to make an engine modification in order to receive an airworthiness certificate. In response to the directive, the repair facility made the modifications to both of the engines, then signed off that the aircraft was now airworthy. The repair facility informed Local Air Ltd. of the work done and invoiced Local Air Ltd. for the repair that amounted to $19,825. When Local Air Ltd. was advised of the repair invoice, they informed the repair facility that in their view the amount was excessive, as the airworthiness repair could have been made at their own shop for half the cost. At this point in the discussion, the repair facility refused to release the aircraft unless the repair account for the aircraft was paid in full. Advise the parties. What are the issues in terms of the law? Speculate as to the outcome. Answer: Students should recognize that the facts indicate a bailment for repair or service was created when the pilot, at the company‘s direction, authorized the repair facility to make the repairs. However, did the authorization extend to the additional work required by the air worthiness directive? Note that the aircraft cannot be flown without an airworthiness certificate. Note also that in a repair situation where the price is not agreed upon in advance, that the bailor would be required to pay a reasonable price for the work done. Can a comparison be made with the bailor‘s own shop to determine what is a reasonable price? The bailee is usually entitled to a lien on the aircraft until the repairs are paid for, failing which, the aircraft could be put up for sale at public auction. Given the facts of the case, the bailor would be obliged to pay a reasonable price for the repairs, which, in this case may be the bailee‘s invoice of $19,825. Case 3 Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-251

Yusef Ali parked his automobile in a parking lot owned by the Dumas Corporation. At the request of the parking-lot attendant, he left his keys at the attendant‘s office and received a numbered ticket as his receipt for the payment of the parking fee. Before leaving his keys with the attendant, he made certain that the doors of the vehicle were securely locked, as he had left a number of valuable books on the rear seat of the car. Unknown to Ali, the attendant closed the lot at midnight. Then he delivered the keys to the cars on the lot to the attendant of the parking lot across the street. This lot was also owned by the Dumas Corporation, but it remained open until 2:00 a.m. Ali returned to the parking lot to retrieve his automobile shortly after midnight, only to discover no attendant in charge and his vehicle missing. By chance, he noticed the attendant on duty at the lot across the street. Ali reported the missing vehicle to him, and found the attendant in possession of his keys. The police discovered Ali‘s automobile a few days later in another part of the city. The vehicle had been damaged and stripped of its contents, including Ali‘s rare books. Ali brought an action against the Dumas Corporation for his loss. However, the company denied liability on the basis that the ticket (which Ali received at the time of delivery of the keys) read: ―Rental of space only. Not responsible for loss or damage to car or contents however caused.‖ Dumas also alleged that the attendant‘s office had a sign posted near the entrance that bore the same message. Identify the issues in this case and prepare the arguments that Ali and the Dumas Corporation might use in their claim and defence respectively. Render a decision. Answer: This case requires the student to determine the nature of the relationship between the owner of the motor vehicle and the parking lot. Is it for "the rental of space only" as the ticket states? Bear in mind that the ticket, in effect, is the written contract between the parties. Does it represent the entire agreement? What effect does delivery of the keys to the attendant have on the relationship? Does it change it from rental to a bailment? How does the notice in the form of a sign affect the liability of the lot owner? Does the removal of the keys to a lot across the street alter the relationship? Does the exemption clause in the contract allow the parking lot owner to avoid liability for loss of the car and contents? In Heffron v. Imperial Parking Co. et al. (1974), 3 O.R. (2d) 722, a somewhat similar situation to this case, the court held that the relationship became a bailment on delivery of the keys, and that the failure to return the car and contents when required constituted a fundamental breach of the contract - hence the exemption clause was ineffective, and the parking lot owner liable for the patron's loss. Case 4 The Sakuras considered moving to Western Canada from the city of Toronto after Mr. Sakura‘s retirement. In order to determine an appropriate community in which to reside, they visited a number of west-coast cities by automobile. On their visit to one community, which appeared to be a delightful place to live, they met the owner of a warehouse business. The warehouse owner suggested that he would be prepared to receive their household goods if they wished to ship them to him. He would hold them in storage until such time as Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-252

they found a permanent residence. On their return to Toronto, the Sakuras decided to move immediately. They dispatched their household goods to the warehouse operator that they had met on their visit to the city. Instead of taking up residence immediately, they planned an extensive vacation that would take them across the United States and eventually to that particular community. While the Sakuras were on vacation, the household goods arrived at the warehouse. The owner issued a warehouse receipt, which he mailed to the Sakuras at the temporary address that they had given him. The warehouse receipt set out the terms and conditions of storage, one item being a condition that read: ―All goods stored at owner‘s risk in case of fire (storage rates do not include insurance).‖ On their return from their vacation, the Sakuras found the warehouse receipt in their mail, but did not read the document. They proceeded to obtain a new home. However, before they could retrieve their goods from the warehouse, the building was burned by an arsonist who had apparently gained entry to the building by way of an open rooftop skylight. The household goods that belonged to the Sakuras were totally destroyed by the fire. When the warehouse operator refused to compensate the Sakuras for their loss, an action was brought claiming damages for the value of the goods. Discuss the nature of the plaintiff‘s claim and the defences that the warehouse operator might raise. Render a decision. Answer: The facts of the case establish a bailment for reward situation. A bailee for reward, where the bailment involves the storage of goods is subject to a duty of care that is much lower than that of a carrier of goods, and of course, higher than that of a mere gratuitous bailee, where the bailee receives no benefit from the bailment. The general rule is that a bailee for reward for the storage of goods must take "reasonable care of the goods. The standard that is usually applied is that of skilled shopkeeper (Brabant & Co. v. King, [1895] A.C. 632). The liability, however, would normally not extend to include loss or damage that could not have been foreseen by a careful and vigilant shopkeeper (Bowert v. Parks (1964), 50 D.L.R. (2d) 313). In this case, the Sakura's would argue that the failure to block the skylight window would constitute carelessness, and a breach of the bailee's duty to take reasonable care of the goods. The warehouseman would argue that he could not have foreseen the entry of the arsonist and the burning of the building. He would also argue that his liability did not extend to loss by fire, as this was specifically excluded by the contract of storage. In the case of Mason v. Morrow's Moving & Storage Ltd. (1978), 87 D.L.R. (3d) 234, the court held: (1) the warehouseman has no duty to warn the bailor that the goods were not insured against fire. (2) the warehouseman is only obliged to take reasonable care, and could not have foreseen the entry of the arsonist and the burning of the building. Case 5 The members of an investment club arranged for a banquet and overnight accommodations for their members at the Municipal Hotel. Most of the members arrived early for the dinner in order to check into Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-253

their rooms. One member, however, arrived late and, instead of checking in at the desk, went directly to the banquet room where the dinner was about to be served. Before entering the room, she noticed a coat room adjacent to the dining room that contained a number of coats. She hung her fur jacket on a hanger in the coat room. No attendant was in charge of the coat room, although a person wearing a hotel porter‘s uniform was standing near the doorway to the room. The club member spent the evening in the banquet room, and at the end of the dinner meeting went to the coat room to retrieve her jacket. The jacket was missing. As compensation the hotel offered her the sum of $40, the amount that an innkeeper was obliged to pay under the Innkeeper‘s Act of the province. The hotel explained that as a guest in the hotel, this was the extent of its liability to her. The hotel manager pointed out that the club member was aware of the limited liability of the hotel by virtue of the notice to that effect that was posted in all hotel bedrooms. The club member refused to accept the sum offered as payment. She brought an action against the hotel for $2,800 an amount that she alleged was the appraised value of the fur jacket. Discuss the issues raised in this case and indicate how the courts might deal with them. Would your answer be any different if the club member‘s jacket had been stolen from a locked hotel room? Answer: This case is similar to the case of Hansen v. 'Y' Motor Hotel Ltd., [1971] 2 W.W.R. 705. For class discussion purposes, the question might be asked: Does this case concern an ordinary bailment, or does it involve the liability of an innkeeper for the goods of a guest? Bear in mind that the liability of an innkeeper differs from that of the ordinary bailee. The club member would obviously wish to hold the innkeeper liable for the value of the jacket, and may argue that the relationship was that of bailor-bailee. In this case, however, it would be necessary for the bailor to show that the innkeeper had taken constructive possession of the coat. This might be established using the Murphy v. Hart case mentioned in the answer for Case 9. In the Hansen case, the court applied Murphy v. Hart, and found that by providing a coat room, the innkeeper had invited the bailment, and was liable for the loss. If the club member was a guest in the hotel, and had left the coat in her room, the answer would be different. As a guest in the hotel, the innkeeper's liability for the loss of goods from the room would be limited to the amount specified in the Act, unless the loss was due to the negligence or the deliberate acts of the innkeeper's servants, etc.

Case 6 Lacey inherited a large brooch from her grandmother. The brooch contained what appeared to be a number of large precious stones. She was curious as to the value of the piece of jewelry and took it to the B & S Jewelery Shop for examination. The jeweler was busy at the time. She asked Lacey to leave the brooch, saying she would examine it when she had a moment to do so. Lacey filled out a small claim check that required her to set out her name and address. She did so, and was given a portion of it bearing a claim number. Lacey placed the claim check in her jewelery box when she returned home. She paid no further attention to the matter, believing that the jeweler would notify her when he had completed his appraisal of the brooch. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-254

Some five years later, while cleaning out her jewelery box, Lacey noticed the claim stub in the bottom of it and remembered that she had left the brooch at the jewelers. She immediately went to the jewelery shop with the ticket to claim her jewelery, but the jeweler was unable to find the brooch. The shop records indicated that Lacey was sent an email three weeks after she had brought the brooch in, to advise her that its value was $6,500. Lacey had not received the email, however, and, until her return to the jewelery shop, was unaware of its value. When the shop could not produce the brooch, Lacey brought an action for damages against the shop for the value of the piece. Indicate the nature of Lacey‘s action, and discuss the various arguments that both Lacey and the B & S Jewelery Shop might raise. Render a decision. Answer: Lacey in this case has created a bailment for reward by delivering up possession of the brooch to the jeweler. Once a bailment is determined, it would be necessary to establish the standard of care which the courts would likely impose on the bailee. As a bailee for reward, this would probably be the case where the standard of care would be that of a skilled shop-keeper. See: Brabani & Co. v. King [1985] A.C. 632. Since the bailer is a jeweler, the standard would consequently be very high, as jewelers are considered to be extremely careful in the protection of their own goods. Lacey would therefore argue that this standard should apply to the jeweler, and the onus would be on the jeweler to show that the brooch was lost through no fault of his. The jeweler might argue Lacey's failure to return to pick up the brooch following its email to her represented abandonment of the goods, and it had no obligation to protect them or care for them after the expiry of a reasonable time. The question of application of any Limitations Act period also arises. Since Lacey ―ought to have known‖ she had a claim against the jeweler for return of the piece, waiting five years (even if inadvertently) to commence an action, likely means her action would not be permitted. See: Chaing v. Heppner et al. (1978) 85 D.L.R. (3d) 487, as noted in the case excerpt in the text, and Davis v. Henry Birk & Sons Ltd. (1982) 41 B.C.L.R. 137. Case 7 Central Ceramic China Ltd. was an importer of various lines of dishes and tableware that it sold in quantity to hotels and restaurants. Approximately 70 percent of its sales consisted of hotel-grade dishes, 20 percent of fine bone china dishes, and the remaining 10 percent consisted of cutlery and eating utensils. For many years the firm used the services of Able Transport Co. to deliver its goods to customers who were located in various parts of the country. All goods were shipped in cartons marked: ―FRAGILE. CONTENTS BREAKABLE IF ROUGH-HANDLED.‖ The contents were normally packed in a strawlike material to provide some protection in the event of impact or careless handling. This reduced breakage of the shipped china to a minimum acceptable level. Only occasionally would a customer report breakage, and this usually consisted of only one or two pieces in a shipment of perhaps many hundreds. Central Ceramic recently tested a new type of foam packing material, and decided that its use would permit the contents of a case to withstand a reasonable amount of impact if the case should accidentally Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-255

be dropped. Management then decided to use the new packing material in cartons that were not marked with a ―fragile‖ label in order to obtain a lower shipping rate. The company informed Able Transport of the removal of the ―fragile‖ notice on the containers and requested a lower shipping rate. Able Transport agreed to handle the goods at a lower rate. During the month that followed, management of Central Ceramic monitored the breakage rate and noted that it was approximately the same as when the other marked containers were used. The next month the company shipped a very large quantity of china to a distant hotel customer in the new containers. The china was shipped in 36 cases. When it was received by the hotel, almost half of the china was found to be either cracked or broken. An investigation by the carrier revealed that road vibration during the long trip had caused the packing material to shift, allowing the pieces of china to come in contact with each other and break, if the carton received any impact. Central Ceramic took legal action against Able Transport for damages equal to the loss. Able Transport denied liability. Discuss the arguments (if any) that the parties might raise in this case. Render a decision. Answer: This case is concerned with the liability of the common carrier of goods, and hence a bailment situation. The issue is whether the carrier should be liable for the breakage of the china. Central Ceramic would probably argue that the carrier was aware of the contents of the cases, and failed to properly handle the goods. The carrier would have two lines of defence: (1) The goods were packed by the shipper (2) the shipper changed the designation of the goods from 'fragile' to ordinary in order to obtain the lower shipping rate, and in doing so, was not entitled to the extra care required to handle fragile goods. The key issue here is the fact that the carrier agreed to handle the goods at the lower rate knowing that they were in fact "fragile". This point should be discussed to determine its impact (if any) on the defences which the carrier has raised. The knowledge might affect the carrier's second defence but not the first one. Since the carrier had no control over the way in which the goods were packed, it would probably avoid liability, particularly in light of the evidence that ordinary road vibration caused the protective packaging material to shift, leaving the china vulnerable to breakage if normally handled by the carrier. Case 8 Universal Paper Products Ltd. of Vancouver consigned three-and-a-half boxcar loads of goods to RapidMovve Transport Co. to take the goods from Vancouver to Le Havre, France. RapidMovve would normally have made direct arrangements with Canadian Atlantic Railways (CAR) for the Vancouver– Montreal leg, but because there was a half-carload involved, they engaged Railshippers Inc. to put together the Vancouver–Montreal leg. Railshippers could get a better rate from CAR as they specialized in making up full carloads from an assortment of partial carloads. RapidMovve engaged Maritime Containerways to ship from Montreal to France, and a French trucking firm for local delivery in France. All would have gone well, had it not been for a derailment of the CAR train in Northern Ontario. Unseasonable rains had washed out a section of track and, in the dark, the train was derailed. Most of the product was probably in good shape after the accident, but unfortunately one of the welding crew pressed into service by CAR to clear the blockage of the main line in the emergency ignited the contents of one car as he cut away wreckage. The flames spread to the other cars, destroying $60,000 of paper products. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-256

Three weeks later, Universal Paper became frustrated that RapidMovve could still only provide a garbled, contradictory explanation of what had happened. A newspaper account noted that there had been no salvage of any freight from the wreck. Universal Paper, knowing only that they had delivered goods to RapidMovve, and that none had arrived in France, sued RapidMovve for the value of the goods. Identify and discuss the legal issues raised in this case and the liability (if any) of the parties. Render a decision. Answer: Students should recognize the type of bailment in this case as one of carriage of goods by a common carrier. The general rule here is that the common carrier is essentially an insurer of the goods and will be liable for loss or damage except for those circumstances that would allow it to avoid liability, such as Act of God, goods that self-destruct, etc. The train wreck might be considered an Act of God, however, but it did not damage the goods. The goods were destroyed as a result of the fire caused by the negligence of an employee. On this basis, the carrier might be liable for the loss, subject to any limitations on the dollar amount of liability that the legislation might have fixed for common carriers. Case 9 Hart operated the Riverside Restaurant and Bakery Shop, which was located on a busy downtown street. The front portion of the premises contained the bakery shop, and the rear part of the building housed the restaurant. Patrons entering the building were required to pass through the store portion to reach the restaurant. In the store area, near the entrance to the restaurant, the owner had installed a number of coat hooks in a recess in the wall of the building. Employees of the shop and restaurant used the alcove to store their overcoats and hats. Wallinsky, a stranger to the community, entered the shop for the purpose of dining, and proceeded through the shop to the restaurant area. Along the way he noticed the clothing in the alcove and placed his overcoat and hat on one of the unused hooks. He then entered the restaurant and ordered a meal. Some time later, when he was about to leave the restaurant, he discovered that his overcoat and hat were missing. Hart denied responsibility for the loss. Wallinsky brought an action against him for the value of the hat and coat. Discuss the arguments that the parties might raise in this case, and identify the legal issue involved. Render a decision. Would your decision differ in any way if the coat hooks were located in the restaurant beside Wallinsky‘s table? Answer: The first and perhaps most important point to be discussed in this case is the matter of possession of the overcoat and hat. In order to have a bailment, possession must be transferred to the bailee, and the bailee must be prepared to accept possession of the goods. Here, there was no actual physical taking of the goods by Hart. However, was the provision of a coat rack in the alcove an invitation by Hart to Wallinsky to hang Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-257

his coat in that area? Was the coat rack there for public use - or for use by the employees only? Would this affect the relationship? The only way that Wallinsky would succeed against Hart would be by establishing that the presence of the coat hooks constituted an invitation for him to place his hat and overcoat in that area, and by doing so, Hart acquired constructive possession of the goods. If additional coat hooks were located in the restaurant beside Wallinsky‘s table, and Wallinsky had placed his coat on the hooks, his chances of recovery would be greater, as the presence of the coat hooks in the restaurant area would likely be considered by the court as an invitation by Hart to accept the chattels as a bailment. See: Murphy v. Hart (1919), 46 D.L.R. 36, where the bailee was held liable for the patron's loss of his overcoat and hat on the basis of constructive delivery to the bailee of the goods by placing them on the coat hooks placed for that purpose in the alcove. Case 10 Harriet, a licensed pilot, rented an aircraft from Aircraft Rental Services at a local airport. The purpose of the rental was to fly a friend to a large metropolitan city some 500 kilometres away and return before nightfall. At the time that she arranged for the use of the aircraft, she assured the owner that she would leave the city in ample time to return the aircraft before dark. She paid a deposit for the use of the aircraft and, accompanied by her friend, made an uneventful flight to the distant city. Before returning home, however, she spent some time shopping and lost track of time. Eventually, she realized that she was behind schedule and hurried to the airport. The weather report for the return trip was not promising, but she nevertheless decided to chance the flight. She took off at 4:45 p.m., some two hours before official nightfall on that particular January night. En route, she discovered that the weather had deteriorated and that visibility was decreased by the combination of sundown and low cloud conditions. At 7:05 p.m., some 20 minutes after official nightfall, she found that she could proceed no further, as the poor weather and semi-darkness made recognition of her route on the ground virtually impossible. To avoid further difficulties, she made a forced landing in a farmer‘s field, which resulted in damage to the airplane‘s undercarriage. Harriet assumed that the aircraft owner‘s insurance would cover the cost of the repairs. However, she was surprised to hear that the insurance covered only public liability and not damage to the aircraft itself. The cost of repairs amounted to $11,165. When Harriet refused to pay for the damage, Aircraft Rental Services brought an action for damages against her for the amount of its loss. In her defence, Harriet alleged no negligence on her part, as the landing was made in accordance with accepted forced-landing procedures and skillfully executed on her part. She argued that in any forced landing, some damage to the undercarriage could be expected, and that the mere fact that damage occurred was not an indication of negligence. The plaintiff brought out in the evidence that Harriet was licensed to fly under daylight conditions only. She did not have what was called a ―night endorsement‖ on her licence that would permit her to fly after dark. The plaintiff alleged that her act of flying after official nightfall was a violation of Air Regulations under the Aeronautics Act. Discuss the nature of the plaintiff‘s claim in this case, and the various other arguments that might be raised by the parties. Indicate the issues that must be decided by the court.

Render a decision. Answer: The facts of this case are similar to those in the case of Townsend Air Services Ltd. v. Hansen (1974), 54 D.L.R. (3d) 205. The plaintiff's claim would be based upon bailment, as the rental of the aircraft would be the "hire of a chattel." With the hire of a chattel, the liability of the bailee should be ascertained by asking what standard of care is imposed upon the bailee. Was the damage to the aircraft due to her negligence in flying after official nightfall, when she was not trained to fly under night conditions? If she executed the forced landing properly, and in accordance with accepted forced landing procedures, would this nevertheless be negligence? What significance (if any) should be attached to the fact that she violated the air regulations by flying after official nightfall without a "night endorsement" on her licence? In the Hansen case the court held that the onus was on the bailee to show no negligence. Had the pilot not been flying after dark, the need for the forced landing would not have arisen and the damage not occurred. The bailee's negligence in violating the air regulations resulted in the loss suffered by the bailor, and the bailee was liable for the loss.

CHAPTER CHART Additional Chart for Instructor‘s use (not appearing in text) book.

CHAPTER 21. THE SALE OF GOODS Chapter Topics Codification of the Law Nature of a Contract of Sale Contractual Duties of the Seller Contractual Duties of the Buyer Remedies of the Buyer Remedies of the Seller Electronic Sale of Goods Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-260

Chapter Objectives After study of this chapter, students should be able to: • Explain the nature of the contract of sale and the Sale of Goods Act. • Identify the rights and duties of the seller and the buyer. • Describe the remedies available to the buyer or seller in the event of breach of the agreement. YOUR BUSINESS AT RISK Selling goods should be easy — payment is made and goods are delivered. Unfortunately, the vast majority of trade does not work that way. Commercial sales tend to be on credit terms, production is agreed for the future, and delivery dates rarely correspond to payment dates. Beyond that are the problem cases — strikes, disasters, accidents, delays, misunderstandings and mistakes. Businesses could plan every eventuality into their sales contracts, but each one would fill a book of its own. The law of the sale of goods fills in the gaps that businesses fail to cover. CHAPTER COMMENTARY The sale of goods, which is covered in this chapter and in the Chapter 27 (Consumer- Protection Legislation), represents an area of law that has been subject to much codification and legislative activity. This originated with the general codification of the law pertaining to sale of goods at the end of the 19th Century, and now includes the original legislation supplemented by "consumer protection" activity of the past two decades. As a result, much of the law pertaining to the sale of goods is now found in the statutes, rather than in the common law. The codification of the law was a beneficial change in many ways, the most important being: (1)

It clarified and simplified the law;

(2)

It established the circumstances under which title passed, and when;

(3)

It established the rights and duties of the buyer and seller under a contract of sale, and

(4)

It outlined the various remedies available to the parties in the event of breach.

For classroom purposes, the nature of the contract of sale should be examined, and the rules for the transfer of title (and hence, risk of loss) should be reviewed. In addition, the distinction between a condition and a warranty should be emphasized. The duties of both the buyer and the seller are worth noting, and may be reviewed using the case problems. Case problems 1 and 2 may be useful in this regard, as they not only raise the issue of the seller‘s duty, but deal with the remedies available to the injured buyer. On the topic of breach or failure to perform, the Foley v. Piva Contracting Ltd. [Douglas Lake New Holland] Court Decision provides an example of fundamental breach, and the right of a party to damages for loss.

The Pihach v. Saskatoon Diesel Services Ltd., Court Decision illustrates the application of the term ‗merchantable quality‘ in the Sale of Goods Act to a sale contract, and the consequential loss arising under the warranty. Consumer protection legislation is not covered in this chapter, but reserved for Chapter 27 (Consumer-Protection Legislation). The principle of caveat emptor, however, is briefly examined in this chapter, and provides an outline of the position of the parties under the Sale of Goods Act with respect to those contractual activities that have been subject to much legislative activity under the guise of consumer protection.

Review Questions 1. Under what circumstances would the skill and judgment of the seller give rise to an implied warranty or condition upon which the buyer might rely? Answer: The warranty or condition would arise where the seller was made aware of the use intended for the goods and the buyer relied upon the seller‘s selection.

2. Why is the time of passage of title important in the sale of goods? Answer: Risk of loss follows title. Hence, the time of passing of title is important.

3. Under what circumstances would a buyer of goods be entitled to rescind the contract? Give an example. Answer: The buyer could rescind the contract if the seller is in breach of a condition. Example: Where the seller is in the business of selling a particular line of goods, and the buyer makes it known that he requires goods for a particular purpose, or relies on the skill of the seller to supply suitable goods, there is an implied condition in the agreement that the goods will be reasonably fit for the use intended.

4. Indicate the significance of "notice" in the sale of goods. Answer: "Notice" applies in those cases where the seller must do something to put goods in a deliverable state. When the buyer is given "notice" that this is done, the title passes. (Rule 2-3).

5. Outline the contractual duties of a seller under the Sale of Goods Act. Answer: Seller must deliver the required quantity of goods to the buyer in accordance with the contract at the required time and place for delivery. (Note also that seller makes certain implied conditions and warranties).

6. What implied warranties are part of a sale of goods?

Answer: Implied warranties are: (1) goods are free from incumbrances. (2) buyer will have quiet possession of the goods.

7. Distinguish between a "warranty" and a "condition." Why is this distinction important? Answer: A condition is a fundamental or essential term of the contract, which if broken, would entitle the innocent party to treat the breach as a discharge. A warranty is not an essential term of the contract, and would not entitle the injured party to treat the contract as at an end. It would only entitle the injured party to claim damages.

8. Explain the significance of "caveat emptor" in the sale of goods. Answer: Caveat emptor places the onus on the buyer in a transaction to satisfy himself/herself that the goods will be satisfactory for the purpose intended, without recourse against the seller if they are not.

9. What are the implications of an unconditional contract for the sale of specific goods in a deliverable state? Answer: Title passes immediately. (Rule 1)

10. Outline the remedies available to a seller of goods if the buyer fails to comply with the contract. Answer: Remedies of a seller are: (1) lien (2) action for the price, (3) damages (4) retention of deposit, (5) stoppage in transitu (6) resale.

11. Explain stoppage in transitu. Answer: Stoppage in transitu is a procedure whereby the seller may stop delivery of the goods by a carrier if the buyer becomes insolvent.

12. Distinguish a "sale" from an "agreement to sell." Why and when is this distinction important? Answer: A "sale" refers to a transaction where ownership is transferred to the buyer. An "agreement to sell" refers to goods not in existence or subject to some condition before transfer of ownership can take place.

13. If goods that are the subject matter of a contract for sale are stolen by a thief during the "cooling off" period, who bears the loss: the buyer or the seller? Answer: Since the contract does not become effective until the "cooling off" period expires, and the goods are in the possession of the seller, title and possession would be with the seller. Loss follows title, and the seller would therefore bear the loss. 14. With so much consumer commerce now conducted online, describe how the risk of loss or damage to goods might apply for an online seller and buyer. Answer: In online contracts, in the absence of terms explicitly agreed upon by the parties, the risk of loss and passage of title to the goods will still be governed by the Sale of Goods Act. Specifically Rules 4 and/or 5 may apply to an online transaction for consumer goods. If a buyer receives goods ordered though an online retailer and retains them past the specified return date or beyond a reasonable time, if no return date is specified, the title to the goods will pass to the buyer at the expiry of that time. Similarly, if the seller needs to produce the goods before shipping them to the buyer and subsequently deposits them with the carrier for delivery to the buyer, the risk and title will pass at the time of delivery to the carrier. Note: these rules are applied in the same manner for online contracts for the sale of goods as for offline ones.

Mini-Case Problems

1. Andrew wished to buy paint for a dock he had built at his cottage, so he visited Sheldon‘s Paint Store to obtain something suitable. He asked the clerk for dock paint that would not peel under damp weather conditions. Andrew mentioned that he had heard Brand X was good, but wished to have the clerk‘s opinion as to its suitability for use on a dock. The clerk said it was ―Okay as a paint,‖ and Andrew purchased a quantity. Several months after the paint was applied to the dock, it began to peel and fall off the surface. If the paint supplier refused to accept responsibility for the suitability of the paint, outline the rights of Andrew.

Answer: The clerk‘s answer was not a strong endorsement, and can even be taken as a negative opinion. Even so, Andrew could opt to take action against Sheldon‘s Paint Store for breach of the implied condition that the paint was suitable for the use intended, with a modest chance of success. Andrew might argue that he had raised the name brand X for an opinion, and since he had made Sheldon‘s aware of the purpose intended, the statement by the seller that it was "O.K." implied that it was suitable for the use intended. Andrew might argue that if it was unsuitable the seller was obliged to state that it was not. He would argue that he was relying on the skill of the seller to supply a suitable paint. Conversely, the fact that the clerks reply hardly satisfies the question should have been a trigger for Andrew to ask for more detail.

2. Fresh Fruit Juice Co. agreed to supply 100 250-litre drums of concentrated apple juice to the Institutional Food Produce Corporation, with delivery not later than October 31st. On October 30th, the seller delivered 125 200-litre drums of the concentrate to the purchaser‘s plant. The purchaser rejected the goods because they were in the small drums rather than the 250-litre size. Discuss the rights of the parties. Answer: The seller in this case may be in breach of the contract, since the contract specified 250 litre drums. Performance of contracts must be exact, and in this instance the seller failed to comply with the terms of the agreement. The 'reason' for the 250 litre specification may have been related to the product mixing facilities of the buyer, and hence an important term of the agreement.

3. Basil Supply Co. shipped on credit twelve cases of goods to Able Wholesale Corporation on June 1st. On June 15th, Able Wholesale Corporation was declared bankrupt and its assets taken over by a trustee in bankruptcy. At that time, the trustee was in possession of eight cases of the goods that were shipped by Basil Supply Co. Discuss the rights of the parties. Answer: Under the Bankruptcy Act, Basil Supply Co. may submit a written demand to the trustee for the return of the goods w/in thirty days of the Corporation's bankruptcy. If the goods are unsold and still in the delivered condition, Basil Supply Co. may be able to recover the eight cases.

4. Early on a Monday, Nora agrees to purchase a big-screen TV from a major chain home-electronics store, to be ordered in from a central warehouse. The purchase order did not specify a delivery date, but the salesperson assured her verbally that ―it will be here in a couple of days.‖ Nora left a $100 deposit and her credit card number. On Friday, Nora saw the same model TV offered at another store, with a $500 cheaper sale price, and purchased it. She then called to cancel her order with the first store. Does the Sale of Goods Act affect Nora? Will she likely lose her deposit, or should it be refunded? Will she likely end up with two TVs or one? Explain why in each case. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-265

Answer: Nora would have an agreement to purchase a TV from the electronics store. Her deposit and credit card number (assuming authorization to charge the balance) would ‗bind the contract‘. Her cancellation would perhaps represent express repudiation of the contract and she may be in breach of the agreement. Query: does the salesperson‘s promise of delivery represent a binding condition that if breached, would allow Nora to avoid the contract? On the facts, Nora may lose her deposit unless the delivery condition and its breach applies.

5. Morgan owned logging equipment, which was then working in a forest in a remote area. While in the city, Morgan met and discussed business with Henri, and wound up selling the logging equipment to him. Their agreement stated that payment would be made at the end of the month. A forest fire destroyed the equipment two days before the end of the month. Discuss the rights of the parties. Answer: This case illustrates the occurrence of a frustrating event while the goods are still in the possession of the seller. If this should be the case, the contract would be terminated. However, if Henri had taken possession of the equipment, then title would have passed, and Henri would be liable for the contract price. One would hope, in this case, that Henri had insured the equipment. 6. An online retailer offers a page with its contract conditions for its online customers to read before they check out. There is wording on the checkout page of the retailer‘s website stating that ―by placing your order you agree to the conditions of sale‖ although this warning does not pop up as a prompt at the time of placing the order. The link to the conditions is at the bottom of the checkout page in light blue type font. If customers click on the link they will find the following terms: Risk of Loss: For online items purchased from our site the risk of loss and title to the items passes to the customer when we deliver it to a carrier for delivery to the customer. If the items must cross an international border, risk and title will pass to the customer when the items clear customs. Returns: We welcome returns if you are not happy with your item. All returns must be received by us within 90 days of your order. If you return an item to us within the stated return period, we will not take title to any returned item until it is documented as received in our returns warehouse in Halifax NS. Discuss this in terms of risk to the buyer and recommend any actions a buyer should consider. Answer: The buyer may not be aware of the online seller‘s terms regarding passage of title unless he sees the warning and discovers the faint link to the contract terms page at the bottom of the checkout screen. As the checkout process can be completed without ever forcing the buyer‘s attention to address the issue of additional contract terms, they can easily be overlooked. These terms alter the provisions of the Sale of Goods Act by shifting the risk of loss or damage to the buyer before the goods are in the possession and control of the buyer and long before the return period has expired. Moreover, it requires the buyer to bear the same risks if the goods are returned until the seller has positively received them. Buyers may wish to mitigate this latter risk with insurance and tracking when shipping the goods for return. The greatest concern may be the lack of knowledge of the contract terms on the part of the buyer which may prevent Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-266

the buyer making an informed decision about accepting the risks under the contract.

Case Problems for Discussion Case 1 Benjamin owned and operated a dollar store, and decided that adding a full line of greeting cards and party supplies would be desirable. He contacted a wholesaler and placed an order for greeting cards, supplies and display racks. The wholesaler advised him he would receive the manufacturer‘s ―late year package,‖ which would cover Christmas and New Year‘s theme merchandise. As it was a first order, the wholesaler required payment in full by cash or credit card, and Benjamin provided his credit card number for a payment of $4,000. The delivery date was projected as November 15th. When the goods did not arrive by November 17th, Benjamin called the wholesaler, who apologized and revised the delivery date to December 1st. Benjamin accepted this and waited. December 1st passed without delivery, and increasingly agitated calls resulted in nothing but the wholesaler blaming the manufacturer. Christmas Day came and went, and on December 31st, a truck full of goods arrived. The card boxes were sealed and appeared in good order. The Christmas decorations were in good condition. The racks and equipment were sturdy and of high quality. Benjamin reluctantly accepted delivery, reasoning that he could sell the party merchandise anytime, and could sell the decorations and cards next year. After the truck drove away, Benjamin began opening the boxes. Every piece of the New Year‘s decorations and cards was printed with the current year. Advise Benjamin. Answer: This case concerns the sale of goods by description where the delivery in time for the season was an essential term of the contract. Did Benjamin waive the term of delivery by accepting the numerous delays? Students should discuss the rules under the Sale of Goods Act that may apply here. Note that Benjamin would be entitled to examine the goods to ensure that they were of merchantable quality. In this case they were not, and Benjamin may be able to reject the shipment, as the delay rendered them unsaleable. Case 2 Hightower Industries produced 20kg bags of dry dog food, and shipped them on wooden pallets. The firm required an industrial process that could be integrated into its production line that would wrap each loaded pallet in a protective plastic wrap. The firm approached an engineering design firm, Tech-Solutions which agreed to develop such a machine for a fixed price. In the course of its design work, Tech-Solutions found two routes to such a machine. The more costly approach used stretch wrap and a pallet-spinning platform. The less costly way employed shrink wrap with pallets passing under a heater unit. Both options were offered to Hightower, who chose the less-expensive shrink wrap machine. When the machine was delivered, installation testing revealed that the bags became wet, as the heater condensed water out of trapped air under the shrink wrap, degrading both the bags and the dog food. Hightower rejected the machine. Advise both parties. Answer: The Court Decisons in the chapter address the issues of evidence of a contract as required under the Sale of Goods Act, (N. M. Patterson & sons Limited v. Lowenburg), what constitutes ―merchantable Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-267

quality‖ (Pihach v. Saskatoon Diesel Services Ltd)., and the enforceability of limitation clauses (Foley v. Piva Contracting Ltd. [Douglas Lake New Holland]). These cases may be discussed in class to illustrate the application of the Sale of Goods Act to various sale contract situations. Case 3 Small Parts Manufacturing Co. entered into an agreement with Foremost Forging Co. to have an automated stamping press made for it. The agreement called for the construction of the press and its preparation for pickup by a carrier that Small Parts Manufacturing would designate, not later than March 1st. Payment terms were 50 percent payable at the time of signing the agreement, with the balance of the price payable on March 1st. On February 25th, the construction of the press was complete. Foremost Forging informed Small Parts Manufacturing that the press was now ready for pickup by the transport company. The parties agreed that the press would be turned over to the carrier as soon as pickup could be arranged. The press was placed in Foremost Forging‘s warehouse for the carrier to pick up. However, on February 26th, the press was destroyed when an unknown arsonist set fire to the warehouse building. Discuss the rights (if any) and the liability (if any) of the parties in this case. Indicate the possible outcome of the case if legal action should be taken. Answer: This case is concerned with risk of loss when the subject matter of a contract of sale is destroyed. A discussion of this case should involve the transfer of title, and a determination of when the title in the goods passed. When the press was completed and ready for delivery the seller notified the buyer as required under the rules (Rule 5) for the transfer of title. The question here is: was the press unconditionally appropriated to the contract at this point? Did the buyer assent? Probably yes. The buyer was to arrange for the pick-up, and the seller's obligation under the sale was probably complete when the press was moved to the warehouse. The loss was probably not due to the negligence of the seller, since the fire was caused by an arsonist. Consequently, the seller may not be liable for the loss. The buyer, however, would be liable to the seller for the contract price of the press. Case 4 A wholesaler in Toronto agreed to sell 2,000 5-kilogram cases of walnut pieces to a buyer in Vancouver. The wholesale price was to be $7.70 per kilogram with delivery F.O.B. Toronto. The goods were paid for and shipped by common carrier in accordance with the buyer‘s instructions. The goods were subject to moisture and freezing during transit, and the buyer, on inspection of the goods, found them unfit for his purposes. The goods were then sold by the buyer for $4.62 per kilogram in Vancouver, while the goods were still in the hands of the carrier. In the meantime, the carrier had found a buyer willing to purchase the 10,000 kilograms of walnuts at $6.16 per kilogram. However, the carrier was unable to complete the sale because of the buyer‘s actions. The Vancouver merchant later brought an action against the Toronto wholesaler and the carrier for his loss, calculated at $3.08 per kilogram, or $30,800.

Indicate the nature of the plaintiff‘s claim in this action and the defences that might be raised by the defendants. Render a decision. Answer: This case raises a number of issues that might be discussed concerning the formation of the contract, and the risk of loss. When did the title pass under the contract? Did it pass when the goods were delivered to the carrier? When received in Vancouver? Who is responsible for the loss? The fault was primarily that of the carrier, since he allowed the goods to freeze during shipment. Should he be liable for the full loss, when he was prevented from selling the goods (at only a partial loss) by the buyer's actions? On what basis could the buyer claim the full loss from the seller? In this case, if the goods were in merchantable condition when delivered to the carrier, the title probably passed at the moment when the buyer was notified. (See: text). Responsibility for the loss would normally be that of the carrier, since it was due to his negligence that the value of the goods was diminished, but the actions of the buyer may have limited his right to recover the full loss from the carrier. The seller, however, would be entitled to payment in full, if the goods were of the proper quality, etc., at the time the title passed, as the risk of loss passed with the title. See: Donald H. Bain Ltd. v. Beaver Specialty Ltd. et al., [1970] 2 O.R. 555, for a slightly different fact situation, but one which included a number of similar issues. Case 5 Davy Crockett, a northern Alberta farmer, ordered a set of logs for the construction of a log home from a lumber company that advertised log houses for sale in a back-to-the-land magazine. The magazine advertisement stated that the house was in kit form, and claimed that any qualified builder could construct it in less than ten days. The advertisement recommended hiring a qualified builder. However, it indicated that any person who had experience in house construction could probably do the work, but the result would be his or her own responsibility. Crockett ordered the log kit early in March for delivery in the second week of April. The logs did not arrive until late May, however, when Crockett was busy planting his crop. He was unable to begin construction during the summer months, due to an injured hand; and during the fall months he was busy with his harvest. When Crockett was ready to build in late October, he unwrapped the logs and discovered that a large number of them were warped and unsuitable for construction. The lumber company normally instructed buyers to construct the house promptly on delivery to avoid warping. However, they had failed to do so in Crockett‘s case because of the late delivery. The company refused to refund Crockett‘s money or take back the log kit. Crockett continued to correspond with the company concerning the logs. Eventually, some months later, the company agreed to replace the logs that had warped. When Crockett was finally able to begin construction a few weeks later, he discovered that because the replacement logs had experienced a different drying or seasoning time, they would not fit properly with the remainder of the logs in the kit. He then brought an action for rescission against the lumber company. Discuss the arguments that might be raised in this case. Render a decision.

Answer: The agreement between the parties stipulated delivery in mid-April but the seller did not deliver until late May. Crockett could probably reject the goods at the time, but accepted delivery. The failure to inform Crockett to build promptly would perhaps entitle Crockett to replacement of the warped logs, and the seller did so. However, did this agreement (offer and acceptance) prevent Crockett from claiming fundamental breach of the first agreement when he discovered that the new and old logs did not fit? The seller would certainly argue that this was the case. Crockett's position would be that the logs were useless for the construction of a home and that he had agreed to the replacement on the understanding that the seller was providing materials fit for the use intended. They were not, and the seller's breach went to the root of the agreement. The court in this case might find in favour of Crockett on the basis of fundamental breach, or breach of a condition that the goods were reasonably fit for the use intended. However, in the case of Miller v. Pine Log Homes Ltd. (1984) 50 A.R. 106, the court held that by delaying construction for an unreasonable time that by implied condition of fitness no longer applied. Case 6 A Swiss corporation entered into a contract with the Canadian Dairy Commission to purchase anhydrous milk fat for the production of condensed milk. The contract was executed in Canada by a New York agent of the corporation, who provided that the goods be shipped to Algeria. The Commission was advised that it was to meet the import conditions of the Algerian government, and payment was to be made on presentation of a clean bill of lading and proper certificates of analysis of the goods. While they met the contract stipulations in Canada, the goods were rejected by the Algerian authorities because the caps on the drums had not been sealed and some of the caps had loosened during shipment, allowing the contents to spoil. The Swiss corporation then brought an action against the Commission for rescission and reimbursement of the contract price. Discuss the arguments that the parties might raise, and render a decision. Answer: The important questions raised in this case are: Did the seller meet the terms of the agreement? Did the buyer have the right to reject the goods? When did the title pass? The seller would argue that the sale was complete and the title to the goods passed when the goods and their certificates etc. were placed in the hands of the carrier. (Rule 5). The goods, therefore, belonged to the buyer when the Algerian authorities rejected them. The buyer would argue that one of the stipulations of the contract was that the goods meet the import conditions of the Algerian government, and until such time as they did, the title would not pass. In the alternative, the buyer might argue that the careless packing by the seller resulted in the rejection, and the seller was liable for the loss the buyer suffered. If the stipulation that the goods meet the import conditions of the Algerian government was a term of the contract (express or implied) then the seller may be in breach of the contract, as the seller would be obliged to pack the goods as required to meet the import conditions. In the case of Agrex S. A. v. Canadian Dairy Commission et al. (1983) 24 B.C.L.R. 206, on similar facts, the court found that the title had passed, but the seller was liable for breach of warranty concerning the improper packaging. The court awarded the plaintiff lost profits as damages. Case 7 Stubert operated a produce brokerage, buying agricultural produce and reselling it to any of 30 smaller Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-270

independent regional distributors. Each distributor served an area no greater than a city, and some competed with one another. The distributors generally sold to independent convenience stores, and they vied for institutional sales such as hospital kitchens. Stubert visited a farmers‘ co-operative in an agricultural area, and after some discussion secured a truckload of tomatoes at the wholesale market price for Number 1 Grade Hothouse Tomatoes. Three weeks later, a commercial-freight company truck arrived in Stubert‘s part of the province with the tomatoes. Stubert had the driver open the van, and he looked at the frames of cello-packed tomatoes visible from the door. They appeared fine, so he handed over his $4,400 bank draft to the driver in return for the bill of lading. He endorsed the bill of lading and gave it back to the driver with instructions to him to carry on, as was often the case, to one of his bigger customers, a distributor in the next town. The driver was to turn over the bill of lading against a payment of $6,700. When the driver returned to Stubert‘s premises, he had no payment to deliver, but he still had the entire load of tomatoes. The distributor had insisted on unloading the tomatoes before payment. He had found that while the tomatoes near the doors were Number 1 Hothouse, those beyond the doors were at best Number 3 Hothouse, or perhaps even Field Grade. The distributor rejected the shipment, packed it back on the truck, and sent the driver back to Stubert. Stubert demanded a return of his bank draft and ordered the tomatoes to be returned to the co-operative. The driver said his company rule was that a driver is to always leave the load with the last person who pays, and that one never returns money once it is received. Accordingly, he off-loaded ―Stubert‘s‖ tomatoes despite the protests of Stubert, and drove away. Advise the parties, including a commentary on the trucking company‘s policy. Render a decision. Answer: Students should determine that Stubert entered into a contract for the produce by description as the goods were not in existence at the time. According to the Sale of Goods Act for goods sold by description there is an implied condition in the contract that the goods will conform to the description. In this case the goods were to be Number 1 Grade Hothouse Tomatoes. On delivery, the buyer is entitled to a reasonable time to inspect the goods to determine if they meet the description. Did Stubert's careless examination represent that opportunity? Did his endorsement of the bill of lading constitute acceptance of the tomatoes? Students should consider these questions. Normal practice of the trade was to confirm that the goods meet the description before signing the title over (bill of lading) for delivery to the customer. Stubert may have accepted the goods and it may be too late to later object to the seller about the quality. Signing the bill of lading would be an act of the 'owner' of the goods, and this might constitute acceptance of the goods. Caveat emptor. However, if the packing of the tomatoes could be considered a deliberate misrepresentation of the goods to induce Stubert to accept them without examining the entire shipment, Stubert may be able to avoid the contract on the basis of misrepresentation. Case 8 Maria Henderson contacted Cool Air Contracting Ltd., a local refrigeration contractor with a view to Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-271

obtaining an air conditioner for use in the beverage room of her hotel. She explained to an employee of the company that she wished to install a device that would not only cool the room, but remove tobacco smoke as well. The employee described a number of room air conditioners (for which the company was the local distributor). He recommended a particular model that he indicated was adequate for a room the size of Henderson‘s beverage room. Henderson entered into a contract for the model suggested by the contractor and had the equipment installed. After the equipment was put into operation, Henderson discovered that the equipment did an adequate job of cooling the room, but did not remove the smoke to any significant extent. She complained to the company, but the company was unable to alter the equipment to increase its smoke-removal capacity. When the company refused to exchange the air conditioner for a larger model, Henderson refused to pay for the equipment. The company then brought an action against her for the amount of the purchase price. Discuss the issues raised in this case and indicate how a judge might decide the matter. Answer: The action by the seller for payment of the purchase price would be based upon the rule that the goods were sold and delivered, and the seller therefore entitled to payment. The resistance to the action by the buyer might be based upon a number of defences related to the Sale of Goods Act. For example, the defendant might argue that he made known his requirements to the seller, who was in the business of selling air conditioning equipment, and he relied upon the seller to select the proper equipment for the purpose. Since the device did not remove the smoke as required, the seller had failed to provide goods that were reasonably fit for the use intended (the seller accordingly being in breach of a condition). See: Sale of Goods Act (Ont.), s. 15 (a) and Canada Building Materials Ltd. v. W. B. Meadows of Canada Ltd., [1968] 1 O.R. 469. A second defence might be to argue that the requirement that the equipment satisfactorily remove smoke was a condition precedent, and until satisfied, the property in the goods did not pass to the buyer. Since the buyer did not signify approval of the goods, the seller was free to remove the goods, but had no right to bring an action for the price. See: Polar Refrigeration Service Ltd. v. Moldenhauer (1967), 61 D.L.R. (2d) 462. Case 9 Grant planned to spend his winter vacation at a ski resort in the Rockies. In preparation for the holiday, he purchased a new ski outfit from a local sports-clothing merchant. The first time he wore his new ski outfit, he noticed that his wrists had become swollen and irritated where the knitted cuffs of the jacket contacted his skin. He wore the jacket the second day, but found that after skiing for a short time, he had to return to the lodge because his wrists had again become badly irritated and had blistered. Grant required medical treatment for the injury to his wrists. The cause of the injury was determined to be a corrosive chemical that had been used to bleach the knitted cuffs of his jacket. The chemical was one that was normally used to bleach fabric. However, from the evidence, the chemical had not been removed from the material before the cloth was shipped to the manufacturer of the jacket. Neither the manufacturer nor the retailer was aware of the chemical in the cloth, and its existence could not be detected by ordinary inspection. The injury to Grant‘s wrists ruined his holiday and prevented his return to work for a week following his vacation. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-272

Discuss the rights (if any) and liability (if any) of Grant, the sports-clothing merchant, the manufacturer of the jacket, and the manufacturer of the cloth.

Answer: This fictional situation raises the question of liability to the buyer for the injuries he sustained as a result of the chemical in the fabric used to manufacture his ski jacket. Grant purchased the jacket after examining the material, but the defect was hidden in the fabric. On a strict interpretation basis, the buyer would be bound, but this is not the case where the defect is not apparent to the eye. The buyer is not obliged to perform extensive tests on the fabric in order to determine suitability, but employ only those tests that might be performed by a "reasonable person." The seller would be liable in this case for the sale of goods that were not merchantable if the buyer acted promptly on discovery and rescinded the contract. Where the seller and the manufacturer of the clothing could not detect the chemical, the manufacturers of the cloth could be held liable in tort for Grant's injuries. See: Grant v. Australian Knitting Mills, Ltd., [1935] All E.R. 222.

CHAPTER CHART Additional Chart for Instructor‘s use (not appearing in text).

CHAPTER 22. INTERESTS IN LAND Chapter Topics Introduction Historical Development Estates in Land Registration of Property Interests Lesser Interests in Land Fixtures Title to Land Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion

Chapter Objectives After study of this chapter, students should be able to: • Identify and understand the various estates and interests in land. • Describe the ways in which interests in land are obtained, transferred and protected. • Explain the registration system used to identify property interests and their ownership.

YOUR BUSINESS AT RISK In many cases, the most valuable asset that a business owns is its interest in land. Short of ownership, there are rights of possession that can be just as important, remembering the business maxim of ―location, location, location.‖ Failing to understand where those rights begin and end places a critical business asset in constant jeopardy of being lost to competing claimants. CHAPTER COMMENTARY Chapter 22 (Interests in Land) introduces the law of real property, and with it, the legal terminology associated with land law. The distinction between real and personal property should be pointed out when dealing with this topic, as students often tend to consider property in a very general sense, without realizing that in some cases things that would normally be chattels become realty when attached to land in the form of fixtures, etc. The significance of a chattel becoming a fixture is examined in the case quote from Stack v. T. Eaton Co. et al. where the judge noted five points of law concerning chattels and fixtures, and what distinguished one from the other. While fixtures are explained in the text, the case provides a good description of the nature of a fixture in the words of the judge, as well as an example of a situation where the issue might arise. The nature of land holding in Canada is sometimes a revelation to students, as most have considered land ownership to be absolute, without realizing that the "owner" simply holds an estate from the Crown, and it is the Crown that is the true owner. A useful approach in dealing with the different estates in land might be to start with the Crown, show the Crown patent grant in fee simple, then work from there for each different type of estate. In this fashion, the reversion to the owner of the fee where a life tenancy has been granted may be highlighted as well. (See Chart) Lesser interest in land and the use of restrictive covenants to control the use of land, etc. are also concepts to review in class, either by way of example, or using the case problems at the end of the chapter. Case 9, for example, deals with possessory interests in land, and Case 3, is concerned with easements and rights-of-way. Both of these cases may be used, either for review or teaching purposes. The Court Decision, Dube v. Philbrick provides an example of the application of restrictive covenants, and the importance of clearly stating the property to which they would apply. Of some importance in any discussion of real property law is the difference between the two major land registration systems. Under the Registry System for example, a possessory title to land may arise by way of adverse possession, but this may not be the case under Land Titles (in Ontario). Consequently, these differences should be emphasized in any review of the topic. The differences in determining a 'good title' under each system should also be noted.

Review Questions 1. How are condominiums normally established? Answer: A condominium is usually established by a developer who buys the land, constructs the building, follows the necessary steps for creating the condominium (declaration, etc.) and forms the corporation to manage the operation. The developer then sells the individual units.

2. Explain the term freehold estate, how does this term apply to land? Answer: A freehold estate is an estate in land where the land may pass on by intestacy or by will to the heirs of the grantee if the grantee should die. It may also be sold by a grantee during his or her lifetime.

3. What lesser estates may be carved out of an estate in fee simple? Answer: Lesser estates would include (1) life estates (2) leasehold estates.

4. Indicate how a condominium organization deals with the problem of a unit owner who fails to contribute his or her share of the cost of maintaining the common elements of the condominium. Answer: If a unit owner fails to pay common expenses, the corporation is usually entitled to claim the expenses as a lien against the unit, and if necessary have the unit sold to cover the unpaid amount.

5. Define the terms: fee simple; escheat; life estate; seisin; tenants-in-common; prescriptive right. Answer: fee simple:

- The highest estate in land that an individual may hold. The equivalent of absolute ownership.

escheat:

- The vesting or reversion of land in the Crown which occurs when a person possessed of land dies intestate without heirs at law.

life estate:

- An estate in land which a person may hold for their life-time or the lifetime of another person.

seisin:

The right to possess land.

tenants-in-common:

- The holding of an undivided interest in land by two or more persons.

prescriptive right:

easement without interruption by the owner of the land.

6. How does a life estate differ from a leasehold estate? Answer: A life estate is an estate in land which runs for an indefinite period of time. A leasehold estate is an estate in land for a fixed term.

7. Describe briefly how land holding developed in Canada, and identify the system upon which it is based. Answer: Land holding in Canada was based upon the system in England, which in turn dates back to the feudal system introduced by the Normans in 1066. Under this system, all of the land is owned by the Crown, and estates are granted to individuals.

8. What method is generally used to determine the unit owner's interest in the common elements? Answer: Unit owners' interests in the common elements are usually calculated on the basis of the cost of each unit as a percentage of the total unit cost divided into the cost of the operation of the common elements.

9. Once land is granted by the Crown, how is it recovered? Answer: The Crown recovers granted land by way of expropriation, if the land is required for public purposes.

10. In what way (or ways) would an easement arise? Answer: An easement may arise by (1) express grant (2) prescriptive right (3) by necessity.

11. Under what circumstances would a restrictive covenant be inserted in a grant of land? Give three common examples of this type of covenant. Answer: Restrictive covenants are used to control the use of land conveyed to another. For example: restrictions on the size of a house or building that may be built on the land, restrictions as to the type of use made of the property (residential, commercial, etc.), or alteration of landscape (cutting of trees, excavating, etc.).

12. What characteristic distinguishes a fixture from other chattels brought onto real property? Answer: A fixture is a chattel brought on the property which when affixed to the property is for the better use of the property, and becomes a part of it. (e.g.: storm windows or window screens).

13. Explain the term adverse possession, and describe how it might arise. Answer: Adverse possession is open occupation of property for a lengthy period of time with the full knowledge of the actual property owner, and in defiance of his or her rights. It might arise where a "squatter" moves onto the lands of another and lives there for 10-20 years without the lawful owner taking steps to eject the trespasser.

14. What is the purpose of a land registry system? Answer: The land registry system is a public registry system where deeds and other interests in land may be recorded.

15. Explain how the Land Titles System differs from the Registry System. Answer: The Land Title System differs from the Registry System in that the Crown certifies the title of the registered owner under the Land Titles System, while under the Registry System, the individual must determine the validity of a registered owner's claim to the land.

16. What special advantages attach to the Land Titles System? Answer: Under the Land Titles System the title of the present 'owner' of the land is confirmed and warranted by the province as it is represented on the land register. There is no need to search the title to establish ownership. It provides greater certainty of title.

17. Why is a "good chain of title" important under the Registry System? Answer: A good claim of title is the establishment of an unbroken line of registered owners of the property for a lengthy period of time. In Ontario the time period is 40 years. It determines the right of a person to claim absolute ownership of the property.

18. Distinguish joint tenancy from tenancy-in-common. Answer: A joint tenancy is the ownership of an individual interest in common in land whereby if one tenant should die the surviving tenant becomes the absolute owner in fee simple of the interest. Under a tenancy in common the interest of each tenant passes to his/her heirs by will or intestacy on his/her death.

Mini-Case Problems

1. Southside Land Development Corp. offered to sell Trend Contracting Ltd. a small block of vacant land in a large city for $950,000. Southside Land Development Corp. presented a deed describing the property and showing Southside Land Development Corp. as the owner in fee simple. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-278

What information should Trend Contracting Ltd. obtain before delivering the $50,000 to Southside Land Development Corp.? Answer: Trend Contracting Ltd. should search the title to the block of land to make certain that Southside Land Development Corporation is the registered owner of the land, and that the deed of Southside Land Development Corporation is supported by a "good chain of title". Trend Contracting Ltd. should also check for any encumbrances (mortgages, etc.) or other registered claims against the land.

2. A conveyed a parcel of land to his daughter B and son C. The deed recited, in effect: to B for life, and then to C in fee simple. C would like to sell the land to D. Advise C. Answer: C holds the remainder interest in the land. B has possession for B's lifetime. C may only sell the right to future possession of the land. The only way that D could obtain the property in fee simple would be for both B and C to convey the land to D.

3. Able acquired a condominium unit that included a parking space on a surface lot facing a sidewalk and street. Able leased the space to his friend Samantha, who parked her chip wagon in the space. She sold french fries and soft drinks to the public from the location. The other residents of the condominium objected. Advise Able of his rights (if any). Answer: The parking place may be part of the common elements or it may be described as part of the property conveyed to Able. Regardless, it is within the competence of the condominium corporation to make bylaws as to the activities that may be conducted in units or in common elements. 4. Lot ‗A‘ was a lot that had attached to it a 5 metre wide right-of-way over Lot ‗B‘ to enable the owner of Lot ‗A‘ to reach a lake front beach where the owner could launch a canoe. The owner of Lot ‗A‘ decides to leave his canoe on the right-of-way at the beach rather than carry it back to Lot ‗A‘ after each use. What are the rights of the parties in this situation? Answer: The rights of A are for passage only. He is not entitled to store his property on the right of way. The owner of Lot B may properly demand its removal. 5. A lumber company for over 50 years had owned a 3,000 hectare tract of forested land. In a far corner of the tract an old fur trapper had built a cabin, where he had lived for 40 years. Discuss. Answer: Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-279

There can be no claim by the trapper unless the property lies in a Land Registry jurisdiction. Even so, despite being present for more than the qualifying period, he has not taken any steps to exclude the true owners, and thus a claim for adverse possession is likely to fail. His claim (to at least the footprint of the cabin and a right of way) would be strengthened if the forestry company had been aware of his presence during the whole of the qualifying period and did not take steps to assert their ownership.

Case Problems for Discussion Case 1 Iron Mining Corporation held the mineral rights to a large area of land in a municipality where the surface rights were owned for the most part by cottage property owners. In fact, Iron Mining Corporation had the mineral rights to all of the land around a lake where 30 surface rights land owners had built large, expensive cottages. Several years after the cottages had been built, a geologist at Iron Mining Corporation examined some recent mineral surveys of the area, and decided that the area warranted further investigation. He accordingly sent out a drilling crew to drill some core samples ―to see what was under the land by the lake.‖ The drilling crew arrived at the lake, and made an effort to find a cottage owner present, but because it was early April, no cottage owners were at their cottages. The drilling crew then proceeded to drill a large number of drill holes in the yards of the cottages. While little evidence remained of their drilling work, the cottage yards were torn up by the heavy machinery and trucks. When the cottage owners arrived in May to open their cottages, they discovered the extensive damage to their former manicured lawns, ornamental trees and gardens. Advise the parties. Answer: At law, the owner of the mineral rights has an obligation to compensate the surface rights owner for all interference. In practice, the owner of the mineral rights would probably seek to purchase the surface rights, rather than risk this kind of developing situation. Case 2 Dillon and Alexei owned a 20 hectare parcel of farm land as tenants-in-common. For many years they operated a vegetable growing operation, each farming and harvesting a 10 hectare part of the parcel. Each made his own decisions as to crops planted and harvested. They shared equally the cost of property taxes, the only expense related to their ownership of the land. Each kept the profits earned from their respective farming operations, but Alexei usually earned double the profits of Dillon because he specialized in growing unusual and high value vegetables. Just before one harvest season, Alexei was killed in a traffic accident. To save the crop, his widow and only heir-at-law, helped Dillon harvest both of the 10 hectare crops. When the crops were sold, Alexei‘s widow asked Dillon for the proceeds from the sale of the crop from Alexei‘s 10 hectare parcel. Dillon offered her half of the net proceeds from the total 20 hectares after the deduction of his production expenses. Discuss the rights of the parties. How would a court likely decide the issue? Answer: As this was a tenancy-in-common, Alexi‘s widow inherits all the rights and title that Alexi had at the time of his death. This is not a joint tenancy in which Dillon would take title to the entire property. Given the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-280

historical separate farming practices, Alexi‘s widow would be entitled to half the value of the entire property, and the entire value of Alexi‘s crops. Presumably a quantum meruit claim by Dillon for his work in harvesting Alexi‘s crops would be set off by a similar claim by the widow for aiding Dillon to harvest his own crops. Case 3 Maya and Louis were unit owners in the Happy Times Condominium complex, along with 95 other unit owners. Both Maya and Louis considered themselves to be creative cooks and bakers. Their cooking odours or the smoke from their burnt baked goods constantly filled the hallways and common elements, because both insisted on leaving the doors to their units open during the baking or cooking process to allow the air to circulate through their units. The remaining unit owners objected to their cooking activities and demanded that the Happy Times Condominium Corporation prohibit Maya and Louis from engaging in their hobbies on the premises. The solicitor for the corporation, however, advised that cooking or baking, as long as it was not for commercial purposes, could not be prohibited in the complex without affecting everyone else as well. When the unit owners discovered that the cooking could not be stopped, a number of the unit owners suggested that the condominium be terminated by selling the complex to a buyer who was interested in operating it as a rental apartment building. Maya and Louis objected vigorously to the suggestion of terminating the condominium. However, in the end, all unit owners except Maya and Louis agreed that steps should be taken to do so. Advise Maya and Louis of their rights. Describe the procedure that must be followed to terminate the condominium. Answer: This case raises two important points concerning condominium occupancy. Control of unit owner activity is limited in the sense that control is exercised largely over activities that involve the use of common elements or uses of the units which apply to all. In this case, cooking cannot be controlled or prohibited unless it applies to all, and the condominium as a result is helpless to control the activities of the two unit occupants. The selling of a condominium is essentially a last resort means of ending an unpleasant state of affairs, but effective, as long as a large majority are in favour. If 93 of the unit owners wish to sell, and only Maya and Louis object, if the percentage in favour meets the provincial number required to approve the sale, then the unit owners may sell. Maya and Louis (depending upon the provincial legislation) may have their units and interest appraised, and if the price received is less than the appraised value, the other unit owners will be obliged to compensate them for any loss. Case 4 Winston County Condominium Corp. No. 221 (WCCC #221) was formed just over a year ago, with all the usual condominium documentation. Contained in its declaration was a reference that common expenses included municipal water charges, unless the same were separately metered for each unit. There were 91 units in the building, one of which was a ground-floor restaurant unit. The restaurant represented 10 percent of floor space, and therefore 10 percent of common expenses. Each of the other 90 dwelling units would bear 1 percent of common expenses.

After examination of the accounts for the first year of operation, WCCC #221 found that the restaurant accounted for 47 percent of water charges, and the amount budgeted by the corporation of $50,000 would fall short of actual costs by $18,500. The directors passed a motion for a special levy on the restaurant unit, and a motion that a meter be installed on the pipes to and from the restaurant unit. The action was ratified by the unit holders 90 to 0, with one abstention in protest. The owner of the restaurant unit came before the courts for relief, stating that water rates had figured into her calculations on whether to purchase the unit, and that the same calculations must have figured into WCCC #221‘s decision to sell the unit to her. WCCC #221 had the power to write what it wished into its declaration, and she now holds it to what it has written. The corporation had set the price for her commercial unit, knowing it would contain a restaurant. The restaurant owner acknowledged she was prepared to suffer her fate, should WCCC #221 on a vote decide to install meters to all units. Elaborate on the issues in the arguments and render a decision on behalf of the court. Answer: The operation of the condominium is subject to the charges set out in the declaration, and the system of allocation of all expenses was determined on a floor space basis. The actions of the corporation to assess the restaurant extra may be argued as discriminatory in the sense that only the one unit would be metered and subject to a special levy. The corporation would probably be obliged to place all units on meters to fairly apportion the charges. However, this may not make economic sense where only one user was responsible for the excessive use. In the case upon which this case was based, the court held that the existing system of charges represented unjust enrichment for the restaurant owner and imposed an undue hardship on the rest of the unit owners. The court then went on to decide that the metering of the one unit would fairly apportion expenses. See: York Region Condominium Corporation No. 771 v. Year Full Investment (Canada) Inc. (1992) 10 O.R. (3d) 670 (Ont. Ct. Gen. Div.). Case 5 Baxter owned a large block of forested land that surrounded a small lake. The lake was fed by a small stream that crossed the property, and another that drained the lake into a larger body of water several kilometres away. With the intention of eventually constructing a resort on the lot, Wilson purchased from Baxter a parcel of land fronting on the lake. On the payment of the purchase price he received a deed to the land from Baxter. Without examining it, he placed it in his safety deposit box. Wilson used the property as a personal campsite for several years while he searched for financial backers for his resort. Because the lake was several hundred metres from the road, each time he visited the lake he would leave his automobile parked at the roadside and carry his camping equipment through the woods to his property. Five years after he purchased the land from Baxter, he was in a position to build the resort on his lot. No road access was available to the land, but Wilson assumed that the pathway that led to his property was his access route. He engaged a logger to cut trees to widen the path in order that a truck carrying his building materials could reach his lot. No sooner had Wilson‘s logger cut the first tree than Baxter appeared and ordered him to stop cutting. When Wilson arrived, Baxter ordered him to leave the property. Wilson protested that he was entitled to clear the trees from the access route to his land, but Baxter Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-282

replied that he had sold him only the lot and not a roadway. According to Baxter, Wilson had water access by way of the stream if he wished to enter or leave his property. The surrounding land belonged to Baxter. Wilson had travelled the stream with his canoe on a number of occasions. While it was possible to gain access to his lot in that fashion, it would not be possible to transport the heavy building materials into the property as the stream was too shallow to allow the use of larger watercraft. Rather than continue his argument with Baxter, Wilson decided to examine his deed to determine if Baxter was correct in his position on the access route. Wilson returned home and read the description of the property contained in the conveyance. It described the lot only and made no mention of a roadway to the property. According to the deed, Baxter owned all of the land surrounding Wilson‘s property. His only access appeared to be by way of the small stream to the lake. Examine the rights of the two parties in this case. If either party should decide to take legal action to enforce his rights, explain the nature of the action and indicate the probable outcome. Answer: The principal issue in this case is the right of Wilson to establish a reasonable access route to his land-locked property. His deed did not contain an express grant of right-of-way, but he might claim a right-of-way of necessity. To have this type of right-of-way, however, no other access route must be available to the parcel of land. Does the water access represent an alternative route to the lot? A right of easement of this nature is founded on necessity, rather than convenience, and where alternative access is available, even though inconvenient, a right-of-way of necessity may not be granted. See: Fitchett v. Mellow et al. (1897), 29 O.R. 6. Case 6 Suburban Land Development Ltd. owned a block of land that it wished to develop as a residential housing subdivision. The land was heavily treed and bordered the shore of a lake. To preserve the woodland setting of the area as each house lot was sold, the corporation inserted in the deed the following clauses: The grantee agrees: (1) to construct a house on the premises with a floor space of not less than 237 square metres and a construction value of not less than $200,000. (2) that construction shall not begin until the grantor approves in writing the architectural drawings or plans for any proposed dwelling. (3) that no trees shall be cut on the property without the express consent in writing of the grantor. (4) that no pigs, chickens, or other domestic animals may be kept on the property. (5) that the above covenants shall run with the land for a period of 20 years, and shall be binding on the heirs, executors, and assigns of the grantee. Casey purchased a large, heavily wooded lot in the subdivision. She received a deed to the lot in fee Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-283

simple that was registered in the Land Registry Office and contained the above covenants. Without constructing a house or dealing in any way with the property, she sold it to MacGregor, who received a deed to the lot that did not contain the covenants. He registered that deed in the Land Registry Office without examination of the title to the property. Some time later, MacGregor attempted to cut some of the trees on the property to clear a place where he intended to build a small building to house his racing pigeons. When Suburban Land Development Ltd. became aware of MacGregor‘s activity, it immediately informed him that he must stop cutting the trees until approval was given, and also that the company would not permit the construction of any building on the property except a dwelling-house. MacGregor decided to ignore the prohibition, on the basis that he was unaware of the restrictions and had not agreed to them. Advise MacGregor and Suburban Land Develop-ment Ltd. What might be the possible outcome, if legal action was taken by Suburban Land Development Ltd. to enforce the restrictions? Answer: Covenants which are included in a registered deed are open to examination by the public since they are registered in the Land Registry Office. Legislation pertaining to the registration of documents in all provinces provides that registration constitutes public notice of documents and their contents. As a consequence, MacGregor would be deemed at law to have constructive notice of the restrictions which are attached to the lot which he purchased. He is therefore bound by the restrictions and Suburban Land Development Ltd. may enforce them. If legal action was taken, and the court decided that the restrictions were reasonable, and for the protection of the adjacent land-owners, McGregor would not be permitted to build his pigeon house. McGregor would have no right of action against Casey for failing to disclose the restrictions, as McGregor would be deemed to be aware of them. Case 7 The Golf and Country Club owns a large block of land at the edge of a municipality that the club uses as an 18-hole golf course. A small stream runs through the property and eventually drains into a lake some distance away. The stream also passes through the municipality that is located upstream from the Golf and Country Club property. The municipality installed new storm sewers in an area of the city and constructed them in such a way that, in a heavy rain, overflow from the sewers would drain into the stream. Shortly after the construction of the new sewers, several days of heavy rains resulted in a large quantity of water from the storm sewers being discharged into the stream. This in turn produced flooding of the stream and serious erosion of the banks of the stream where it passed through the golf course. Damage was estimated at $350,000. The Golf and Country Club instituted legal proceedings against the municipality for the damage. Discuss the arguments that might be raised by each of the parties, and render a decision.

Answer: This case is concerned with riparian rights, as the club owns land that is adjacent to the watercourse. The issue here is can an upstream user (the municipality) introduce additional water into the stream in such quantity that it damages the property of the downstream user? The municipality might argue that it was simply directing the natural flow of water (rain water) into the stream. It might also argue that the downstream user may object to actions that decrease the flow of water. Would these be valid arguments? The club would probably argue that the upstream user may not do anything with the water flow to damage the downstream users enjoyment of the stream. The club might also argue that the municipality should have foreseen the likelihood of downstream damage by its actions of directing the additional water into the stream. In the case upon which this fact situation was based, the court held that the municipality was liable for the damage to the downstream user. See: Scarborough & Gulf Country Club v. City of Scarborough et al. (1986), 55 O.R. (3d) 193. Case 8 Samuels, an elderly widower, conveyed his farm land to his son Peter for life, then to his grandson Paul in fee simple. In the deed, he reserved to himself the right to continue to live on the farm and to receive 50 percent of the income from the farm during the rest of his lifetime. Peter operated the farm with the assistance of both Samuels and Paul for a number of years, during which time he paid his father 50 percent of the farm income. Eventually, Peter decided to seek employment in industry and took a job in a nearby manufacturing plant. At that point he decided to cease farming. A short time later, the barn was accidentally destroyed by fire and the farm machinery destroyed. Samuels, Peter, and Paul each claimed to be entitled to the proceeds of the fire insurance on the barn and the farm machinery. Discuss the rights (if any) of each of the parties to the insurance funds in this dispute. Answer: This case illustrates a situation where the owner of the property in fee simple conveys a life estate and the remainder to his two sons, while retaining for himself a right in the property. Students might be invited to assess the nature of the estate which Samuels retained for himself. Is his interest a life estate? How could it be if he granted a life estate to his son Peter? Did he reserve for himself something less? If so, what type of interest? The loss of the barn, and the demand for the proceeds of the insurance by all parties raises the question: To whom should the proceeds be paid? Are all three named insured? Do all three have an insurable interest? Does any one have a greater claim against the proceeds, considering the different interests in land? The case is designed to explore the special interests of each of the parties in the land. Samuel's interest is limited to the right to live on the property, and to a portion of the income (if any). Peter has only a life interest, and is obliged to pass the land along to the remainderman in substantially the same condition as he received it. Paul has the reversion in the property, and would have the greatest interest in maintaining the value of the property. The logical solution would be to use the proceeds to rebuild the barn. Case 9 Smith owned a large farm. Part of the farm, which consisted of a woodlot, fronted on an unimproved township road. In 1995, Crockett, a middle-aged bachelor, constructed a small log cabin in the woodlot for use as a fishing and hunting camp, with Smith‘s permission. For several years Crockett occupied the cabin on weekends, while fishing in the area in the summer months, and for a few weeks in the fall of each year during the hunting season. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-285

During the summer of 1998, Crockett took a month‘s vacation and spent the time at the cabin. He planted a small vegetable garden and constructed a fence around both cabin and garden to keep animals away from his flowers and vegetables. During the hunting season of the same year he cut down a number of small trees and extended the fenced-in area to a parcel of land 23 metres by 30 metres, and he built a gate in the fence where it faced the roadway. Smith noticed the fence and gate shortly after it was constructed and asked Crockett why it was necessary. Crockett replied that the animals in the area were damaging the flowers that he had planted around the cabin, and he felt that the fence would probably keep them out. The next year, Crockett decided to accept early retirement from the firm where he was employed. He spent the period from May 1st to November 30th at the cabin. Crockett planted a vegetable garden, fished, and helped Smith with the planting of his crops and his fall harvest. At the end of November, he left his belongings in the cabin and spent the winter in a warmer climate. He returned to the cabin the next April, only to be met by the local tax assessor, who asked him if the cabin was his. He replied in the affirmative, and, some time later, received a municipal tax bill issued in his name. He paid the municipal taxes for that year (2000). Crockett continued to live in the cabin, spending only the coldest of the winter months away from the premises. He paid the taxes on the land and building each year. In 2011, he moved the fences to include an area 30 metres by 45 metres in order to enclose a larger vegetable garden. Smith did not object to the new location of the fence, but warned Crockett not to cut down two large hickory nut trees in the enclosed area. Crockett agreed to leave the trees standing. In the summer of 2019, during a thunderstorm, lightning struck and damaged one of the large hickory trees. Without consulting Smith, Crockett cut down the damaged tree. Several months later, Smith noticed that the tree was missing. In a rage, he ordered Crockett from the property. Crockett refused to leave, claiming he was the owner of the parcel of land. Discuss the rights of the parties. Evaluate the arguments and evidence that each might raise if the matter should be brought before the courts to determine the rights of the parties in the land. Does the answer depend on Registry or Land Titles registration? Render a decision. Answer: This case is concerned with a claim of adverse possession by Crockett. If the land is located in a Land Titles registration area, then a claim of adverse possession is not possible. Only if the land is located within a Registry System area can a claim for adverse possession proceed. Adverse possession requires the open, notorious, continuous, exclusive, possession of property (with the true owner aware of the possession) for a 10 year period of time. The first question might be: When did the time period begin to run? The original parcel of land was fenced by Crockett in 1998, and he began payment of taxes on the property in 2000. Both of these acts are important in establishing adverse possession, as they are acts normally performed by an owner of property. It would also indicate an 'animus possidendi' on the part of Crockett. Possession was essentially continuous from 1995 on. The second parcel was fenced in 2011, and again, Smith did not object - but he warned Crockett not to cut down a tree in the fenced-in area. Was this the exercise of ownership rights by Smith? Did time start to run on the second parcel in 2011? When did it end? Smith Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-286

attempted to exercise his rights in 2019. Since the first parcel had been occupied exclusively by Crockett since 1995, by 2019 Crockett had probably acquired adverse possession of the property (no acknowledgement of the true owner's right was made in the interval). On the second parcel, however, Crockett would only be able to establish an 8 + year period of possession, not enough to give him a possessory title to the second parcel of land. See: Keefer v. Arillotta (1976), 13 O.R. (2d) 680, and Re St. Clair Beach Estates Ltd. v. MacDonald et al. (1974), 50 D.L.R. (3d) 650 as examples of cases concerning adverse possession.

CHAPTER CHART

CHAPTER 23. THE LAW OF MORTGAGES Chapter Topics Introduction Historical Development The Nature of Mortgages Priorities Between Mortgages Rights and Duties of the Parties Special Clauses Discharge of Mortgage Assignment of Mortgage Sale of Mortgaged Property Default, Foreclosure, and Sale Business Applications of Mortgage Security Summary Key Terms Review Questions Mini-Case Problems Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-288

Case Problems for Discussion

Chapter Objectives After study of this chapter, students should be able to: • Describe the nature of a mortgage. • Identify the rights and duties of the parties under a mortgage. • Explain the effect of assignment of a mortgage. • Outline the default, foreclosure and sale provisions of mortgages. • Identify the business uses of mortgages.

YOUR BUSINESS AT RISK While land and buildings are often the most valuable assets of a business, mortgages are just as often the largest liabilities. If mortgages are not well understood, or entered into without regard to their technical provisions, a default may trigger immediate repayment obligations. If the mortgage cannot be refinanced, the usual result is insolvency, and cascading difficulty in paying other trade debts may lead to bankruptcy proceedings. CHAPTER COMMENTARY The law of mortgages in Canada is complicated to a degree because the two land registration systems (in addition to the system in the Province of Quebec) affect the nature of the instrument. In addition, each province has altered the rights of the parties to some extent, with the result that much provincial variation exists. From a conceptual point of view, the creditor, in return for the loan of money, either takes title to the debtor's land by way of the mortgage, or obtains a claim or lien on the land in the case of a charge under the Land Titles System or the hypothec (used in Quebec). Using the mortgage as an example, the transaction may be graphically displayed in this manner:

Mortgage Transfer (charge) of legal title to B, but A retains possession of land

Party A

Party B

Mortgagor

Mortgagee B loans money to A with land

as security

Discharge of Mortgage A repays the loan

Party A

Party B

Mortgagor

Mortgagee B reconveys title of land to A

by way of discharge

In the case of a charge, the creditor has only a secured interest in the debtor's land, and on repayment of the loan, the cessation of charge, given by the creditor as receipt of payment, extinguishes the claim against the debtor's land.

The difference between first and second mortgages may also be explained by way of diagram:

Transfers (charges) legal title to B, but retains possession of land Party A Mortgagor

Party B Mortgagee

(holds legal mortgage) B loans money to A with land as security

C loans money to A with right of redemption as security Mortgage of equity (right to redeem from B)

Party C

(Equitable mortgagee, or Second Mortgagee)

The terminology used in connection with mortgages is important and should be stressed in class discussion. In particular, the terms mortgagor and mortgagee should be properly used to identify the parties to the transaction. The Court Decision, Omista Credit Union Ltd. v. Bank of Montreal examines the assignment process for a mortgage, and the importance of determining the responsibility for payment where the mortgagors have separated, and only one mortgagor continues on with the mortgage payments.

Review Questions 1. What is the normal procedure used to re-vest the legal title of a property in the mortgagor when the mortgage debt is paid? Does this differ in the case of a charge? Answer: The normal procedure is to deliver a discharge, which is a statutory re-conveyance, and receipt for payment. A charge is extinguished by a cessation of charge, which removes the charge from the title of the property.

2. In what way does a mortgagee's interest differ from that of a person who holds land in fee simple? Answer: A mortgagee holds only the title to the property, and does not have possession.

3. In what way (or ways) does a mortgage differ from a charge? Answer: A mortgage involves a transfer of title to the property; a charge simply encumbers the land with the debt.

4. Explain the relationship that exists between a mortgagee and a person who acquires the mortgaged property from the mortgagor. Does the original relationship of mortgagor-mortgagee continue as well? Answer: The mortgagee and the third party have privity of estate between them. The relationship between the mortgagee and the mortgagor continues to exist, however, and the mortgagee may still look to the original mortgagor for payment if default by the third party occurs.

5. How does a "first" mortgage differ from a "second" mortgage? Answer: A first mortgage is the "legal" mortgage in the sense that the legal title to the property passes to the mortgagee. A second mortgage is an equitable mortgage in the sense that it is a mortgage of the equity of redemption.

6. What factors must be considered by a person who wishes to extend a loan of money to another on the security of a second mortgage? Answer: The lender must be aware that there is a risk that the mortgagor may default on the first mortgage, in which case the second mortgagee would be obliged to put it in good standing.

7. What is the nature of the covenants that a mortgagor agrees to in a mortgage? Answer: The covenants include: (1) payment. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-292

(2) insure the premises. (3) pay taxes. (4) not commit waste.

8. Why do mortgages usually contain an acceleration clause? What is the effect of the clause if default occurs? Answer: If a mortgage is repayable by instalments, default on each instalment would require separate legal action for payment. An acceleration clause renders the entire balance due an owing when default first occurs.

9. Outline the nature of a mortgagor's interest in the mortgaged land. Answer: A mortgagor of land retains an equity of redemption, which entitles him to a reconveyance of the title when the debt is paid.

10. Indicate what the rights of a mortgagee would be if a mortgagor defaulted on the payment of the mortgage. Answer: On default, the mortgagee may take action against the mortgagor on the covenant for payment, or may institute foreclosure or sale proceedings. As well, the mortgagee may demand possession.

11. Outline the rights of an assignee of a mortgage from a mortgagee. What steps must be taken to ensure that the mortgagor makes payment to the assignee after the assignment takes place? Answer: An assignee of a mortgage takes the mortgage as it stands between the mortgagor and the mortgagee. To ensure that the mortgagor makes payments properly, notice must be given to the mortgagor to make future payments to the assignee.

12. What are the rights of a mortgagor if, on default of payment, the mortgagee commences foreclosure proceedings? Answer: The mortgagor may request the right to put the mortgage in good standing by payment of all arrears and costs, or ask for the right to redeem. The mortgagor may also ask that the foreclosure be changed to a judicial sale of the property.

13. How does a sale under a power of sale differ from a sale action?

Answer: A sale under a power of sale is a sale of the mortgaged property by the mortgagee in accordance with the right and procedure set out in the mortgage itself. A sale action represents a sale of the property by the court.

14. What rights, if any, are available to a mortgagor after foreclosure takes place? Answer: Where the mortgagee is still in possession of the foreclosed property and during the period for redemption, the mortgagor may still redeem the property by making payment.

15. Define the term "mortgage" as an interest in land. Answer: A mortgage is an instrument whereby an owner of land pledges the title or interest in land as security for the debt, but remains in possession of the property until such time as default occurs.

16. If the original mortgagor sold the mortgaged lands to a purchaser, and the purchaser failed to make payments or the mortgage, explain the possible courses of action which the mortgagee might take. Answer: Causes of action open to the mortgagee would be: foreclosure, sale and possession of the mortgaged premises, or action against the original mortgagor on the covenant for payment.

Mini-Case Problems

1. B mortgages ―Blackacre‖ to A for $100,000. Some time later, B defaults on payment, and A begins foreclosure proceedings. If Blackacre has a value of $500,000, what should B do? Answer: B has an equity of $400,000 in the property and should ask for the right to redeem or put the mortgage in good standing. If B has no money, he could ask that the foreclosure be changed to a sale.

2. If B did nothing in the above case until after foreclosure proceedings were completed, then wished to pay the amount owing, could B still do so to re-acquire the property? Would your answer be any different if A had sold the land to C? Answer: If A still has the property, B may request the right to redeem if payment could be made. The court may allow this. However, if A has sold the property to C, it would be too late for B to redeem.

3. Rosa gives a mortgage on Green Acres to Shelley, and it is duly registered. Rosa later gives a mortgage to Tina, and it is registered. Rosa, a year later, defaults on the mortgage to Shelley. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-294

What is the position of Tina and Rosa? Answer: Rosa is in jeopardy of losing her property, whether by sale or foreclosure. It is advisable for Tina, as second mortgagee, to put the first mortgage back into good standing. If Tina does not, she will face loss of her rights if a) foreclosure proceeds without being converted to a sale, or b) the proceeds of sale are insufficient to cover the amounts owing on the first mortgage (first) and her mortgage (second). Of course, if Tina pays out Shelley, then Tina will take over as first mortgagee.

4. William owns a house and lot, and gives a mortgage on the property to Wallace. William later sells the house and lot to Black, with Black assuming the mortgage. A year later, Black defaults on the mortgage. Advise Wallace. Answer: Wallace may foreclose on his mortgage and take the property. Since William is personally liable on the mortgage, Wallace could, in the alternative, sue William on his personal covenant for the amount owing on the mortgage. 5. Sunset Financing Corporation assigned its first mortgage rights to a major Canadian bank for 10 parcels of land being developed for industrial/commercial purposes by Urban Developers Limited. Due to a postal service disruption, the written notice of Sunset‘s assignment to the bank was not received by Urban Developers until after the next scheduled payment was sent by Urban to Sunset. The bank has contacted Urban Developers claiming it is in default under its mortgage financing agreement and is seeking accelerated payment in full of the entire mortgage debt. Advise the parties. Answer: Sunset took the required steps to notify the mortgagor, Urban Development of the assignment of the mortgage to the bank. However, given the postal service disruption, it ought to have been foreseeable to Sunset that the notice of assignment may not reach Urban in a timely fashion and that it should take other steps to notify Urban of the assignment and its new obligation to make payment to the bank. Urban has a valid defence to the bank that it had no actual notice of the assignment and made its proper payment in satisfaction of its obligation under the mortgage to the first mortgagee. The bank may be able to recoup payment from the assignor, Sunset, for the mortgage payment plus any damages it has incurred as a result of Sunset‘s failure to provide notice to Urban Development prior to its payment obligation

Case Problems for Discussion Case 1 Smith, Jones and Davis carried on business in partnership as SJD Building Contractors. They arranged for the purchase of 3 adjacent lots in a subdivision at a price of $80,000 per lot, financing the transaction with a mortgage on the three lot parcel for $180,000, and the partnership supplying the balance of the funds. The mortgage was in the name of the three partners carrying on business as SJD Building Contractors. Smith signed the mortgage on behalf of the partnership.

A month later, Davis decided to retire from the partnership, but wished to build a home for himself and his family on one of the lots. The partnership approached the mortgagee and requested a release of the lot from the mortgage on payment to the mortgagee of $60,000, being approximately one third of the amount of the mortgage. The mortgagee agreed, and Davis personally paid the $60,000 for a release of the lot. The housing market, however, took a downturn, and Smith and Jones found themselves shortly thereafter in financial difficulty. Unable to make mortgage payments, the mortgage fell into arrears. The value of the two lots, unfortunately, had fallen in value and were worth approximately $50,000 each. The mortgage at this point, with arrears, was $118,000. Advise each of the parties (including Davis) of their rights and obligations (if any). Answer: The two lots under mortgage are now worth a total of $100,000 and with the mortgage at a balance of $118,000 there is an $18,000 shortfall to be repaid. As Davis‘s lot was released (discharged) from under the mortgage, there is no direct attachment of the debt to his property. However, the mortgagee may look to the personal assets of the individual partners to satisfy its claims. Unless Davis retired from the partnership by giving all required notices to creditors and making appropriate public filings (see partnership chapter), he will remain liable for the debts of the partnership. Thus, indirectly, the mortgagee may turn to Davis‘s home and lot to satisfy its claim. Smith and Jones are likely to encourage this approach, however they will be obligated to account with their former partner in due course. Case 2 Headrick owned a house and lot in a very desirable residential neighbourhood of a large city. In order to purchase a new luxury motor vehicle, new boat, and pay for a luxury vacation, he arranged for a mortgage on the house and lot for $330,000. The property at the time had an appraised value of $375,000. Once in funds, Headrick left on his vacation. While on vacation, he decided to extend his travels, even though his vacation time had ended. A month later, he returned home, only to find that he had been terminated by his employer. At this point in time he had spent all of his money on the automobile, boat and vacation, and was unable to make payments on the mortgage. Over the next number of months, Headrick searched for employment without success. He ignored letters from the mortgagee demanding payment, and eventually, the mortgagee decided to sell the property under its power of sale. The mortgagee contacted an appraiser and requested an appraisal of the property ―at a fire sale price‖ as it was anxious to get rid of the property. The appraiser gave an appraisal at $300,000, well below the value of the property if it was offered in a normal real estate listing. The mortgagee proceeded with the sale under the power of sale, and quickly sold the property at the appraised value of $300,000. The mortgagee then demanded the difference between the sale price and the amount of the mortgage, which was still at $330,000. Headrick had protested the listing of the property in the power of sale advertisements at such a low price, and had advised the mortgagee that his friend Esson was prepared to purchase the property for $345,000, but his objections had been ignored by the mortgagee, who simply wanted to get rid of the property. He is now angry and upset that the mortgagee is demanding payment of the additional $30,000 from him. Advise Headrick. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-296

Answer: The mortgagee selling under power of sale has an obligation at law to take reasonable precautions to obtain the true value of the property. Accordingly, the mortgagees reasonable precautions would include obtaining multiple appraisals (two or three) or similar evaluations of market price, refraining from poisoning the mind of an appraiser with words like ―fire sale price‖, and generally conducting the sale in a proper commercial manner. See: Canada Trustco Mortgage Co. v. Casuccio, 2005 CanLII 25887. Case 3 Agricola sold his farm to Ambrose for $300,000. In addition to $40,000 of his own funds, Ambrose arranged for a purchase-money mortgage from the Agricultural Loan Company for $200,000, and Agricola agreed to take back a mortgage in the amount of $60,000 in order that Ambrose could acquire the property. On the date fixed for closing, Agricola gave Ambrose the deed to the property and received a cheque from Ambrose in the amount of $40,000. He also received a cheque from the loan company for $200,000 when the company registered its mortgage immediately after the registration of the deed to Ambrose. Agricola then registered his mortgage for $60,000. At the time, Agricola transferred the fireinsurance policy (which covered the buildings) to Ambrose. The policy transfer named Ambrose as the new owner, subject to the interest of Agricola as mortgagee. Through an oversight, Agricultural Loan Company was not named as an insured on the policy. Some time later, Ambrose defaulted on the mortgage to Agricola, and it was necessary for Agricola to foreclose on the mortgage. Agricola continued to make the mortgage payments each month to Agricultural Loan Company and allowed Ambrose to remain on the property to work the farm on a cropsharing basis. Not long after Agricola had foreclosed on his mortgage and taken back the property, a serious fire destroyed a large barn on the premises. The barn had a value of $50,000. The insurer noted that the fireinsurance policy listed Ambrose as the owner of the property, and Agricola as the mortgagee. However, before the insurance company made payment, all three parties — Agricola, Ambrose, and the Agricultural Loan Company — claimed the insurance proceeds. Discuss the nature of the rights that each party might raise. Discuss the possible outcome. Answer: While this case concerns the rights of the parties to the insurance proceeds, the rights are to some extent determined by the relationships established through the mortgage transactions. Students should determine the priorities of the mortgages. Is Agricola's mortgage a second mortgage? Agricultural Loan Company was presumably aware of its existence. Can the parties agree to priorities? In the case, Agricola had a second mortgage, and found it necessary to foreclose. This gave him the interest of Tenant, and the land was subject only to the mortgage to the Agricultural Loan Company. Does the fact that Tenant is still living on the property give him any right to the insurance proceeds? Would the crop-sharing agreement constitute an interest? As a general rule, a person not named as an insured has no claim to the proceeds under the policy. Can Agricultural Loan Company claim the funds under a mortgage that requires the mortgagor to insure the property against loss? According to Re Clovis King & Sons Ltd. (1971), 5 N.B.R. (2d) 493, the execution of a mortgage that contains a covenant to insure by the mortgagor is an equitable assignment of the proceeds of the policy to the mortgagee, and effective on the date of issue of the policy. On the basis of this case, Agricultural Loan Company might have a claim against the funds. Agricola, although a named insured as Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-297

mortgagee "as his interest may appear" may find this case helpful, but some older cases indicate that where the mortgagee acquires the interest of the mortgagor, he cannot claim for the loss because he is no longer a mortgagee. See, for example, Pinhey v. The Mercantile Fire Insurance Co. (1901), 2 O.L.R. 296; Gaskin v. The Phoenix Insurance Company (1866), 11 N.B.R. 429. Quaere whether the courts would take such a strict approach to-day. The matter is perhaps academic in this case if the Agricultural Loan Company can claim the entire proceeds. Case 4 An elderly woman who could only read with difficulty operated a rooming house for students. Her home was large and in close proximity to the college. As such, it was a valuable piece of residential property. Her nephew, Herman, had on numerous occasions urged her to retire and suggested that she sell the property. For many years she refused to consider the idea. However, as a result of Herman‘s insistence, she eventually agreed that she would list the property with a local real-estate agent to see what the market might be. A few days later, Herman appeared at her home with some papers that he said were the forms that he had obtained from the real-estate agent for the listing of her property. In reality the forms were mortgage forms. Herman represented the forms as ―only a formality, to let the real-estate agent have authority to show the house to prospective buyers.‖ His aunt signed the forms, believing them to be copies of the real-estate listing agreement. Herman later registered the mortgage, which was drawn for $50,000, and assigned it to a finance company for $45,000. He intended to use a part of the money to make the payments on the mortgage himself; he planned to use the balance for a trip to Las Vegas, where he expected to make a fortune by employing a new system for placing bets at the gambling tables in a casino. Herman‘s scheme failed, however, and he returned to Canada penniless. He soon spent the funds, which he had originally set aside to make a few payments on the mortgage, and again found himself without funds. The mortgage, as a result, went into default, and the finance company instituted foreclosure proceedings against the property. At that point his aunt suddenly became aware of the mortgage. Indicate the action that the aunt might take in this case. Discuss the position of the finance company. What might be the outcome of its foreclosure proceedings? Answer: The first point to consider in this case is the validity of the document. Could the Aunt claim non est factum and avoid the document? Was the nature of the document completely different from the one which she believed she was signing? Was it necessary for her to rely on her nephew to determine its nature? If the Aunt could successfully claim non est factum, what effect would it have on the finance company's right to foreclosure? What would the rights of the assignee be in this case? Does it take the mortgage as it stands between the Aunt and Herman? There is a chance that the Aunt may be able to establish non est factum as a defence in this case, and if so, the mortgage would be unenforceable. See: Brown and Brown v. Prairie Leaseholds Limited (1953), 9 W.W.R. (NS) 577; Michels v. Miner, [1949] 2 W.W.R. 269. The finance company may be able to claim against Herman for the amount owing, due to Herman's actions in acquiring the mortgage, and his subsequent dealings with it.

Case 5 Zalinski was the owner in fee simple of a house and lot. She mortgaged the property to the Home Bank for $500,000. Then she sold the house and lot to Steele for $750,000, of which $500,000 represented the mortgage Steele assumed and the remaining $250,000 was payment to Zalinski for her equity. Shortly after that, Steele borrowed $100,000 from Gray, giving Gray a $100,000 second mortgage on the property as security for the loan. Steele then sold the property to Allen for $800,000, of which $500,000 was the first mortgage to the Home Bank, $100,000 the mortgage to Gray, and $200,000 cash payment for Steele‘s equity. The house caught fire and burned to the ground a few days after Allen acquired the property. The house was insured for $450,000. The policy named Allen as the insured, the Home Bank as first mortgagee, and Gray as second mortgagee. After the fire, Allen abandoned the property and left the country. Advise the Home Bank and Gray as to their legal rights. Speculate as to how the parties might proceed toward protecting their respective interests. Answer: From the facts of this case, the fire insurance proceeds would be applied first to the first mortgage, then the second (if any surplus existed), with the balance (if any) to the insured, Allen. Since the policy was for only $450,000, the entire proceeds would go to the bank as first mortgagee. To acquire the remaining $50,000 owing on the mortgage, the bank has several options open: (1) foreclosure on the lot, (2) sale of the property under the power of sale (3) take legal action for the balance on the covenant against the mortgagor (Zalinski). If the bank follows this last route, Zalinski would be entitled to take an assignment of the bank's mortgage and proceed with options (1) or (2).

The second mortgagee (Gray) would be able to: (1) pay the balance owing on the first mortgage then proceed with the courses of action open to the bank, or (2) take action against Steele on his covenant to pay. Case 6 Penfield owned property that he mortgaged to The Bank of Regina for $100,000 on a term of three years, amortized over 25 years, at a rate of 8 percent per annum. At the end of one year he sold the property to Carson, who assumed the Bank of Regina mortgage. At Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-299

the end of two more years, when the mortgage came up for renewal, Carson renewed the mortgage for another three years, at the going rate of 9 percent per annum, amortized over 25 years. Two years later, Carson defaulted on the mortgage, and the bank sued not only Carson (who was penniless) but Penfield as well. In defence, Penfield claimed novation. What is the source of the bank‘s claim against Penfield, and how does Penfield construct novation as a defence? Who is likely to be successful? Answer: The bank in this case is attempting to recover the balance outstanding on the mortgage because it was originally placed upon the lands by Penfield. If the 'renewals' were of the same mortgage the bank might argue that Penfield was still liable under it on his personal covenant to pay as contained in the mortgage. Penfield's argument of novation is put forward on the basis that the purchaser (Carson) and the bank changed the terms of the mortgage without his consent and he would no longer be a part of the mortgage agreement as a result. On the basis of the judgement in Cabot Trust Co. v. D'Agostino et al. (1992) 11 O.R. (3d) 144 on which this case was based, the changes to the mortgage did not constitute novation, and Penfield was liable on his covenant to pay in the original mortgage. The reasoning of the court was that novation must be clearly shown to be effective. Since the original mortgage was still in effect, and had not been discharged or replaced, the mortgagor was still liable on his covenant. Case 7 Hambly was the owner of a block of land in fee simple. He arranged a mortgage on the property with Blake for $500,000, and the mortgage was duly registered in the appropriate Land Registry Office. Hambly used the funds for the renovation of an existing building on the premises, but discovered that he had insufficient funds to complete the changes he wished to make. A few months later, he borrowed the sum of $100,000 from his friend Clark and gave a second mortgage on the property as security. Clark did not register the mortgage; instead, she placed it in her safety deposit box, with the intention of registering it at some later date. When the renovations to the building were completed, Hambly decided to install a swimming pool on the grounds. He borrowed $50,000 from Simple Finance Co. to pay the pool contractor for the installation. Simple Finance, as security for its loan to Hambly, took a mortgage on the property. The mortgage was registered the same day that the funds were given to Hambly. Shortly thereafter, Hambly arranged a party to celebrate the completion of the swimming pool and invited his many friends to attend. At the party, Clark mentioned to Anderson, another friend of Hambly, that she held a mortgage on Hambly‘s property, and that she would like to dispose of it in order to have the funds available for another more attractive investment. Anderson expressed an interest in the purchase of the mortgage and, after some discussion, agreed to give Clark $90,000 for it. The next day, Anderson paid Clark the $90,000 for the mortgage (on which the full $100,000 principal was owing) and received an assignment of the mortgage. When Anderson realized that the mortgage itself had not been registered, he had the documents registered immediately. Unfortunately, he failed to notice the mortgage to Simple Finance in his examination of the title to the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-300

property. Hambly was killed in an automobile accident a few days before he was scheduled to make his first payments on the mortgages. His only asset was his interest in the property. Blake instituted foreclosure proceedings when the first payment required under the mortgage became overdue. An appraisal of the property indicated that it had a market value of approximately $600,000. Discuss the position of the parties in this case. Indicate their rights in the foreclosure action. Comment on the possible outcome of the case. Answer: The key points illustrated in this case are concerned with the priorities of the mortgages, and the rights of the mortgagees. The case also illustrates the position of the assignee of a mortgage where problems are attached to the mortgage assigned. Students should identify the $500,000 mortgage to Blake as a first or legal mortgage. The mortgage was properly registered under the Registry System to establish its priority over any subsequent encumbrances. The mortgage to Clark should be identified as a second (or equitable) mortgage (at least in terms of the order given), but the failure on the part of Clark to register it affected its priority over subsequent mortgages. The mortgage that was (in terms of time) a third mortgage, was given to Simple Finance Co. The finance company registered its mortgage without knowledge of the mortgage given to Clark. Since the mortgage to Simple Finance was for value and without notice of the Clark mortgage, under the Registry Act, it takes priority over Clark's mortgage, and becomes the "second" mortgage. The assignment of the Clark mortgage to Anderson transfers the rights of Clark under the mortgage to Anderson, but Anderson also takes the mortgage as it stands. Registration by Anderson only protects its priority as against mortgages given subsequent to the registration. In this case there were none. The institution of foreclosure proceedings clearly illustrates the importance of priority. The value of the property was $600,000. Blake's mortgage was for $500,000; Clark's mortgage was for $100,000; and Simple Finance Co. held a mortgage for $50,000. The mortgages total $650,000. Subsequent encumbrances may ask to have Blake's foreclosure changed to a sale, and the subsequent encumbrancers would undoubtedly do this to prevent Blake from acquiring the property free of encumbrances. This assumes that neither Simple Finance Co. nor Anderson wish to pay out the Blake mortgage. If the foreclosure is changed to a sale, some of the questions that might be asked are: How is this done? Does it affect the priorities of the parties? What happens if there is a deficiency? How should the money be divided? On the last point the priorities would be: Blake - lst mortgage - gets the full $500,000. Simple Finance Co. - 2nd mortgage - gets the full $50,000. Anderson - 3rd mortgage - gets the remaining $50,000 plus a judgment against Hambly's estate for the remaining $50,000. Since Hambly has no other assets, Anderson's judgment is essentially worthless, and he has lost the remainder. For a case on priorities: See: Gray v. Coughlin (1891), 18 S.C.R. 553, or, for a more recent case, Ocean Park Securities Ltd. v. Foulkes and Schlesiger (1978) 9 B.C.L.R. 64. The latter case is concerned with a situation where the parties were aware of the two mortgages.

Case 8 Parker Construction Co., a building contractor, constructed a convenience store on a building lot in a suburban area. To obtain the necessary funds to build the house, Parker Construction Co. entered into a mortgage with Green Mortgage Co. for the principal amount of $800,000. Some time later, Parker Construction Co. sold the property subject to the mortgage to Baker at a purchase price of $1,500,000. Baker paid Parker $700,000 cash and assumed the mortgage. He continued to make payments on the mortgage while he possessed the store, but two years after he had purchased the property, he moved abroad. He sold the property at that time to Brown, who assumed the mortgage and paid Baker $750,000 for the property. The mortgage had a principal balance outstanding of $750,000 at the date the property was sold. Unfortunately, Brown found herself overextended financially soon after she had purchased the property. She was forced to let the monthly mortgage payments fall into arrears in order to pay more pressing debts. In spite of repeated requests for payment by the mortgage company, Brown refused to do so. Eventually, Green Mortgage Co. was obliged to take action. Instead of foreclosure, however, it brought an action against Parker Construction Co. for payment. Discuss the possible reasons why the mortgage company decided to take action against Parker Construction Co. rather than institute foreclosure proceedings. On what basis could it do so? Discuss the rights and obligations of the parties in light of this action by the mortgagee.

Answer: This case concerns the rights of mortgagees on default, and the obligations of both the original mortgagor and the person in possession of the property at the time of default. The important points to raise in this case are the rights against Parker Construction Co. on its covenant to pay, and the obligation on the mortgagee if Parker Construction Co. does so. What must the mortgagee do? It must be prepared to assign the mortgage to Parker Construction Co. in order that it has the security and the right to recover against Brown. The rights acquired by Parker Construction Co. on payment would be those of Green Mortgage Co., as the assignee takes the mortgage as it stands. The question might be asked: Should Green Mortgage Co. be obliged to proceed against the property first? What effect would it have on its rights? For a discussion of the rights and duties of the mortgagee: See: Bank of Nova Scotia v. Dorval et al. (1979), 25 O.R. (2d) 579. Note, however, that the facts and issues in this case are quite different.

CHAPTER CHARTS

CHAPTER 24. LEASEHOLD INTERESTS Chapter Topic Leasehold Interest Historical Development Creation of a Tenancy Rights and Duties of the Landlord and Tenant Rights of a Landlord for Breach of the Lease Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-305

Rights of a Tenant for Breach of the Lease Termination Shopping-Centre Leases Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion

Chapter Objectives After study of this chapter, students should be able to: • Understand the legal nature of a tenancy and the rights and duties of the landlord and tenant. • Explain the effect of a breach of a lease agreement. • Understand shopping-centre leases.

YOUR BUSINESS AT RISK There are times when owning the perfect business location is impossible because the owner will not sell, or it is financially unworkable for cash-flow or taxation reasons, or in cases where ownership would mean taking on unwanted responsibilities. In these situations, possession without ownership may be the preferred (or only) option, and the mechanism that will achieve this goal is the leasehold interest. All other options would be less than optimal.

CHAPTER COMMENTARY The leasehold interest has been subject to a certain amount of legislative change during the past decade as a result of organized tenants groups and their supporters seeking greater security of tenure, and the right to safe accommodation. The pressure from these groups has resulted in rent controls in a number of provinces, and a greater obligation on the landlord to maintain leased premises in not only a safe, but habitable condition. The law varies from province to province, and the particular jurisdiction should be consulted for these matters before class discussion of the law takes place. The nature of a tenancy is readily understood by students, but the sub-tenancy and the assignment of a lease is often confused. Some time might be spent discussing these differences in class. The position of fixtures brought on the property under a lease might also deserve review. Leasehold interests are basically concerned with the landlord-tenant relationship. It is a very old type of land relationship that should be distinguished from a license, where the licensee does not acquire exclusive possession of the property. Leases are always for a specific term, under which the tenant acquires exclusive possession of the property for the term, provided that the rent is paid, and the other conditions of the lease met. In the event of default under a lease by the tenant, the landlord may re-enter, or take steps to have the tenant evicted, depending upon the jurisdiction, and the type of tenancy.

The Court Decision 1163133 Ontario Ltd. v. Lazer Mania Inc. provides an illustration of a commercial lease, and the importance of a careful review and understanding of the terms by the tenant. The lease in question would appear to be a lease of premises in a shopping centre, and may be examined along with the text topic on Shopping Centre Leases, since they represent a specialized form of commercial lease.

Review Questions 1. What remedies are available to a landlord where a tenant fails to comply with the terms of the lease? Answer: The landlord may: (1) take action on the covenant to recover unpaid rent. (2) distrain against the goods of the tenant (commercial leases). (3) re-enter the premises. For minor breaches of the lease the landlord may only take legal action for the damages and for an injunction.

2. In what way (or ways) does a tenancy differ from a license to use property? Answer: A tenancy differs from a license in that a tenancy entitles the tenant to exclusive possession of the land, whereas a license entitles the licensee the use of the land in common with others.

3. In a commercial lease in most provinces, landlords may distrain against the chattels of the tenant for non-payment of rent. What does this mean, and how is it accomplished? Answer: To distrain means to seize the chattels of the tenant for rent due and owing, and to have the chattels sold if the rent is not paid.

4. What is a "reversion" in a lease? Answer: Reversion is the right to possession held by the landlord when the lease terminates.

5. Explain how the term of a tenancy may be determined where the tenancy agreement is not specifically set out in writing. Answer: The term of a tenancy when unspecified is usually determined from the periodic payment of rent. If rent is paid monthly, the term is considered monthly, etc.

6. Define or explain the term tenancy at will, and indicate how it differs from a tenancy at sufferance. Answer: A tenancy at will is created when a person allows another to occupy the premises for an express purpose, usually connected to another transaction. A tenancy at sufferance arises where a landlord allows the tenant to stay on in the premises after notice to quit has been given and the lease expired.

7. How does a sub-tenancy differ from an assignment of a lease by a tenant? What rights are created in the sub-tenant by the granting of a sub-tenancy by the tenant? Answer: A sub-tenancy is a tenancy created by a tenant and a sub-tenant and may be for a term less then the tenant's lease. An assignment of a lease brings a third party (the assignee) into possession of the property and releases the tenant from the lease. Under a sub-tenancy the tenant is liable for the property, rent, etc. 8. Distinguish privity of estate from privity of contract, and explain how the rights of the assignee and the tenant are affected when an assignment of lease is made by a landlord. Answer: Privity of estate is created by a lease, because both the tenant and the landlord each have an interest in the same land. Privity of contract is created by the agreement between the landlord and the tenant which is contractual in nature, and sets out the rights and duties of the parties. An assignee takes the estate of the assignor, creating a privity of estate with the tenant, but the original contract remains between the tenant and the landlord.

9. Outline the covenants which a tenant makes in an ordinary lease. Explain the effect of the tenant's non-compliance with these terms. Answer: The ordinary express covenants which a tenant makes are: (1) to pay rent (2) to repair (3) not to sub-let without permission (4) insure (5) pay taxes (6) not to commit waste. A breach of any covenant would entitle the landlord to take action on the covenant.

10. What are the rights of a landlord if a tenant abandons the leased property? Answer: If a tenant abandons the property, the landlord may accept the abandonment as surrender, and the lease would be treated as at an end.

11. What is the legal nature of a leasehold interest, and how does it arise? Answer: A leasehold interest is an estate in land whereby the lessee acquires possession of the property for a fixed period of time.

12. How do residential tenancies differ from commercial tenancies in most provinces? Why was this change in the law necessary? Answer: In most provinces, residential tenancies are subject to special legislation which obliges the landlord to maintain the premises in a safe, habitable condition, and which severely restricts the landlord's right to re-entry. The change in the law was necessary to provide tenants with greater security of tenure. Commercial leases are not affected by this type of legislation as commercial landlords and tenants are considered to have equal bargaining power.

13. Explain the legal significance of "surrender of a lease." How is this effected? Answer: Surrender of a lease is the formal termination of the lease where the parties agree to termination in writing (and perhaps under seal).

14. Explain the legal nature of a covenant of quiet enjoyment as it pertains to a leasehold, and give an example of a case where breach of the covenant would arise. Answer: Quiet enjoyment means a right to "legal entry and enjoyment without the permission of any other person." Interference with this right usually takes the form of interference with the tenant‘s use of the land by the lessor or persons acting under him.

Mini-Case Problems

1. X entered into a verbal monthly tenancy with Y, on June 1, to rent Y‘s shop. X paid Y the first month‘s rent and also moved into possession on the same day. Some months later, on November 1, X gave Y notice of his intention to vacate the premises on November 30 and paid Y the November rent. Y demanded an additional month‘s rent in lieu of notice. Is Y entitled to the additional rent? Answer: In commercial leases in most provinces, notice to terminate a monthly lease must be given on or before the last day of the month preceding the month in which the notice is effective. In this case, notice must be given on or before October 31st to be effective November 30th. Notice given after October 31 would not be effective until December 31st. Y is entitled to the extra month's rent because the notice was given too late for a November 30th termination.

2. The Regal Co. leased a large commercial building for its business. The lease called for monthly payments of $5,000 per month on a two-year lease. At the end of the first year, the Regal Co. fell into arrears on its monthly rent payments. Three months‘ rent is now due and owing. What action might the landlord take against the Regal Co.? Answer: Since the lease is a commercial lease, the landlord may: (1)

take legal action for the arrears of rent owing.

(2)

distrain against the goods of the tenant for the rent owing or

(3)

re-enter the premises.

If the landlord exercises its right of re-entry, the lease terminates.

3. A tenant rented a small store from the owner of a commercial building under a five-year lease. The tenant vacated the premises at the end of the first year, and refused to make any further lease payments. The owner of the building did nothing to find a new tenant for over two years, then finally rented the property again. What are the rights (and liabilities) of the parties? Answer: The only amount in question is the unpaid rent for the two-year period in which the property was vacant. As the landlord did nothing to accept the tenant‘s abandonment as surrender, the lease remains in force, and the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-310

tenant therefore remains liable to the landlord for the unpaid rent during the gap of occupancy.

4. A landlord rented office space in a building to a commercial tenant under a five-year lease. Two years later, the tenant vacated the office space, and stopped rental payments. The landlord immediately rented the space to a new tenant at a higher rent. The landlord then took legal action against the former tenant for the rent owing on the balance of the lease. Advise the parties. Answer: The general rights and obligations of contract law continue to apply to leases. In the circumstances described, it would be unjust enrichment for the landlord to receive an increased stream of rent from its new tenant as well as succeed in its claim for rent against its former tenant.

Case Problems for Discussion Case 1 Basic Warehousing Inc. leased a 300 square metre warehouse building to Fabrics & Lace Inc., a cloth and fabric wholesaler, under a five year lease. The lease provided for an annual rental of $15,000, payable monthly, with the tenant responsible for all costs related to the maintenance of the building except taxes. During the course of negotiations, the president of Fabrics & Lace Inc. mentioned that it would be necessary to have insurance of goods on the premises, and the president of Basic Warehousing Inc. commented that in his opinion the tenant would probably be able to obtain insurance coverage for the goods. Fabrics & Lace Inc. moved its goods into the warehouse, and shortly thereafter, applied for insurance coverage. An inspector from the insurer examined the building and concluded that it could not accept the risk of insuring the type of goods stored by the tenant. When insurance coverage was refused, Fabrics & Lace Inc. immediately moved its goods out of the warehouse, and ceased making its monthly rental payments. Advise the parties. What would be the nature of the claims and arguments if the case came before the court? Render a decision. Answer: Commercial leases freely negotiated often force grave results upon unwary tenants. However, those same leases are subject to all the rules generally applicable to contracts. In this case, both parties specifically averted their minds to the need for insurance, and expected that it would be available. They have learned that they were mistaken as to an essential element of their contract, which renders (at least to the tenant) a tenancy which is materially different than what they had bargained for. The lease is therefore unenforceable against the tenant. Alternatively, again as a result of the specific discussion, the requirement of insurability of the business activity may be seen as a condition precedent for the existence of the lease, in which case the contract is void, for it never came into being.

Case 2 Down Country Mall Ltd. owns a small shopping mall that consists of eight small, leased shops offering various products and services to the public, and one large shop that it had leased to Mini Department Store Ltd. The lease to Mini Department Store Ltd. was for a ten-year term, with no provision for termination or notice. Mini Department Store Ltd. initially found business at the location to be good, but after a few years, it noticed that the suburban neighbourhood was becoming more affluent, and less interested in its array of goods. Sales were gradually declining during this period, and by the end of the sixth year, the store experienced a loss. Revival of sales appeared to be unlikely, and Mini Department Store Ltd. vacated the premises without giving notice of its departure to Down Country Mall Ltd. Down Country Mall Ltd. immediately set out to find a new tenant, but was largely unsuccessful. Eventually, after much searching, it found a new tenant, but at a rental that was 30% less than the rent amount paid by Mini Department Store Ltd. The lease with the new tenant was for a five-year term. Down Country Mall Ltd. has decided to take action against Mini Department Store Ltd. for breach of its lease, and seeks damages for its loss. It also claims for the rent owing for the four remaining years of the lease. Discuss the position and arguments of each party. Render a decision. Answer: Among the landlord‘s options, where premises are abandoned, the landlord may re-enter and elect to seek prospective damages arising from the unexpired portion of the term of the lease (see the Supreme Court of Canada in Highway Properties Ltd. v. Kelly, Douglas & Co. Ltd., [1971] S.C.R. 562). The rent which is later generated by a new tenant serves to mitigate the losses of the landlord for the balance of the original rental period, and reduces the liability of the former tenant accordingly. Case 3 Bingham leased a small shop from Wright under a tenancy agreement that provided for a three-year term at a monthly rental of $800 per month. The lease did not contain an option to renew, but following the expiry of the lease on October 31, 2017, Bingham continued to pay the monthly rental of $800 to Wright. The term of the tenancy was never discussed between the parties, nor was the lease arrangement discussed until June 2018, when Wright gave Bingham a written notice that read: ―I have sold the property in which you presently occupy space, and the purchaser will require vacant possession on December 31, 2018. This letter gives you written notice to vacate in six months‘ time.‖ In response, Bingham wrote Wright and advised her that he was in possession under a lease that did not expire until October 31, 2020, and that the notice given did not apply to his present tenancy. Wright gave Bingham a second written notice on October 25, 2018, now demanding vacant possession of the premises by November 30, 2018. When Bingham refused to vacate the shop, Wright brought an action for a writ of possession. Outline the arguments that might be raised by the parties in this case. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-312

Render a decision. Answer: The term of the lease in this case expired on October 31, 2017, and was renewed by the payment of rent by the tenant, Bingham. The key issue is the nature of the tenancy created by the "renewal". Was a lease from year to year created, or was it a periodic tenancy of a monthly kind? What notice would be required of each? These are some of the questions that might be asked. If the lease is silent, and there is no agreement to the contrary, the renewal of an annual tenancy is also an annual one, and would require the proper notice of termination based not upon the date the notice is given, but prior to the termination date of the lease, as the notice may only relate to that date. Wright's argument was that initially six month's notice at any time would terminate the tenancy. The second notice, however, viewed the tenancy as one of month-to-month. Bingham argues that it is an annual tenancy that would not expire until October 31, 2020, and (for the jurisdiction) required six month's notice be given prior to the termination date. On the basis of Re Sons of England Benefit Soc. & Ezrin, [1962] O.W.N. 42, there would be a presumption of a tenancy from year to year (unless evidence could establish the contrary) where a tenant on an annual lease continues to occupy the premises and pay the rent. If this case is followed, Bingham would have been entitled to remain in possession until October 31, 2020. Case 4 Quinn leased a small retail shop from Chaplin for the purpose of establishing a fruit and vegetable market. The lease was drawn for a three-year term, commencing May 1, 2011, and provided for a total rental of $36,000, payable at $1,000 per month. The first and last months‘ rent were due on May 1. Quinn paid the two months‘ rent and moved into possession. A month later, and a few days after the rent for the month was due, Chaplin discovered that Quinn had sold the business to Rizzoto. The sale was contrary to the terms of the lease, which permitted assignment of the lease only on consent. Chaplin immediately went to the shop and, when Rizzoto arrived, told him that he was not willing to have anyone but Quinn operate a shop on the premises. Chaplin advised Rizzoto that Quinn was in breach of the lease by assigning it without his consent and suggested that Rizzoto seek out Quinn to get his money back. Chaplin then contacted a licensed bailiff and gave him authority to collect the rent owing. The sheriff went to the store and made an inventory of the stock and equipment, which he valued at $5,000 and $6,000 respectively. He then changed the locks on the door and posted a notice on the premises that informed the public that the landlord had taken possession for non-payment of rent. The next day he notified Quinn and Rizzoto that he had distrained the chattels in the shop on behalf of the landlord. He advised the two parties that they had five days to redeem the chattels by payment of the arrears of rent, otherwise the chattels would be sold. Quinn and Rizzoto made no attempt to pay the rent. The bailiff later attempted to sell the business, but was unsuccessful. Eventually his services were terminated by Chaplin. Chaplin did not attempt to rent the premises and retained the stock and equipment. In December 2011, he brought an action against Quinn for damages for breach of the lease. Discuss the particular issues that are raised by this case and indicate the arguments that the parties Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-313

might present with respect to each. Render a decision. Answer: The first issue to be considered in this case is the nature of Quinn's liability as a tenant. Could Chaplin distrain for rent when it was only a few days overdue? Was Chaplin entitled to withhold consent when Quinn transferred the business to Rizzoto? Can Chaplin retain the chattels and stock and still claim damages? Does it make any difference if he made no attempt to lease the premises after evicting Quinn? According to the case of Fuda et al. v. D'Angelo et al. (1974), 2 O.R. (2d) 605, when Chaplin evicted the tenants, changed the locks, and attempted to sell the goods and equipment of the tenants "as a going concern", his actions constituted a termination of the lease. In order to collect the unpaid rent, Chaplin would be obliged to show that he had given notice to the tenant that he intended to hold him responsible. This he would be obliged to do if he expected to recover from Quinn. Case 5 Sheila verbally agreed to lease Beverly‘s furnished apartment from her for the months of May through to August, while Beverly would be in another city attending a university summer program. Under the agreement, Sheila would pay the rental payments to the landlord at the beginning of each month and ―take good care of the apartment‖ in Beverly‘s absence. Sheila was expected to vacate the apartment on August 30. Sheila moved into the apartment on May 1 and lived in it until July 30, when she found a new apartment located closer to her place of employment. On July 30, she permitted several of her friends to move into Beverly‘s apartment on the condition that they pay the August rent and vacate before the end of the month, when Beverly was expected to return to the city. The new tenants did not pay the rent as they had agreed to do. On August 25 they held a party at the apartment that resulted in $2,000 damage to the premises and $800 damage to Beverly‘s furniture. The new tenants vacated the apartment the next day, leaving no forwarding address.

When Beverly returned to the city on August 31, she discovered her apartment in ruins. A few days later, she received a notice from her landlord demanding the overdue rent for the month of August. Advise Beverly of her rights and outline a course of action for her to follow. Answer: Assuming that the landlord has given the right to sub-let the premises, Sheila and Beverly have created a sub-tenancy for the period May through August. The sub-tenant in turn created a further sub-tenancy with her friends for the month of August. While each sub-tenant was responsible to their respective lessor (Beverly and Sheila), the responsibility to the landlord for rent payment rests on Beverly. She must pay the rent, and in turn, look to her sub-tenant for payment (in this case Sheila). Sheila in turn must look to her friends for the money. The damage to the apartment is another matter. A tenant is not strictly liable for the negligence of a sub-tenant, and Beverly may be able to argue that the conduct of the sub-tenant was not contemplated and so alien to the conduct of a sub-tenant that it could not be contemplated. By this agreement Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-314

the court might consider the sub-tenants liable for the damage (See: Gallo et al. v. St. Cyr et al. (1983) 144 D.L.R. (3d) 146). However, a more persuasive counter-argument might be that since the tenant is liable for the damage caused by guests and others on the premises, the tenant will also be liable for damage caused by a sub-tenant. See: Warren v. Keen [1945] 1 Q.B. 15. Beverly would probably be liable as well under the landlord and tenant legislation (in most provinces) which usually states that a tenant is liable for any damage caused by the tenant or the tenant's guests. Beverly of course, would be entitled to take action against Sheila, who is her sub-tenant, for the damage to the premises, and Sheila in turn would be obliged to take action against her friends to recover the damages. With respect to the furnishings, Beverly, in effect, gave Sheila possession (a bailment), and the unauthorized bailment of the furnishings to the sub-tenants by Sheila would render Sheila strictly liable for the $800 damage. Sheila would, of course, be in a position to take action against her friends for this damage as well. Case 6 The Acme Co. leased the second floor of a three-storey office building to the High Finance Company for a three-year term. The lease contained a clause in which the tenant acknowledged that the building was in a good state of repair. The lease made no mention, however, of responsibility to repair subsequent damage to the rental premises. Before moving into the premises, the High Finance Company made extensive changes to the leased premises by adding several partition walls, special electrical wiring for its computer operation, and an airconditioning system. Three months later, a fault in the electrical wiring caused a serious fire that destroyed the interior of the High Finance Company‘s rental premises, and caused serious damage to the third floor of the building and water damage to the first-floor tenant‘s equipment and merchandising business. The High Finance Company agreed to pay for the damage to the part of the premises that it had leased, but refused to pay for the general damage to the building on the basis that the landlord had agreed to the changes in the electrical wiring that had resulted in the fire. The High Finance Company also refused to pay rent for its part of the building until the premises were again fit for occupation. Discuss the rights of The Acme Co., the third-floor tenant, and the first-floor tenant. On what basis, if any, might the High Finance Company refuse to pay its rent? Answer: High Finance Company would be liable for the damage to the building, assuming the electrical fault was due to the negligence of the electrical contractor who installed the wiring. High Finance would have a right of action against the contractor for negligence. High Finance would probably be liable for the damage caused to the third floor tenant and the first floor tenant as well. Unless the lease provides to the contrary, rent is not normally payable by an upper floor tenant during the repair period if the upper floors of the premises are no longer accessible due to a fire. The case is different here because the fire was caused by the tenant, and High Finance may be liable for the payment of rent during the repair period. Case 7 New Tomorrows Inc. is a registered, non-profit charitable corporation that runs a group home allowing ex-convicts, homeless persons, and others who are ―down on their luck‖ a chance to ―get on their feet‖ in an understanding environment. Applicants sign a rehabilitation agreement and receive the use of a Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-315

bedroom and common kitchen space. Failure to pay any month‘s modest fee on time was to be taken, under the agreement, to be notice by the resident of his or her intention to leave the home in five days‘ time. This point was reiterated each month, as those who had given their notice were quickly replaced by other people. After residing for three months, Henry was late in the payment of his fees on the first day of the new month. Five days later, he and his belongings were ―helped‖ to the street and, as was so often the case, he was replaced by someone else. Henry went to the provincial ministry responsible for tenancies to complain. Discuss the legal issues in this case, and the arguments and principles that the parties may rely upon. What rights, if any, does Henry have? Answer: The basic issue in this case is whether Henry was in fact a tenant. Students might be asked to decide if the relationship is one of landlord-tenant. The crucial point here is exclusive possession. Henry has exclusive use of the bedroom, but is obviously only a licensee with respect to kitchen use. His occupancy is also related to the 'rehabilitation agreement' and it might be argued that the use of the room was a part of that agreement rather than a lease of the bedroom. The case is based upon Keith Whitney Homes Society v. Payne (1992) 9 O.R. (3d) 186 where the court held that a tenancy was created because he had exclusive use of the bedroom, and this constituted 'residential premises' under the Landlord and Tenant Act. Case 8 In 1989, Relax Retreat Inc. leased a 20-hectare parcel of land for use as a recreational ―park‖ from Land Holdings Co. on a 30-year lease. During the term of the lease, the corporation constructed a number of small one- and two-room cabins on the property, and eventually installed an inground fibreglass swimming pool. The cabins were of wood construction and set on concrete blocks, in order that they could be occasionally moved as the site was developed. In 1992, a concrete-block building was constructed on a reinforced concrete pad to house shower and washing facilities and an office for the park manager. When the lease expired in 2019, Relax Retreat Inc. informed Land Holdings Co. that the cabins, main office/shower building and pool, and all of the facilities would be removed. Land Holdings Co. objected to the removal of any structure from the property. Advise the parties of their respective rights and, assuming that the case came before the court, render a decision. Answer: This case deals with leased premises and structures placed thereon by the tenant. The tenant in this instance viewed the structure as chattels that could be removed, and expressed the intention of removing them on the expiration of the lease. The facts of the case problem are essentially the facts in Boxrud v. Canada, a 1996 Federal Court Trial Division case in which the court held that the swimming pool and the buildings on the concrete pad were permanently attached to the land, and could not be removed, but the other moveable structures were not fixtures, and were removeable by the tenant.

Case 9 The Washa-Matic Company carried on business as the owner of coin-operated washing machines. The company entered into an agreement with 108 Suite Apartments to provide washing machines for use by tenants of the apartment building. The agreement was entitled ―Lease Agreement‖ and provided that the landlord ―demise and lease the laundry room on the ground floor of the building to the tenant for a monthly rental equal to $1 per machine installed.‖ The agreement was drawn for a five-year term and provided for free access to the room by all tenants. The agreement also allowed employees of Washa-Matic the right of access to the premises ―at all reasonable times‖ to repair or service the machines. Some time after the machines were installed, the owner of the building sold the premises to a new owner, and the new owner asked Washa-Matic to remove the washing machines. Washa-Matic refused and argued that it was the lessee of the laundry room under the lease agreement. The new owner removed the washing machines owned by Washa-Matic and installed new equipment. Washa-Matic Company then brought an action against 108 Suite Apartments for damages for breach of the lease and for lost profits. Discuss the legal issues raised in this case. Render a decision. Answer: The issues in this case are similar to the issues raised in Metro-Matic Services Ltd. v. Hulmann (1974), 4 O.R. (2d) 462. In a discussion of the facts of the case, it is first of all necessary to determine the nature of the agreement made between the parties. The agreement uses the terminology found in leases, yet is it a lease simply because it uses such language? What else might it be? Is it a licence to install machines in the room, and to use it along with all others? What rights and duties are necessary to render the relationship that of landlord and tenant? In the case cited above, the court held that unless a contrary intention could be established, the use of the language of a lease and the rights conferred by that language rendered the relationship that of landlord and tenant. In particular, the court noted that the agreement gave the tenant exclusive possession of the laundry room, subject only to the rights of the tenants in the building to enter and use the machines. Had the landlord retained the right to use the premises for other purposes, the outcome may have been different, as exclusive possession is a key factor in the relationship. Case 10 The Chens leased an apartment suite from Broughton Road Apartments for a one-year term, commencing July 1. The Chens were particularly attracted by the location of the apartment building, since it was a long, low building of Tudor design, surrounded by rather spacious grounds. The grounds were important to them because they required a place where their two-year-old child might have a safe place to play. A few weeks after the tenants moved into their apartment, the owner of the building decided to remove the roof of the building and replace it with new roofing boards and shingles. The noise of the construction work, which was carried on from approximately 8:00 a.m. to 4:00 p.m., interfered with the normal sleeping hours of Mr. Chen, who worked a second shift as a night security guard at a nearby industrial plant. It also interfered with their child‘s customary afternoon nap. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-317

In addition to the noise of the construction, the Chens discovered that another tenant in the building owned a large pet snake, which was permitted to roam at will over the lawns of the property. The Chens protested to the landlord that the noise of the roof repairs interfered with Mr. Chen‘s sleep, and the presence of the snake made the use of the grounds impossible, since they both feared the reptile, even though it was of a harmless species. When the landlord refused to limit the construction and failed to control the snake, the Chens moved from the apartment. They had been in possession for less than two weeks. The landlord then brought an action to recover apartment rent and other expenses that were alleged to be owing as a result of the breach of the lease by the tenants. Discuss the arguments that the defendants might raise in this action and determine the issues that the court must deal with before a judgment might be given. Render a decision. Answer: This case raises for discussion the requirement of the landlord to not interfere with the tenants' use and enjoyment of the leased premises. Does the construction interfere with the tenant unduly? Is the landlord obliged to stop the construction or repair of the roof to permit Mr. Chen to sleep? Is the landlord obliged to do the work in order to maintain the building in a water-tight condition? Construction or repair of the roof is presumably a necessary and temporary inconvenience for Mr. Chen to bear, and would probably not entitle him to treat the lease at an end. The important factor here would probably be the nature of the interference with the tenants' enjoyment of the property. If it was physical interference with their enjoyment, then there would be breach by the landlord, but a temporary, personal annoyance would probably be insufficient to constitute a breach of the lease. Nor would the landlord likely be obliged to control the pet snake owned by another tenant, as he may be unaware of the true owner. If the snake was annoying Mr. Chen, action might be taken by them against the particular tenant. The extent of a landlord's obligation to a tenant is discussed in Greenbranch Investments Limited v. Goulborn and Goulborn (1972), 3 O.R. 532.

CHAPTER CHART

Chapter 25. Commercial and Residential Real-Estate Transactions Chapter Topics Introduction Modern Real-Estate Transactions Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Chapter Objectives After study of this chapter, students should be able to: • Describe the steps encountered in a real-estate transaction. • Identify the tools available to shift or mitigate risk in real-estate transactions. • Describe the role of an agent, surveyor, appraiser, and the legal professional in the conduct of a real-estate transaction. • Recognize aspects of real estate law that are unique to commercial transactions.

YOUR BUSINESS AT RISK Without certainty in land-ownership rights, major business assets (and personal assets securing business debt) are exposed to risk. Complex rights of ownership have led to complex processes to secure those rights. You will engage professionals to navigate these processes, but it is important for you to be aware what services and performance you can expect in return for the professional fees you pay.

CHAPTER COMMENTARY The purpose of this chapter is to explain some of the more important searches, checks, and activities that are carried out in conjunction with the purchase or sale of real property. The chapter is not designed as a do-it-yourself guide, but rather, to provide a brief outline of some of the complexities of the transaction, and the purpose of the many searches, etc. The historical background is for information purposes only, since the modern transaction is quite different. The role of the real estate agent is worthwhile to examine, however, as it points out the importance of the agent, and also the fact that the agent in the transaction is the agent of the vendor in almost every case. The agent cannot act for both parties without their express consent - a point that should be emphasized in class. See text on this point. The duties of the legal profession in real estate transactions are of major importance, due in part to the many searches, legal considerations, etc., required. The text helps explain the numerous activities of the lawyer to ensure that the transaction is properly carried out. These are usually quite straight forward, but may be emphasized by way of an example of a typical purchase of residential property. This following fact situation might be used for discussion purposes using the various steps in the transaction as described in the text:

Smith listed his house and lot with a real estate agent named Jones. The listing price was $480,000. The property was subject to a mortgage in the amount of $290,000. Brown has expressed an interest in the purchase of the property. What procedure would follow from this point? What steps would each party take, assuming the transaction proceeded to closing?

The various steps may be summarized for an ordinary residential sale as follows: 1.

Offer to purchase is made by the prospective purchaser.

Acceptance of the offer by the vendor to form a binding contract, subject to the proviso that the title to the land is good, etc.

Purchaser engages a surveyor to determine the boundaries of the land.

Purchaser engages a solicitor to undertake the necessary searches to ensure that the vendor has a good title to the property, and that no charges are attached to the land. These searches include: (a)

search of the title to the property in the Land Registry office.

(b)

tax search for arrears of taxes.

(c)

search for utility charges or liens (such as hydro, etc.).

(d)

search for outstanding work orders of the municipality.

(e)

search to confirm property meets zoning requirements.

(f)

standing, if it is to be assumed by the purchaser. (g)

any tenancies are confirmed, and rent change arrangements made.

(h)

search for encroachments, etc. by adjoining property owners, based upon survey.

(i)

search for any judgments or liens against the property in the hands of the Sheriff.

5. In some provinces, when all searches are completed, the solicitors for the purchaser and vendor meet at the Land Registry Office, and the deed and keys are exchanged for the purchase price of the property. In most provinces, however, the exchange may take place in one of the solicitor‘s offices, and the deed registration, etc. done electronically by computer. 6. Registration of the deed transfers the title to the purchaser.

The Court Decision in the chapter provides an illustration of an alleged condition precedent in an agreement to purchase land, and how a court would consider ‗standards of the trade‘ in determining if work has been properly done under the agreement. In any discussion of the case, students should perhaps review the nature and impact of a condition precedent on a contract, as well as the difference between a warranty and a condition in the agreement. In the end, the judge concluded that the demands of the purchaser were not a condition precedent, and did not entitle the purchaser to refuse to perform the contract.

Review Questions 1. Why must a purchaser make certain that no writs of execution are attached to the property which is to be purchased? Answer: Writs of execution against a person who holds property attach to the land, and if a purchaser buys the land, it would be subject to the writ. The property could be sold to satisfy the execution even though it was transferred to the purchaser.

2. Explain the significance of the vendor providing vacant possession at the time of transfer of ownership. Is this also important to-day? Answer: Vacant possession is as important to-day as it was in the past, because it permits the new owner to enter on the property with exclusive possession - a right of an owner. It also completes the ―livery of seisin.‖

3. What role does a real estate broker or agent play in a modern real estate transaction?

Answer: The role of the real estate agent in a modern real estate transaction is to seek out prospective buyers for the vendor, and to bring the buyer and vendor together in a contract for the sale of the property.

4. How is the agency relationship established? Answer: The agency relationship is established by a "listing agreement."

5. Why is a survey important in a land transaction? What does it establish? Answer: A survey is important in order to determine if the vendor's deed actually corresponds with the boundaries of the land described in it. It may also identify encroachments, etc. and show the location of buildings.

6. Explain the purpose and use of an exclusive listing agreement. Answer: An exclusive listing agreement entitles the agent to a commission regardless of who sells the property while the listing is in effect. It also obliges the agent to use his/her best efforts to find a buyer for the property.

7. In what way (or ways) does an appraiser assist in a real property transfer? Answer: An appraiser determines the value of a property based upon zoning, value of similar properties, rental potential, present rate of return, condition of building, etc., and converts this into an opinion of its value on the market. This enables the prospective purchaser to make a realistic offer to purchase.

8. Outline the role of a land registration system in modern real estate transactions. Answer: The land registration system records all interests that might affect land, and enables a person to protect his or her interest by registration of the deed, etc.

9. How does the land registration system aid a prospective purchaser of real property? Answer: The land registry system enables the prospective purchaser to identify the registered owner of the property, and to determine any encumbrances, restrictions, etc. that might attach to the property.

10. What constitutes a good and marketable title to real property? How is this determined under the Registry System?

Answer: A good and marketable title would consist of continuous forty year chain of title dating back from the deed of the present registered owner, with no encumbrances registered against it. (Ontario).

11. In what way or ways does the Land Titles System simplify the determination of the vendor's title to lands offered for sale? Answer: Under the Land Titles System, the province certifies the title in a particular registered owner, and the purchaser or his/her solicitor need not search behind the name stated as the registered owner.

12. What are the duties of a real estate agent? Do they differ in any way from that of an agent in an ordinary principal-agent relationship? Answer: The duties of a real estate agent include: (1) inspect and value the property (or arrange for the valuation). (2) actively seek out prospective purchasers. (3) arrange for purchasers to view the property. (4) prepare a written offer to purchase. (5) hold all deposits pending closure of the transaction. (6) act always in the best interests of the vendor.

13. Describe the role of a lawyer or solicitor in a land transaction. Answer: A lawyer not only reviews all documents related to a transaction, and draws others, but attends to a number of very important searches if acting for the purchaser. These searches include: search of title, taxes, zoning, building standards/ safety, sub-dividers and developers obligations under sub-division agreements, payment of services (such as hydro), searches for executions and liens against the property, chattel searches, and attendance to the registration of the land.

14. What other searches in addition to a title search are necessary in a land transaction in order to protect the purchaser? How are these searches usually made? Answer: Other searches are: Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-324

(1)

search for tax arrears at Municipal office.

(2)

search for zoning, etc. at Municipal office.

(3)

search for service liens (hydro) at Public Utilities office.

(4)

search for judgments and executions at Sheriff's office.

(5)

search for chattel liens, etc. at County offices (for chattel mortgages, etc.).

(6)

search of unpaid corporation taxes (some provinces) at the Provincial Government tax office.

15. Explain the significance of the process whereby a deed of land is "signed, sealed, and delivered." Answer: In some provinces a deed must be made under seal and be signed by the grantor to be effective. Delivery completes the transfer of the property to the grantee. Most provinces, however, have moved away from the requirement of a seal on the deed.

16. Why were the ceremonial aspects of the transfer of land important in early real estate transactions in England? Answer: The formal ceremony of transfer of possession (in the presence of witnesses) was conducted to demonstrate to the community that a transfer of the land had taken place, and was particularly important in a time of widespread illiteracy and a lack of written records.

Mini-Case Problems

1. A agreed to sell B a building lot for $250,000. Without searching the title, B gave A the $250,000 and received a deed to the property in fee simple. B then discovered that the property was registered in A‘s wife‘s name and not in A‘s name. What are B‘s rights? Answer: B's only right is against A for a return of the purchase price. Since the property is in A's wife's name, B has no claim to the land.

2. The ABC Co. intends to offer to purchase a large parcel of vacant land from D, a farmer. The company plans to erect a manufacturing plant on the land after the purchase is completed. What conditions or provisos should the company include in the offer to purchase, and what searches Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-325

should it make to ensure that it may use the land for its intended purpose? Answer: ABC Co. should include a proviso that the farmer D has good title to the property free from encumbrances, and that the zoning of the property be proper for the erection and operation of a manufacturing plant (industrial zoning of the land). The company should not only search the title to the land, but should check with the local municipality to determine if the zoning is appropriate for its intended use of the property.

3. Rudolf owned a house and lot. He engaged the services of Victoria, a real-estate agent, to sell the property for him, and signed a 3-month listing agreement with a commission of 4% payable if she sold the property. A month before the listing agreement expired, Victoria took George, an interested buyer to see the house. While Victoria was adjusting a ‗for sale‘ sign on the lawn, Rudolf told George that if he was interested in buying the property, he could sell it to him in a month‘s time after the listing agreement had expired. Rudolf indicated that he would sell it ‗less commission,‘ which would save George about $30,000. A month later, George returned, and Rudolf and George arranged for the sale of the property at the listed price, less $30,000. What are Victoria‘s rights in this case? Answer: Victoria may well have included a term in her listing agreement to cover just this sort of eventuality. In that case, her right to a commission would be protected simply by virtue of the contractual term. If she did not include such a term in her listing agreement, she may still have a right to compensation as a matter of quantum meruit, presumably based on what she would have earned in the normal course of the transaction. Rudolf‘s actions may also amount to the tort of deceit.

4. Jason purchased a building at an intersection of two highways that had once been a service station and gasoline storage facility. Haggard, the seller, assured Jason that the property was ‗clean‘ and there were no environmental problems. A year after the purchase was completed, the owner of the land next to Jason‘s property complained to Jason that his well water was now contaminated with gasoline and oil. Advise Jason. Answer: As the owner of the property, and regardless of his lack of blameworthiness for creation of the pollution, nuisance or interference, Jason will be primarily liable for the cleanup of the property and either restoration or compensation owed to his neighbours.

Case Problems for Discussion Case 1 Albert, a real-estate agent, entered into an exclusive listing agreement with Amelia whereby he agreed to find a buyer for a block of development land owned by Amelia. The property had a listed value of $1,750,000, an amount that Albert had indicated was a reasonable price for the property. Amelia, who Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-326

was inexperienced in business matters, accepted Albert‘s appraisal as being a fair market value for the land. In actual fact the fair market value was approximately $2,000,000. Albert made no effort to put the parcel of land on the market, but instead, incorporated a company for the purpose of purchasing the property. When the new corporation was operational, Albert prepared an offer on behalf of the corporation, and presented it to Amelia. At the time of presentation of the offer, he told her that he knew the president of the corporation. Since the price was exactly $1,750,000, Amelia readily signed the agreement to complete the contract. The sale was completed in due course, and Amelia gave her deed to the property in return for the payment of the purchase price. At that time, she also paid Albert the 5% commission that the listing agreement had specified as the agent‘s commission. A few months after the sale of the land had been completed Amelia discovered that Albert was the president of the corporation that had purchased her property. Advise Amelia. If Amelia should take legal action against Albert, what would be the nature of her claim? Render a decision. Answer: The actions of Albert are a complete breach of the agent‘s duty of utmost good faith owed to his principal. From the first moment of contriving a price below market value, through misrepresentation by non-disclosure regarding the ―president of the corporation‖ to earning a fraudulent commission on a sale to himself, Albert has not only breached his duty but committed the tort of deceit as well. Amelia should be able to recover the commission paid, and either the $250,000 secret profit or a reconveyance of the property from the corporation. Case 2 A municipality owned a large tract of land that had been a municipal landfill site many years before. Custom Construction Inc., a land development corporation, moved into the municipality from another city, and was anxious to establish itself in the community as a quality developer. When it discovered that the municipality had a tract of land for sale, it approached the municipality to determine if the land could be purchased for residential development. The municipality was anxious to dispose of the property, and agreed to sell to Custom Construction Inc. A price was agreed upon, and the purchase was completed after the lawyer for Custom Construction Inc. had examined the title to the property, and found that the municipality had a good title to the tract of land. During the preparation of the land for house building, Custom Construction Inc. employees noticed that a methane gas smell was rising from the excavations for house basements, and also that a coloured liquid was seeping into a small stream that crossed the property. When Custom Construction Inc. queried the methane gas smell, and seepage into the stream at the municipal office, it was advised at that time that the land had previously been the municipal landfill site. The revelation that the property had been a landfill site in the past effectively precluded Custom Construction Inc. from proceeding with its housing development. Discuss the issues raised in this case, and advise Custom Construction Inc. Speculate as to the outcome of this case if Custom Construction Inc. should decide to take matters to court. Answer: This is (perhaps) not a case where environmental contamination is currently affecting neighbours, however, it is certainly impacting negatively on the plans of the current owner, Custom. For the most part, the environmental problems associated with a particular piece of land belong to the owner, but the question arises Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-327

here whether there is any shared or exclusive liability in the municipality, the vendor to Custom. Indeed, Custom should have done more in its due diligence searches; however, not all features of the property may be readily apparent from public records. Still, one may argue that a major development requires extraordinary research on the part of the buyer. On the other hand, the argument can be made that much of the liability for Custom‘s loss should be borne by the municipality. The municipality knew the precise history of the use of the property as a landfill; it knew that Custom was from out-of-town and was unlikely to know the history of the land; it knew that Custom intended to build houses on the property and that contamination would prevent this. With this in mind, the actions (or inactions) of the municipality can be seen as misrepresentation by non-disclosure. From this perspective of assigning liability, we can ask the question: would Custom have bought the property at any price had it known the facts the municipality should have disclosed? As a vendor in the public interest, the municipality may even have an extraordinary duty to disclose this information; it knows the purchaser‘s development lies in the near future, which may expose many future homeowners to needless hazard and toxicity – a breach of public trust of the first order. Case 3 In December of 2018, Fanshawe agreed to purchase a house and lot from Miovsky for a purchase price of $358,000. The property was in an area under the Registry System, and Fanshawe determined from the registry office that Miovsky had what appeared to be a good title to the land. Unfortunately, he had failed to notice a mortgage that had been registered against the property to secure the indebtedness of Williams, Miovsky‘s predecessor in title. The mortgage had been assumed by Miovsky as a part of his purchase from Williams, but that fact had not been revealed to Fanshawe at the time that the offer was drawn. The offer to purchase that Fanshawe had accepted contained the following clause that read in part: ―The purchaser shall have 10 days to examine the title at his own expense …. Save as to any valid objections made to the vendor‘s title within that time, the purchaser shall be conclusively deemed to have accepted the title of the vendor.‖ Without knowledge of the existing mortgage, Fanshawe proceeded to pay over to Miovsky the $358,000 and received a deed to the property. He registered the deed on January 6, 2019. Some time later, Fanshawe was contacted by the mortgagee and advised that the sum of $85,000 remained due and owing on the mortgage. As Fanshawe was the new owner of the property, the mortgagee would look to him for payment. To compound Fanshawe‘s problems, a finance company that had obtained a judgment for $120,000 against Miovsky in October of 2018 had filed a writ of execution with the sheriff of the county where the property was located. Fanshawe had not searched in the sheriff‘s office at the time of closing the transaction. He was surprised to discover that the finance company now claimed that the execution had attached to the land that he had purchased. Advise Fanshawe of his legal position in this case. What are the rights of the mortgagee and the execution creditor? What action could they take against Fanshawe or the property? Answer: The importance of a careful search of title is illustrated by this case. Had a careful search been made, the registered mortgage would have been discovered. Under the offer to purchase, the title was to be considered accepted by the purchaser if no objection was raised within the time period specified. Does this permit the vendor to escape his duty to reveal the encumbrance? Does the registration of the deed by the purchaser end Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-328

the vendor's duties under the purchase agreement? The offer to purchase would be subject to the general rules of law which apply to contracts, and the innocent or fraudulent misrepresentation on the part of Miovsky would ordinarily allow Fanshawe the right to avoid the agreement. Once the deed was registered, however, Fanshawe's rights against Miovsky change. The deed contains an assurance that the lands are free from the encumbrances, and Fanshawe may be obliged to go back against Miovsky on his covenant for compensation. The rights of the mortgagee and execution creditor are established by statute. The mortgagee may look to Fanshawe for payment of the balance of his mortgage, since Fanshawe is now the registered owner of the property subject to the mortgage. The change of ownership does not affect the mortgagee's right to payment. The execution creditor is in a similar position. By filing the writ of execution with the Sheriff of the county where the judgment debtor's land was located, the writ attaches to the property. Any subsequent purchaser would take the land subject to the execution, and would be liable for payment as the owner of the property. Case 4 Samuel Reynolds was the registered owner of a 200-hectare farm. In July 2011, he retired from farming and gave his son Jacob a deed to the farm property. Jacob did not register the deed, but instead placed it in a safety deposit box that both he and his father rented at a local bank. Samuel Reynolds died in 2019. His will, dated, May 3, 1998, devised the farm to his daughter, Ruth, who was living on the farm at the time, and who maintained the house for her father. The will also named Ruth as the sole executrix of his estate. When the contents of the will were revealed, Jacob announced to Ruth that their father had given him a deed to the farm some years before, and that he was the owner of the property. No further discussion of the farm took place between the brother and sister. However, after the debts of the estate were settled, Ruth had a deed to the farm prepared and executed in her capacity as the executrix of her father‘s estate. Then Ruth delivered the deed to the registry office. The deed conveyed the farm property to her in her personal capacity. Some months later, Jacob entered into an agreement of purchase and sale for the farm with Smith. Smith made a search at the registry office and discovered that the title to the property was not registered in the name of Jacob, but in the name of his sister, Ruth. Smith refused to proceed with the transaction. Discuss the rights of the parties in this case. Indicate, with reasons, the identity of the lawful owner of the property. If Jacob should show his deed to Smith and insist that he has title to the property, what argument might Smith raise to counter Jacob‘s claim? Answer: This case raises a number of questions concerning the registration of conveyances and of notice of prior unregistered conveyances of the property. The Registry Acts of those provinces where the Registry System is used usually provides that an unregistered instrument is void as against subsequent registered instruments unless the subsequent purchaser, etc. had actual notice of the prior unregistered instrument. (See for example, Ontario, Registry Act R.S.O. 1990, c.R-20, s.65 (1)). In the case, the question might be asked: Did Ruth have actual notice of the conveyance made by her father to her brother? Does notice require something more than the assertion of the fact by Jacob? Would it be any different if he had presented Ruth with the deed for examination? When Ruth prepared the deed as executrix, she was acting with knowledge of Jacob's claim that he had in his possession a prior deed to the property. Jacob's statement may be notice sufficient to put Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-329

Ruth on inquiry, where she could have ascertained the true facts. Her failure to do so may affect her right to claim priority over Jacob's unregistered instrument. To claim priority, Ruth would also be required to show that valuable consideration was given for her deed (See: Barber et al. v. McKay et al. (1890), 19 O.R. 46.) The actions of Ruth in making the conveyance to herself is also open to question. The purchaser, Smith need not proceed with the transaction unless Jacob can establish a good title to the property (See: Re Mountroy Limited and Christiansen, [1955] O.R. 352). Jacob, however, might be in a position to have his deed given priority over the instrument registered by Ruth, and have Ruth's deed removed from the title. (See: Winchester v. N. Rattenbury Ltd. et al. (1953) 31 M.P.R. 69.) Case 5 Abner, who was quite elderly, owned a large number of vacant building lots in different parts of a city. He was approached by Drossos to purchase a particular lot that Abner agreed to sell for $250,000. After making certain that Abner had a good title to the property, Drossos paid over the purchase price to Abner and received a deed to the land in fee simple. Drossos didn‘t register the deed, but placed it in his safety deposit box instead, as it was his intention to sell the lot himself at a later date. A year later, Abner was approached by Carol‘s Construction Corporation with an offer to purchase the lot he had sold to Drossos. The price was $350,000, and Abner, who had forgotten that he had previously sold the lot to Drossos, agreed to sell it to Carol‘s Construction Corporation. The solicitor for Carol‘s Construction Corporation made the appropriate searches in the land registry office and, from the records there, determined that Abner was the owner of the land in fee simple. The money was then paid to Abner, and Abner delivered a deed to the property, which the lawyer registered at the land registry office. Some time later, Drossos entered into an agreement with Davis to sell her the lot for $380,000. When Davis searched the title to the property, she discovered that the lot was registered in the name of Carol‘s Construction Corporation. Davis then demanded that Drossos obtain a conveyance of the land from Carol‘s Construction Corporation to enable him to provide her with a good title in fee simple. If Davis brought an action for specific performance against Drossos, discuss the arguments that the parties might raise. Explain the respective positions of Abner and Carol‘s Construction Corporation in relation to the claim. Speculate as to the ultimate outcome of the situation. Answer: This case illustrates the peril associated with delay in the registration of conveyances of land. The first point to note here is that Carol's Construction Corporation was unaware of the prior conveyance and Drossos's unregistered deed. Since the corporation was a bona fide purchaser for value without notice of the prior conveyance, the registration of its deed in the Land Registry Office would render Drossos's deed void as against it. The agreement for sale entered into between Drossos and Davis requires Drossos to provide a valid deed in fee simple to Davis, and Drossos has no valid title to the property. Drossos, consequently, must either obtain a deed to the land from Carol's Construction by negotiation, or pay damages to Davis for breach of contract if he is unable to acquire the lands. Since Drossos does not have title to the lot, the court would not grant Davis specific performance of the agreement. Drossos, of course, would have a right of action against Abner for selling the lot which he, Drossos owned, and could probably recover the value of the lot from Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-330

Abner. Carol's Construction Corporation is the innocent party in the case, and the lawful owner of the lot. Case 6 For 50 years, Metal Plate Inc. manufactured metal signs in a manufacturing plant located in the industrial area of a city. In 2005, a large container of used cleaning solvent that was stored behind the plant leaked into the soil. At the time, the solvent was not classified as hazardous waste material under the provincial Environmental Protection Act, and nothing was done to retrieve the solvent, except to dispose of the leaking container. Several years later, the solvent was classified as a registerable hazardous material. In 2008, traces of the solvent were found in the surface-water drainage sumps in a neighbouring property, and the source was identified on the Metal Plate land. The company notified the Ministry of the Environment, and, as a compliance method, the company drilled several collector wells and installed a pumping system to monitor and collect the contaminant as it moved through the soil. The system was approved by the Ministry, although the Ministry could require the removal of the contaminated soil at any time, if it should be necessary to do so. In 2019, the owner of a business in the area offered to purchase the plant and land for $4,500,000, and Metal Plate Inc. agreed to sell the property. The purchaser was given a full opportunity to inspect the property before the closing of the transaction, but did not do so at the time. The purchaser intended to rezone the property as a residential property and build a large condominium there, but did not disclose his plans at the time of purchase. Some months after the new owner had purchased the property, soil tests were made to assess the suitability of the property for the construction of the residential condominium complex. The test engineers reported that the soil structure would permit the construction of the proposed building, but noted in their report the contaminated soil and the monitoring system. They estimated the cost of removal of the contaminated soil at $1,000,000. The new owner did nothing about the reported problem and proceeded with his proposed plans to construct the condominium. His efforts were in vain, however, as the municipality refused to rezone the land to residential use because of the location in an industrial area. Several years later, the new owner abandoned his plans. He demanded a return of his money from Metal Plate Inc., on the basis that the lands were contaminated and useless for his purposes. Metal Plate Inc. refused to return the purchaser‘s money, and the purchaser instituted legal proceedings against Metal Plate Inc. Discuss the issues raised in this case and render a decision. Answer: This case is adapted from the facts in Tony's Broadloom & Floor Covering Ltd. v. N.M.C. Canada Inc. (1997) 31 O.R. (3d) 481 (C.A.), and illustrates the importance of an environmental audit of a property before purchase, particularly in an industrial area. In the case, the purchaser did not disclose his intended use of the property, nor did he take steps to inspect the property to ensure its suitability for his intended use. It was only after the municipality had rejected his rezoning request that he complained about the contaminated soil. Students should note that the property was not useless, as it could continue to be used for industrial purposes, although the Ministry could at any time require a clean up of the contamination. These reasons formed the basis of the court's dismissal of the plaintiff purchaser's claim. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-331

Case 7 Ibrahim was the registered owner of several adjoining parcels of vacant land that he had purchased some 12 years earlier. During that period of time, the property had appreciated substantially in value. Recently, Ibrahim was approached by a real-estate agent who suggested that the property might be of interest to a number of developers who had just begun construction in the immediate area. After some discussion, Ibrahim entered into a listing agreement with the agent, and the agent agreed to seek out prospective purchasers for the property. Ibrahim established $400,000 as the selling price he would accept for the land. For several months, the agent attempted to find a buyer for the property, but without success. When the developers in the area were not interested in the property, the agent returned to Ibrahim and suggested that a corporation in which he had an interest might be willing to purchase the land. To this suggestion Ibrahim replied that it did not matter to him who the purchaser was, so long as the purchaser was prepared to pay his price for the land. A week later, the agent returned with an offer to purchase from the corporation in which he had an interest. The offer price was $400,000, and was described by the agent as a ―clean deal — all cash.‖ The offer was prepared on a standard real-estate offer-to-purchase form and contained a clause that read: ―Any severance or impost fee plus any expenses for water and sewer connections to be included in the purchase price.‖ Ibrahim queried the clause, and the agent explained that it meant that the cost of obtaining permission to use the three parcels of land as separate building lots, and the hook-up costs of water and sewer lines to them, would be deducted from the purchase price. He added that this ―usually did not cost much.‖ At the agent‘s urging, Ibrahim signed the offer. Some weeks later, Ibrahim discovered to his sorrow that the severance fees and the water and sewer connections would cost close to 10 percent of the sale price. The municipality required the payment of 5 percent of the value of the property as part of the severance fee, and the water and sewer connections accounted for the remainder. When Ibrahim refused to proceed with the transaction, the purchaser instituted legal proceedings for specific performance, and Ibrahim, on the advice of his solicitor, settled the action. As a result, he received only $360,000 for the property, from which the real-estate agent demanded a selling commission of 5 percent based upon the $400,000 selling price. Ibrahim refused to pay the agent and demanded that the agent compensate him for the $40,000 loss that he had suffered. Eventually, the agent brought an action against Ibrahim for the commission that he claimed was due and owing. Ibrahim, in turn, filed a counterclaim for payment of the $40,000 loss that he had suffered. Discuss the arguments that might be raised by the parties in this case. Render a decision. Answer: This case concerns the duty of an agent to his principal. The agent's duty to his principal should be reviewed as a part of the analysis of this case, perhaps by way of such questions as: Should the agent have explained the cost of the severance in terms of dollars, rather than simply saying that it usually did not cost much? Since the agent revealed his interest in the purchaser corporation - does it permit him to act in his own interest alone, or must he still act in the best interests of his principal? Where an agent fails to explain the high cost of a severance to his principal he runs the risk of being in breach of his duty as an agent. In this situation, Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-332

his failure to remove the offending clause from the agreement might also be treated as a breach as well. Breach of duty on the part of the agent would probably prevent him from recovering his commission on the sale. See: Len Pugh Real Estate Ltd. v. Ronvic Construction Co. Ltd. (1973), 41 D.L.R. (3d) 48, for a case in which these rules were set out. Case 8 Justin Abernathy was the registered owner of a building lot in a residential area of a large city. He entered into an agreement of purchase and sale with Karina Giltay, who wished to build a house on the land. Following the execution of the agreement, Giltay engaged a land surveyor to prepare a survey of the property. When the survey was completed, it disclosed that the building lot had a frontage of only 18.15 metres. The agreement of sale stated that the lot had ―frontage of approximately 18.46 metres and a depth of 38.46 metres, more or less.‖ Abernathy‘s deed described the lot as being 18.46 metres by 38.46 metres. The discrepancy between the two measurements was apparently due to the fact that the owner of the adjacent lot had erected a fence that encroached on Abernathy‘s property. The fence had been erected some 15 years before and was taken by the surveyor as the property line. Determine the rights of the parties in this case. Indicate how the problem might be decided if Giltay should refuse to proceed with the agreement. Answer: The amount of land in the offer to purchase is the matter for determination in this case. Does "more or less" mean something less than 0.31 metres? If so, by how much less falls within the limits? The vendor in the offer to purchase must deliver the land as described, and if he cannot do so, the purchaser may either avoid the agreement, or demand a reduction of the purchase price to compensate for the loss. The right of the purchaser to decline an imperfect title is discussed in Re Mountroy Limited and Christiansen, [1955] O.R. 352. As to an abatement of the purchase price: See: Harley v. Roy (1921), 50 O.L.R. 281. "More or less" may mean a certain amount of flexibility in the amount of land which the vendor must convey. A difference of a third of a metre might fall within the "more or less" limits. See for example, Hunter v. Kerr (1912), 7 D.L.R. 829. A contrary decision is Zender v. Ball (1974), 5 O.R. (2d) 747.

Chapter 26. Intellectual Property, Patents, Trademarks, Copyright and Franchising

Chapter Topics Introduction Trade Secrets and Non-Disclosure Agreements Patents Trademarks Franchises Copyright Industrial Designs Licence Agreements IP in a World of Technological Change Summary Key Terms Review Questions Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-333

Mini-Case Problems Case Problems for Discussion Chapter Objectives After study of this chapter, students should be able to: • Describe the unique nature of intellectual property. • Distinguish between patents, trademarks and copyrights. • Explain the legal protection offered to each of these types of property. • Describe the chief elements encountered in license and franchise agreements. YOUR BUSINESS AT RISK Intellectual property — whether a trade name, secret process, design or a manuscript — represents a very important business asset. This property must be properly protected to ensure your ownership rights are enforceable. To commercialize your intellectual property (IP), you may wish to transfer a right to use the property without selling it outright — after all, you may wish to concurrently use the IP yourself. In these cases, a licence agreement will be required in order to transfer a right to use the IP while retaining ownership and control over it. CHAPTER COMMENTARY Chapter 26 with the four principal methods available for the protection of industrial and intellectual property. Patent law is designed to encourage and protect inventions, while copyright law (and to some extent Trade Mark legislation) is designed to encourage and protect intellectual creation. Industrial design legislation is similar in its objects. This area of the law is for the most part statutory, since the rights of inventors, authors, etc., were either unclear, or did not exist at common law. It should also be noted that at the time of writing of this chapter of the text, some of these statutes were undergoing revision, and the current law should be consulted. These statutes represent a highly specialized area of the law, particularly in the case of patents and trade marks, and the purpose behind the incorporation of material on these topics in the text is to provide a general outline of the law only. For this reason, the chapter simply provides an overview of each topic, to acquaint the student with the general nature and purpose of the law, rather than an in-depth examination. The chapter may be deleted from a business law course, if the instructor so desires. Patent law deals with the right to a new invention. It is important to note that a patent will only be granted for something which is new and different, and not already subject to a patent application or an existing patent. The grant of a patent is essentially a reward in the form of a 20 year monopoly from the date of filing for the efforts of the inventor to produce something new and different, because its purpose is to encourage invention. The justification for this type of legislation is discussed in the case quote from Barter v. Smith. Registered design legislation is similar to both patents and copyright in the sense that an original artistic design of a industrial product may be protected from copy by others for a period of time, if the design is registered. It is similar to a patent in the sense that a search must be made to determine the originality of the design. Once the design is registered, it may be protected by an action for infringement.

The Court Decision, A & W Food Services of Canada Inc. v. McDonald’s Restaurants of Canada Ltd. provides an example of a trade mark dispute concerning the use of the words ―Chicken Grill‖ and ―Chicken McGrill‖ and the alleged infringement by the latter name on the registered trade mark ―Chicken Grill‖ that was registered some 4 or 5 years prior in time. Note the authors‘ suggestion at the end of the case concerning other possible words. These may be used for class discussion based upon the comments in the case. The cases at the end of the chapter illustrate a number of common situations that arise under the legislation. Franchising is also covered in this chapter because it is a contractual matter largely concerned with intellectual property rights. Students should be made aware that the franchise agreement is essentially a licensing agreement whereby the franchisor permits the franchisee to use trade names, trade marks and copyrighted material to operate a similar business to that of the franchisor and other franchisees. Much of the agreement is concerned with maintaining the integrity of the goodwill attached to the intellectual property rights.

Review Questions 1. Explain the meaning of ―patent pending‖. Answer: Patent pending simply means that a patent has been applied for by the maker. It has no legal significance.

2. Outline the steps that a Canadian inventor must follow to obtain patent protection for an invention in a foreign country. Answer: To obtain foreign patent protection, a Canadian inventor must make an application for a patent in the foreign country within 12 months of his/her application in Canada. (Assuming the country is a member of the convention).

3. How is the public interest protected under patent legislation? Answer: The public interest is protected by (1) requiring the inventor to reveal how the invention works and (2) requiring the inventor to ―work‖ the patent.

4. What steps must an inventor follow in order to acquire patent protection for an invention? Answer: Patent procedure involves the filing of a petition for a patent together with specifications and a claims statement which describes how it works and why it is "new."

5. For what public purpose did the Crown originally grant monopolies for certain products? Answer: The crown granted monopolies for certain products to foster trade. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-335

6. If an inventor had reason to believe that someone was producing a product which infringed on his or her patent, what would the inventor's rights be? What remedies are available for infringement? Answer: The inventor may take action for infringement. The remedies would be an injunction and an accounting for damages.

7. Under modern patent legislation, what is the purpose of granting a patent for a new product? Answer: The purpose of granting a patent is to give the inventor of a new product, etc. exclusive rights to control its manufacture for (20 years from filing of the patent application). The purpose is also to encourage invention of new and different things, and to reveal how they work.

8. Describe briefly the purpose of trade mark legislation. Why has it been necessary? Answer: Trade mark legislation is designed to protect the distinctive marks of makers of goods, etc., and to protect them from others who might be tempted to copy the mark for the purpose of passing off their goods for those of the owner of the mark.

9. How does a trademark differ from a trade name? Answer: A trade mark is a mark used to distinguish the goods of a particular maker. It must be "distinctive". A trade name is the marker's name for a product, etc., and is usually a "coined word" to identify the maker or the product.

10. Distinguish between a service mark and a certification mark. Answer: A service mark is a mark used to identify a service or the provider of the service e.g.: the mark of an air line. A certification mark is a mark used to distinguish goods of a certain quality or service performed by a certain class of persons, etc. The owner of the mark does not manufacture the goods. 11. Explain the term ―distinguishing guise‖. Answer: A distinguishing guise is a form or shape of a product or its container to distinguish it from similar products of others. E.g.: Coca-Cola bottle.

12. What must a person who has a proposed mark do in order to establish rights to the mark? Answer: A person with a proposed mark need only use the mark to establish rights to it.

13. What constitutes infringement of a trade mark? What steps must the owner of a trade mark take in order to prevent further infringement? Answer: Infringement would consist of copying the mark or distinctive guise, or using a mark or name which resembles the mark so closely that it would be confused with the original, and constitute "passing off". The owner of the trade mark would bring an action for infringement to obtain an injunction and an accounting for damages. Note: that "passing off" may also have criminal implications as well.

14. Outline the purpose of copyright legislation. What type of work is it intended to protect? Answer: Copyright legislation protects the author's sole right to a creation, be it written works, music, art, etc. from unauthorized copy by others. It is intended to protect all original works of this nature.

15. How is notice of copyright usually given? Answer: Notice of copyright is usually given by marking the work with a ©, the date (year) of first publication and the name of the author.

16. What defences may be available to a person who is accused of infringing on a copyright work? Answer: Defences to infringement include: (1)

"fair dealing" for purposes of personal research, study, etc.

(2)

performance by charitable bodies of plays, etc.

(3)

person claiming infringement does not own the copyright.

17. Where infringement is established, what remedies are available to the owner of the copyright? Answer: If infringement is established, the owner of the copyright would be entitled to an injunction, an accounting, and damages.

18. What is an industrial design? How does it differ from copyright? Answer: An industrial design registration is used to protect an original design produced by an industrial process. It differs from copyright in the sense that the original design would be subject to copyright protection, but copyright protection is lost where it is reproduced by an industrial process.

19. Explain the protection that an industrial design offers the owner of the design. How is this enforced? Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-337

Answer: The registered design gives the owner the exclusive right to produce the design for a period of 10 years. Infringement entitles the owner of the registered design to an injunction and an accounting for damages against the person copying the registered design. 20. What licences might be given for a franchisee to successfully operate a fast-food restaurant? Answer: These necessary licences will likely use of trademarks and patented processes and possibly industrial designs. These may be signs and names of products, the attributes of the products, advertising jingles, uniform designs, cooking apparatus, processes and recipes and restaurant architectural design.

Mini-Case Problems

1. A engaged the services of B, a professional photographer, to take a series of photographs of his power boat. B did so and was paid $200 for his services. Some time later, A discovered that B had sold the negative of one of the pictures to a boating magazine for the cover of one of its issues. B received $500 from the magazine for the picture. Is A entitled to the $500? Answer: If A hired B to take photographs of his power boat, the right of ownership in the photos may belong to A. B's subsequent sale to the boating magazine may be an infringement of A's copyright, and A would be entitled to the $500.

2. X produced a cola beverage that he sold for many years under the trade name Krazy Kola. If Y decided to produce and sell a cola beverage in the same area under the name Crazy Cola, would Y‘s actions constitute a violation of X‘s trade name? Answer: Y's selection of a similar name with only a minor change in spelling may constitute infringement if the two cola products would be confused. This would particularly be so if Y used a similar shaped bottle or container.

3. Kitchen Products Inc. produced a unique design utensil that would peel, core and slice apples. It applied for a patent, but before the patent could be issued, a competitor copied the design and flooded the market with its copy of the product. Advise Kitchen Products Inc., assuming that its application for a patent was valid, and a patent would eventually be issued. Answer: The first inventor to file the patent is entitled to its eventual protection, which is dated from the time of application. Once the patent is issued, the entire period of production of the second firm will be considered to Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-338

be an infringement of Kitchen Products Inc. patent rights. To help prevent this situation from developing in the first place, KPI should mark its own production pieces with the warning ―patent applied for‖.

4. Furniture Design Ltd. produced a modified French Provincial chair. It was concerned that competitors might copy it once it was put on display at an upcoming furniture trade show. How could Furniture Design Ltd. protect its product? Answer: Furniture Design Ltd. should protect its product by registration of the design under the Industrial Designs Act. The chair qualifies as an artistic work produced through an industrial process, and is an object which, aside from its utility as a chair, would solely be judged on the basis of its eye appeal.

Case Problems for Discussion Case 1 Karen wrote a novel that she self-published. She offered her novel for sale using an advertisement in a literary magazine. The advertised price of the novel was $9.95, providing her with an after-cost profit of $2.00 per copy. The novel sold well, and had received favourable reviews by book critics. A year later, she noticed that sales of the novel were falling rapidly, and she decided to investigate. To her surprise, she found a small website that was offering her novel for sale in a downloadable form for $5.00 a copy. The website proudly announced that it had sold over 10,000 copies of the novel to date. Advise Karen. What would be the nature of her claim, and how would the court likely decide the case? Answer: Karen‘s claim against the website owner is based on her claim to copyright in her literary work. It is not necessary for her to have registered her copyright. It would have been wise of her, however, to have marked her copies of the novel with the © symbol to indicate copyright. If she did not, all is not lost for there would be a presumption that the website owner knew, or ought to have known, that the copyright did not belong to them to permit their reproduction of the novel. In the absence of the © mark, the presumption would be rebuttable (the web publisher thought copyright had expired, etc.), which might be a reason for it to avoid punitive damages, however it will in any case be responsible to account for its ill-gotten revenues of $50,000 in general damages. Case 2 Dimitri carried on business as an independent consulting engineer. In addition to providing the usual engineering work for firms, he also designed a number of production processes and unique production equipment used in the production processes. He obtained patent protection on both the production process and the equipment. He arranged with a manufacturer to produce the ‗package,‘ which he would supply and license users to use in their production of goods. Several years later, the manufacturer of Dimitri‘s equipment carefully examined his design, and developed a new and more efficient type of machinery that would perform the same work as that of Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-339

Dimitri‘s equipment. The manufacturer applied for a patent on the equipment, and when Dimitri discovered that the manufacturer had designed a new product, he contacted the manufacturer and informed him that he would not permit the manufacturer to use the new design with his production process. Discuss the arguments of the parties. How is the dispute likely to be resolved?

Answer: To the extent that the improvements are themselves patentable, the manufacturer has come up with a marketable product of its own. This new product may replace a product of Dimitri‘s own, but it appears it can function in the production processes that Dimitri sells (a circumstance Dimitri wishes to prevent). Perhaps Dimitri should reconsider this position; he may be overlooking a commercial opportunity. The production process systems he sells may sell even better, or more profitably, if he incorporates the new product, under licence from its manufacturer. He may even consider cross licencing his own designs to the manufacturer. With Dmitri focusing on process design, and the manufacturer focusing on the technical products, more profit may be generated by the two of them working in co-operation and specialization, rather than by conflict. Case 3 Grigori Denton, an electronics engineer, worked on the development of a miniature hearing aid in his spare time. After much experimentation, he was successful in developing what he wanted. Denton was a member of a local service club that frequently assisted persons with hearing problems. For a special meeting of the club, he was invited to give the members a short lecture on hearing aids and a demonstration of how his device operated. At the meeting, he described how the device was constructed and demonstrated its effectiveness even though it was still in the experimental stage. The meeting was later reported in the local newspaper, along with some general information on Denton‘s presentation at the meeting. Another member of the club, who was also an electronics engineer, wrote a brief note on Denton‘s presentation and submitted it to a scientific journal that subsequently printed the note in its ―New Developments‖ section. Several years later, Denton finally perfected his hearing device and applied for a patent. He then set up facilities for its production, marking each unit produced with the words ―patent pending.‖ The product sold well in all parts of the country except British Columbia. When Denton investigated the market in that area, he discovered that a west-coast manufacturer was producing hearing aid units that incorporated the particular design that he had developed. His competitor had been selling the similar models for almost a year before Denton had gone into production. Unknown to Denton, the manufacturer had apparently developed his own hearing aid model from information that he had read in the scientific journal report of Denton‘s presentation to his service club. Denton had the Patent Office expedite his patent application. On its issue, he instituted legal proceedings against the west-coast manufacturer for infringement. Discuss the arguments that might be raised by the parties in this case. Render a decision. Answer: Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-340

The difficulties that face Denton are related to his disclosure to the public, of information concerning his invention, and his long delay in preparing the product for market. The facts raise a number of questions: Did his demonstration of how the device worked constitute disclosure to the public, or publication? Was the report of his demonstration publication? The west coast competitor would certainly argue that disclosure had been made several years before he applied for the patent. Denton, in turn, might argue that the demonstration was to a restricted audience, and did not constitute disclosure. The publication of the information was done without his consent, and he was unaware of it. Denton will have difficulty enforcing his patent rights, as his competitor had been marketing a similar device for almost a year before he applied for his patent, and this evidence may invalidate his patent. Case 4 Pia Myers, a part-time news writer for a local newspaper, attended an air show at a local airport. While watching two aircraft performing synchronized aerobatics, she noticed that the wings of the two aircraft were exceptionally close to each other. She photographed the aircraft at the instant that the two aircraft collided and took a second photograph of the pilots as they parachuted to the ground. Myers wrote a brief description of the accident and submitted the two pictures and the written material to the local newspaper for publication. The pictures and the report were published in the next edition of the newspaper, in which she received credit for the pictures and the story in a byline. She was paid her regular rate for the written material, and $50 for each picture. Myers later submitted the same pictures and story to an aviation magazine, and the material was subsequently published. Myers was paid $300 for the pictures and story by the magazine. When the newspaper discovered the magazine article it instituted legal proceedings against the magazine and Myers, for copyright infringement, claiming that the copyright belonged to it. Discuss the arguments that might be raised by the parties. Indicate how the case might be decided. Answer: This case concerns the ownership of copyright material. The general rule is that the creator of the work has the copyright, but where the creator is employed by another under a contract of service for the purpose of producing the work, the copyright may belong to the employer. Was Myers in the employ of the newspaper when she took the pictures, and wrote the report of the accident? If not, did she sell her rights in the pictures and the report to the newspaper? As the creator of the work, is she entitled to sell the same material to others? These are some of the questions that might be raised concerning this case. Myers might argue that she sold only the right to publish the material in the newspaper, and retained all other rights to the material. She would, however, be met with the argument that she was employed by the newspaper to do precisely this type of work, and the work belonged to the newspaper. The aviation magazine published the material unaware of the prior publication and claim for copyright. Should it be held liable for Myers' actions? Unless the newspaper can establish ownership of the work under a contract of service, it may have only acquired the right to reproduce it as a news/photograph item. The fact that Myers retained the negative may indicate that she retained the right to reproduce the work. See: Bobran v. Bier (1958), 15 D.L.R. (2d) 595, for a case dealing with reproduction of photographs, etc. Case 5 Holtzkopf, the President of Holtzkopf Furniture Design Ltd., a furniture manufacturer, engaged the services of Adrienne, a professional photographer, to attend a furniture exhibit and take a number of photographs of a particular chair that Larsen, a competitor, had on display. Adrienne did so and delivered Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-341

the photographs to Holtzkopf, along with her invoice for $500. Holtzkopf paid the invoice and began the production of a chair that was very similar in appearance to the competitor‘s chair, but that had a different structural design beneath the fabric outer cover. Holtzkopf advertised his chair in a trade magazine. He used several of Adrienne‘s photographs (which were black-and-white prints) because, although the chairs were similar in appearance, the exact design and colour of the fabric could not be ascertained from the photographs to identify the chair as Larsen‘s. Larsen noticed Holtzkopf‘s advertisement and brought an action against him for violation of the industrial design that he held on the chair. Holtzkopf‘s defence was that he did not copy the design, he only used Adrienne‘s photograph of the chair, which was too small to permit him to make an exact reproduction of the design. He also argued that the structural design of his chair was completely different as well. When Larsen discovered that Adrienne had photographed his chair, he included her as a co-defendant with Holtzkopf, claiming that she was a part of a conspiracy to infringe on his industrial design. Adrienne had also noticed the advertisement in the trade magazine and determined that Holtzkopf had used her photographs of the chair in the advertisement. She immediately brought an action against Holtzkopf for infringement of her copyright in the pictures that she had taken of Larsen‘s chair. Discuss the issues raised by the facts and the arguments that the parties might raise. Indicate how the court might decide the matter. Answer: Industrial design legislation was introduced to permit the owner of a registered design to protect it by legal action against those who would copy it. The question also raises the law related to copyright with respect to the use of the photograph by Holtzkopf. Did Holtzkopf "own" the photograph or did it belong to Adrienne, who took the picture? The law with respect to the ownership of the photograph depends upon the relationship between the parties at the time the photograph was taken. If Holtzkopf hired Adrienne to take the photograph, then he is probably the owner of the copyright in it, and is free to do as he wishes with the work. If Holtzkopf copied the design of the chairs which was subject to registered design protection to such a degree that a person examining both models would be unable to distinguish them, then Holtzkopf may be liable for infringement. (The test would be "confusability" based upon how a customer or consumer would view the two articles. See: Kevi A/S v. Suspa-Verein U.K. Ltd. [l982] R.P.C.l73). Holtzkopf's argument that the chairs were structurally different would probably not be a defence to the claim of infringement if the appearance was identical. However, if Holtzkopf could establish that the design was not original, he might successfully avoid liability. Case 6 For several years, the residents of Smallville had been served by one prominent pizza franchise, Lotza Pizza, which had operated in Smallville with the telephone number 456-1010. This telephone number corresponded to that of the parent company, which was 123-1010 and was a registered trademark of the company. The telephone number figured prominently in the company‘s advertising and jingles. A rival franchise of a competing pizza company then moved into Smallville and established a similar Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-342

operation. That company, Better Pizza, also had a trademarked telephone number, which was 222-0234. Just like Lotza Pizza, the telephone number played a large role in the company‘s promotions and was one of the major factors of customer recognition. In Smallville, Better Pizza had obtained the number 4570234. Smallville had only two exchanges, 456 and 457. Quon, a resident of Smallville, who had the telephone number 456-0234 for almost 15 years, began to receive a large number of inadvertent calls intended for Better Pizza. Quon soon tired of receiving these calls and approached Better Pizza about taking on his number. Better Pizza was content to let matters stand, rather than tak eon the additional expense, so Quon approached the local Lotza Pizza franchise. He told the manager about his telephone number and the recurring problem. Shortly thereafter, the Smallville Lotza Pizza franchise acquired Quons‘ telephone number 456-0234 and used it in its business. The local franchise of Better Pizza, upon discovering the use by Lotza Pizza of the number 456-0234, brought legal action against both the Smallville Lotza Pizza franchise and its parent company. Discuss the nature of the action and the rights and liabilities, if any, of the various parties involved. What arguments and/or defences may be used, and what would be the likely outcome? Answer: The issue raised in this case is 'confusability' of the trade-marked numbers, and whether the acquisition of a similar telephone number of Lotza Pizza was an attempt to 'pass-off' their goods for those of Better Pizza. The facts of the case are similar to those in the case of 241 Pizza Ltd. v. Pizza Pizza Limited et al. (1992) 10 O.R. (3d). In that case the court held that a telephone number was a valid trade mark, and since it was heavily advertised, it was an important source of its business revenue. Consequently, the acquisition and use of a very similar number by a competitor caused confusion and irreparable harm to the owner of the trade mark. An injunction was granted by the court to prevent the use of the similar number by the competitor. Case 7 Natasha Holdsworth produced a beautiful drawing of a French Provincial loveseat at the request of Classical Furniture Manufacturing Company. Classical Furniture paid Holdsworth $500 for the drawing and used it as the design for its loveseat in a current furniture collection. Six months after it acquired the drawing, and several months after it produced its first production models of the loveseat, the company applied for registration of the design. Shortly after Classical Furniture registered its design for the loveseat, it discovered that Antique Furniture Co. had a similar loveseat on display in its collection at a furniture exhibit. Classical Furniture immediately accused Antique Furniture of copying its design. As a defence, Antique Furniture Co. argued that the design was not original. It also came out in the course of discussion that it had acquired its own design by purchasing it from a designer by the name of Holdsworth. If Classical Furniture should institute legal proceedings against Antique Furniture, what arguments might the parties raise on their own behalf. What is the position of Holdsworth, and what are her rights (if any) or liability (if any)? Speculate as to the outcome of the action.

Answer: Industrial design legislation applies to artistic works produced by industrial processes. The design, however, must be original, and not simply a copy of an old creation, or a composite of others. In the case, Holdsworth produced the design at the request of Classical Furniture, and was paid for his services. The design was registered within the time specified in the Act. (1 year). If in fact the design was original and registered, the proprietor of the design could take action for damages against any person who imitates the design. In addition, penalties are provided under the Act for fraudulent imitation and infringement of the design. The right to proceed for offences under the Act is limited, as the proceedings must be instituted within twelve months of the offence. The question of intention to infringe should be considered. Is intention to deceive or use the design of another an element of the offence? Should Antique Furniture be responsible in damages for Holdsworth's actions? If Holdsworth sold the same design to Antique Furniture, then Antique Furniture might have a cause of action against him for selling it a design that was the property of Classical Furniture. For case examples: See: Canadian Heating and Ventilating Co. Ltd. v. T. Eaton Co. Limited and Guelph Stove Co. Limited (1916), 10 0.W.N. 439; and David Findlay et al. v. The Ottawa Furnace and Foundry Company (Limited) (1902), 7 Ex. C.R. 338. Case 8 The Cod Oil Drug Company produced a concentrated vitamin product that it sold in capsule form to its customers. To identify its products, it produced its capsules with three broad red bands — the first bearing the letter ―C,‖ the second, an ―O,‖ and the third, a ―D.‖ Each letter was printed in white against the red background to identify the company and its product that was derived from cod liver oil. The centre red band, bearing the letter ―O,‖ also acted as a seal that held the two parts of the capsule together. The Cod Oil Drug Company applied for a patent on the method of sealing the two parts of the capsule together, and for registration of the three bands with the letters imprinted as a trademark for its product. In the course of its application for a trademark, Cod Oil Drug Company was faced with an objection to its use of the trademark by Careful Drug Company, a competitor that produced its product in capsule form and bearing two blue bands, one on each part of the capsule, the first bearing a white ―C‖ and the second, a white ―D‖ against the blue bands. A thin blue band was used to join the capsule together, but it bore no letter. The design had been used by Careful Drug for many years before Cod Oil Drug developed the marking of its capsules. On what basis would Careful Drug argue that the trademark should not be issued? What might Cod Oil Drug argue in response? How successful would the patent application likely be? Answer: This case raises the issue of confusion with respect to a trade mark. Trade marks must be distinctive, to distinguish the wares of the user from the goods of others. Careful Drug had used its mark for many years before the design created by Cod Oil Drug, and might argue that it was a prior user. It might also argue that the centre band which held the capsule together was a utilitarian feature which could not be protected. On the question of confusion, the Coca-Cola case in the Judicial Decisions might be useful to apply to the facts of this case, as many of the arguments that arose in that case might be raised in this case as well. Could blue be confused with red? Does the letter on each band represent a distinctive mark? Would three broad red bands be confused with two broad blue bands and a narrow blue one? Cod Oil Drug may have difficulty obtaining a patent on its method of closure, since it has been in use by Careful Drug for some Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-344

time. It would appear that the idea is not original, or perhaps too late, as the method of closure seems to be in the public domain. In addition to the Coca-Cola case: See also: Mysterious Chemical Co. v. Protex Corp. of Canada Ltd., [1940] 2 D.L.R. 681; and Battle Pharmaceuticals and The British Drug Houses, Limited, [1946] S.C.R. 50.

Chapter 27. Consumer-Protection Legislation Chapter Topics Introduction Historical Development Modern Development Consumer Safety Consumer Information Consumer-Product Quality and Performance Protection Consumer Protection Related to Business Practices Credit-Granting Consumer Protection Credit-Reporting Consumer Protection Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Chapter Objectives After study of this chapter, students should be able to: • Describe consumer safety, information, and product quality/performance protection. • Explain consumer protection related to business practices. • Discuss credit-granting and credit-reporting consumer protection. YOUR BUSINESS AT RISK In an effort to balance the commercial playing field, our governments have armed consumers with significant legal rights. Business owners must recognize and accommodate these rights. If the firm fails in its responsibilities, or takes advantage of consumers, it will be called to account with significant remedies and penalties available to both consumers and government. Moreover, breaches of consumer-protection legislation are usually well-publicized, creating a severe penalty: damage to the public image of the firm, which is sometimes irreparable. CHAPTER COMMENTARY Consumer protection legislation to some extent reflects the reluctance on the part of the public to seek redress from the courts in cases where unscrupulous merchants pass off shoddy goods, or use deceptive trade practices in the sale of goods. The courts have always provided a degree of "consumer protection" through the common law, but as a general rule, they have been reluctant to provide much in the line of relief for the careless shopper or foolish user of credit. This has not been the case with governments in the preparation of consumer protection legislation. In some instances, consumer protection legislation has imposed strict requirements or obligations on sellers and those whose extend credit to buyers. See, for example, the position of the assignee of a promissory note in a consumer purchase transaction, or the position of the used goods Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-345

seller in Saskatchewan. In many cases, nevertheless, the legislation was necessary to deal with practices that could not adequately be dealt with by the courts, such as credit reporting, and itinerant sellers. The variation from province to province in consumer protection legislation dictated a broad survey approach to the topic in the text, and for classroom purposes, the chapter may be examined in this fashion. As an alternative, provincial legislation for a particular province may be presented to the students to supplement the text, if detailed information on the legislation of the province is necessary. Some of the more important federal statutes are noted in the footnotes, as are some of the typical provincial laws. The problems facing a manufacturer operating under consumer protection legislation are illustrated in the Court Decision of Buchan v. Ortho Pharmaceutical (Canada) Ltd. In the case, the manufacturer had taken a considerable number of precautions, but failed to include a detailed health warning on the package and failed to provide adequate information to the medical profession. The manufacturer complied with the notice requests under the Food and Drugs Act, but the court held that the manufacturer also had a duty to provide adequate notice to the users as well. The case may be used as a vehicle to discuss product liability and consumer protection generally. The Court Decision, R. v. St. James International Academy Ltd. provides an example of misleading statements that are caught by The Business Practices Act (Ontario).

Review Questions 1. Why was it necessary for provincial legislatures to introduce comprehensive consumer protection laws during the post World War II period? Answer: The need for consumer protection legislation arose because the manufacturing and the distribution systems for consumer goods changed. Manufacturing was no longer localized, and goods were no longer serviced by local retailers, nor were the goods easily repaired by the users. Warranties were also limited by the sellers, leaving the consumer unprotected.

2. What form did the consumer protection laws take? Answer: Consumer protection generally took the form of changes in the law pertaining to the sale of goods which prevented manufacturers from excluding the implied warranties under the act. It also imposed an obligation (in some provinces) on manufacturers to provide parts and services for their equipment in that province, and established laws which protected consumers from hazardous products and false advertising claims. Disclosure requirements and contents were imposed on credit granting and credit reporting agencies as well.

3. What practices of some collection agencies led to legislation controlling the collection of debts generally? Answer: Collection agency practices of harassment of debtors, contacting their employers, pressuring their families to pay, and the use of documents similar to court forms led to legislation prohibiting or controlling their activities.

4. Describe the impact of much of the consumer protection legislation on exemption clauses in the sale of goods. Answer: Exemption clauses in consumer good contracts were not permitted to exclude the implied warranties as to fitness, etc.

5. Assess the statement: "consumer protection legislation has increased the cost of selling, and in turn, the price which the buyer must pay for the goods purchased. It does nothing to protect the negligent or careless buyer." Answer: Compliance with consumer protection laws adds to the price of goods and this cost is passed along to the consumer. Overall, however, it probably protects the buyer by providing better service and perhaps better quality goods. Apart from this, it probably does very little to protect the careless buyer.

6. Why was it necessary for the Province of Saskatchewan to introduce its Consumer Products Warranties Act? Answer: The legislation was introduced because manufacturers of goods had failed to provide adequate service for their goods in that province, and because sellers had attempted to avoid obligations to persons who received goods or gifts, etc. and had no right of action if the goods were defective.

7. Has consumer protection legislation carried consumer protection too far in terms of the onus it places on the seller? Does this not simply increase the cost of goods to the buyer? Answer: The cost of compliance with the legislation becomes a cost which the manufacturer or seller will pass along to the buyer as a part of the purchase price. However, compliance with the legislation may increase sales, as buyers will be less hesitant to purchase goods knowing that the warranties, parts, etc. are available, and redress is available under the legislation.

8. Explain the need for legislative control over the selling practices of door-to-door sellers. Answer: The control of high-pressure selling practices of door-to-door salespersons was found necessary because persons were vulnerable when sold goods in their own home, as the lacked the opportunity to simply "walk away" from the seller.

9. What is the purpose of the "cooling-off period" which the consumer protection legislation frequently imposes on contractual relations between buyers and door-to-door sellers? Answer: The "cooling-off" period enables persons who purchased goods from a door-to-door salesperson to review the purchase at their leisure then make a decision as to whether they should proceed with the sale. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-347

10. Describe some of the practices of credit reporting agencies which resulted in legislative control over their activities. Answer: Credit reporting agencies tended to collect a great deal on information of a personal nature about persons, some of it inaccurate, and stored it in large computer data books. Concern over the use made of this information and the inability of persons to examine and correct information concerning them led to the control of the agencies and their use of the information.

11. What controls were generally imposed on sellers of durable goods? Answer: Sellers of durable goods were (in some provinces) expected to provide parts and service, and required to warrant that the equipment would last for a reasonable time in use. The goods were also required to meet certain safety standards.

12. The general thrust of consumer protection legislation has been to provide accurate information or disclosure of essential terms to the buyer. Has consumer protection legislation generally met this goal? Answer: Yes. In general, the information provided by most sellers is accurate and does disclose the essential terms of the sale to the buyer. The number of convictions for violation of consumer protection laws is relatively small in Canada at present.

13. How has consumer protection legislation addressed exaggerated advertising claims? Answer: Exaggerated advertising claims are now subject to the false or misleading advertising prohibition in the Competition Act Investigation Act. Provincial legislation in some provinces also makes sellers liable for any statement made about the goods which proves to be untrue.

Mini-Case Problems

1. An automobile owner purchased a container of cleaning solvent that was designed for removing rust and dirt from corroded metal parts. The directions indicated that it should be dissolved with 10 parts water to 1 part solvent, and stated that it should not be used full strength. The label bore the symbol for corrosive material and the words: ―For Industrial Use Only.‖ The automobile owner diluted the solvent and applied it as directed but, in doing so, accidentally splashed the chemical into his eyes, causing him to lose the sight of one eye. He brought an action for damages against the manufacturer for his injury. Discuss and render a decision. Answer: Under the Hazardous Products Act dangerous goods must be so marked with a warning, and the first aid remedy, etc. provided on the label. The goods in this case were marked with corrosion symbol which should Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-348

be an adequate warning to the user that care must be taken in use. The manufacturer would argue that the product was not intended for use by ordinary consumers, hence, the words: "For Industrial Use Only", where only qualified persons would use the chemical. The seller, however, may be liable for selling the goods to a consumer without providing adequate instructions as to its use and hazards. The case would turn on whether adequate warning of the hazard in use was given, as industrial users need not be given as detailed a warning as ordinary consumers, since they are presumably skilled in its use and aware of any dangers associated with the product.

2. Clarissa purchased a new Super 8 Sedan from Super 8 Motors Ltd., a licensed dealer of the manufacturer of the automobile. The vehicle developed a number of problems after delivery, each requiring extensive repairs by the dealer under warranty. After the twelfth breakdown of the vehicle, Clarissa approaches you for advice as to what she should do. Advise Clarissa. Answer: Since the vehicle is a new vehicle, purchased from an authorized dealer, Clarissa my apply for arbitration under the CANVAP plan, and request either replacement of the vehicle or a return of her purchase price. See text. 3. A magazine salesperson called at Angela‘s home and offered to sell her a ‗package‘ of 6 magazines at a special 1 year subscription price of $360. Angela gave the salesperson credit card authorization for $30, being the first of the 12 payments under the agreement. The next day, Angela discovered that the price she would be paying was equivalent to the regular news stand price for each issue. Advise Angela. Answer: Angela may rescind the contract to purchase the magazines if she acts promptly. Since this is a ‗door to door‘ salesman situation, a ‗cooling off‘ period is provided under most consumer protection statutes, and the contract does not become binding until after the expiry of a statutory period of time. If Angela notifies the seller (usually by registered letter) within the time period, the contract is cancelled, and she would be entitled to a return of her deposit.

4. Max purchased a used motor vehicle from Used Cars Inc. on a time payment arrangement where he paid the seller $300 per month. The vehicle broke down shortly after the purchase, and when Used Cars Inc. refused to make repairs, Max stopped making payments. A few months later, Max was turned down on a credit purchase because he was a ‗bad credit risk.‘ Apparently, Used Cars Inc. had reported his default to the Credit Bureau. Advise Max. Answer: Students should use this case to discuss the position of the buyer of an used vehicle. Did the creditor have the right to report the default by Max? What steps should Max have taken to deal with the automobile? Was the seller obliged to make repairs? If the automobile was sold to Max without a warranty or ―as is‖, Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-349

the seller may have no obligation to repair the vehicle. If this should be the case, Max would be in default, and the seller entitled to report this to the Credit Bureau.

Case Problems for Discussion Case 1 Selma purchased a home entertainment system from a local TV and electronics store. A part of her purchase included a large 60 inch TV. Selma paid the store in full with her credit card. The store delivered the system to her rural home, and an employee of the store hooked it up. Picture quality, however, was poor at the time, and the employee suggested that the poor quality signal was due to issues with her internet service provider. Selma disregarded this and complained to the store owner. A qualified technician came out to Selma‘s home, and adjusted all that could be adjusted, but the change only marginally improved picture quality. A series of email complaints by Selma followed, eventually a senior technician advised Selma that she would never get full performance out of her system, as the internet service provider‘s technology in that rural area ―had no chance of ever living up to the capabilities‖ of her entertainment system. The picture quality that she had seen in the urban store display could not be achieved in her home. Advise Selma. Answer: The issue here is whether the goods were reasonably fit for the use intended. Was the seller under any obligation to determine if her house was suitably located to receive good picture quality? Did Selma rely on the seller‘s advice initially? Students should consider how picture quality might be decided. If it was inadequate by reasonable standards, then the equipment was not suitable, and the seller should have been aware of this fact at the time of installation. If the home entertainment system is otherwise satisfactory (perhaps for music from other connected device), query if Selma would be able to establish that the system was unfit for the use intended. Case 2 Black‘s Furniture Ltd. was a high-end home furnishings establishment in a large city. Hilary, a mid-level executive in a large corporation, visited the showroom, and saw an expensive bedroom suite that she felt would fit well with her other furniture in her town-house. Hilary enquired to determine if Black‘s Furniture Ltd. offered a time-payment plan for purchases, and was advised that the company did so for ‗good customers.‘ She was also advised that purchases on the time-payment plan required a 10% first payment, with the balance payable over the next 12 months in equal payments plus interest at 12% per annum. Hilary signed a purchase agreement for the $16,000 bedroom suite and provided a cheque for the 10% deposit. The agreement included authorization for a credit report. Later in the day, while at work, Hilary was informed by the receptionist for her department that the furniture store had called wanting a mailing address to return her cheque, saying that they would not sell her the bedroom suite due to a ‗bad credit report.‘ Hilary was embarrassed by the news, and immediately called the store. She was then advised by a store employee that the credit report had revealed that she had defaulted on a car loan, and was delinquent in payments on a personal loan. No other information was provided, but Hilary recalled that on the car Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-350

loan, she had returned the vehicle to the car dealer due to defects, and the loan had been cancelled. She also recalled that while she had missed a few payments on the personal loan, it was eventually paid in full. Discuss the issues raised in this case, and the rights and responsibilities of all parties. Answer: The case provides a platform for the discussion of credit reporting agencies and the use of credit checks by business firms. Students should note that the facts indicate that Hilary gave the retailer the authority to obtain a credit report on her from the credit bureau. The report presumably included information on the car loan and her poor performance on the personal loan. This led the retailer to conclude that she was a poor credit risk. Did the purchase contract permit the retailer to refuse her credit on the basis of a credit report? Students should also discuss the actions of the retailer in calling Hilary‘s receptionist and advising her that Hilary was a ‗bad credit‘ risk. Students should note that Hilary has the right to provide explanatory information to the credit bureau concerning the loans in question. This, however, may not help her with the present purchase.

Case 3 Harvey purchased 1 kilogram of ground meat from Alice‘s Meat Market. The package was labelled ―lean ground beef‖ and had been located in a freezer under a sign that advertised ―Special sale: $10.99 per kilogram.‖ Harvey‘s friend, who was a meat inspector at a local packing house, dropped by for a visit while he was preparing to barbecue patties made from the ground meat. His friend examined the meat and advised Harvey that in his opinion the meat was not lean ground beef, but ordinary ―hamburg‖ that contained close to 40 percent fat. Harvey checked with Alice‘s Meat Market and was told that a clerk had mislabelled the meat as lean ground beef, and that the meat was actually standard-fat hamburger. The special sale, however, was for standard-fat hamburg at $10.99. Discuss the issues raised in this case, and discuss the legal position of Harvey and of Alice‘s Meat Market. Answer: The facts of this case are adopted from those of the R. v. Steinberg's Ltd. case footnoted in the text. Some questions might be: To what extent was the error made? Was this an isolated incident? Did a clerk accidentally mislabel the one package, or a large number? What difference would this make (if any)? What steps did the management of the market take to prevent errors of this sort from happening? Note the importance placed upon this activity in the Steinberg's case. What corrective action should the seller take? Was there an intention to deceive the public? Does this matter fall under the legislation? See: Regina v. Standard Meats Ltd., [1973] 6 W.W.R. 350 for a case which states that strict liability is imposed under the Food and Drugs Act for misleading or false advertising in the selling of food - hence mens rea is not important. Compare this with the position of the seller under the Consumer Packaging and Labelling Act in Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-351

the Steinberg's Ltd. case where the defendant had used 'due diligence' to avoid error, and the charge of the Crown failed. Case 4 Carter carried on a part-time business of lending money to his friends to enable them to purchase consumer goods. He would also lend money to strangers who had been directed to him by his friends. The loans were generally for a short term and were written up in a casual way. Usually the document set out the name of the party and referred only to the principal amount borrowed and the lump-sum interest amount payable on the due date. On March 1st, Jerry Messier approached Carter in order to borrow $800 for the purchase of a stereo system. Carter loaned him the money and had him sign a document that read as follows: March 1, 2020 I promise to pay S. Carter on the first day of each month the sum of $200 until the total amount of $1,000 has been paid.

$ 800 $ 200 $1,000

principal interest

Value received ―J. Messier‖ A few weeks later, Messier advised Carter that he had no intention of paying him the money, as the paper he signed was worthless and the debt unenforceable. Advise Carter and Messier. What issues (if any) might arise if Carter should decide to institute legal proceedings against Messier? Answer: The problem faced by Carter is one which has arisen due to his casual manner in the documentation of the loans which he has made. If the loan to Doe is used as an example, the loan fails to provide for a rate of interest, but instead states the interest as a lump sum amount. For discussion purposes, the rate of interest might be calculated as an annual percentage rate. (Depending upon the method used, the annual rate would be in excess of 60% and a violation of the Criminal Code [R.S.C. 1985 c.C-46 s. 347]). Some questions that might be raised to determine the positions of Carter and Doe might include: Is Carter a money-lender subject to any licensing requirements? Would the fact that he considered it a part-time business make any difference? Was the document intended to be a formal legal document i.e., a promissory note? An I.O.U.? Would it make any difference if it was a simple I.O.U.? If the loan fails to comply with the Interest Act, R.S.C. 1985, c.I-15, could Carter collect the $200 interest? What interest rate would apply? (5% ?) Note that an interest rate in excess of 60% is defined as a "criminal rate", and constitutes a violation of the Criminal Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-352

Code. Carter's non-disclosure of the interest rate would also violate consumer protection legislation requiring disclosure of the interest rate in loans for consumer purchasers. If Carter attempts to collect the amount owing, Doe may apply to the court for relief under the Unconscionable Transactions Relief Act, R.S.O. 1990, c. 514 in Ontario (and similar legislation in other provinces) to have the court review the transaction, and revise or relieve the debtor from payment. Case 5 John Smith lived at 221 Pine Avenue in a large city. He had no debts and had never previously purchased goods on credit. He did, however, wish to purchase a particular power boat, so he entered into negotiations with the owner of a marina to obtain the boat on credit. He consented to the marina owner making a credit check before the transaction was completed, and was dismayed when the marina owner refused to proceed with the transaction because he was a ―poor credit risk.‖ The credit-reporting agency apparently had provided a credit report on a John Smith who some months before had resided at 212 Pine Street in the same city, and who had defaulted on a number of substantial consumer debts. John Smith knew nothing of the other John Smith, nor had he resided at 212 Pine Street. What avenues are open to John Smith in this case to rectify the situation?

Answer: This case concerns credit reporting agencies, and the use of credit reports in business transactions. A point to note in the case is that John Smith consented to the credit check. The problem was due in part to the carelessness of the credit reporting agency in failing to carefully check the street address. While it was a rare coincidence that persons with the same surname lived at the same house number, but on different streets (one was Pine Avenue, the other Pine Street), the mistake was nevertheless made by the reporting agency. Under the laws of most provinces, where credit is refused or the charges adjusted to reflect a poor risk, the purchaser is entitled to know the name of the agency and to examine his file. If an error exists, the individual can have the agency correct the error, or if a conflict of opinion exists, the individual can have an explanation added to the file to reflect his view of the matter. See text for a discussion of credit agencies, and provincial legislation such as the Consumer Reporting Act, R.S.O. 1990, c. C-33. Case 6 Mary Dwight purchased a vacuum cleaner from a salesperson at a ―home show‖ booth who represented himself as a sales agent for Speedy Vacuum Cleaners. The salesperson gave a demonstration of the vacuum in Mary‘s living room, and the machine appeared to do an excellent job of cleaning dust and dirt from her carpets. At the conclusion of the demonstration, the salesperson produced a form contract that called for a deposit of $100, and monthly payments of $100 each until the full purchase price of $800 was paid. Mary paid the $100 deposit and signed the contract. Later that day, the salesman delivered the new vacuum to her residence. On his departure, he stated that he was certain that Mary would find the vacuum satisfactory, as the particular model was ―the finest model that the company had produced.‖ The machine did operate in a satisfactory manner for some seven months. Then one day while Mary was using the vacuum to clean her automobile, she noticed a wisp of black smoke seeping from a seam in the casing. She immediately unplugged the machine and threw it in the children‘s inflatable swimming Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-353

pool beside her driveway. A few minutes later she retrieved the machine from the pool and returned it to the Speedy Vacuum Cleaner depot in her city. The repairer examined the machine and explained to her that the smoke had been caused by the melting of a small electrical part in the machine. He offered to replace the part free of charge even though the six-month written warranty had expired, but refused to provide free replacement for several other electrical parts that had been damaged by the machine‘s immersion in the swimming pool. The cost of repairs amounted to $120, and Mary paid the account. At the end of the month, however, she refused to make the final $100 payment under the purchase agreement, because she felt that the company should cover at least a part of the cost of the repairs to the machine. Eventually, the company sent her a demand letter for payment of the final $100 owing under the purchase agreement. Discuss the defences (if any) that Mary might raise in this case. Indicate the possible outcome. Answer: The two issues raised in this case are related to Mary's conduct. From the facts of the case, the warranty on the vacuum had expired, and the vendor's express obligation to repair under contract was past. The seller was prepared to repair the defective part free of charge, and did so, but charged her for the repairs caused by her action of throwing the vacuum in the pool. Were these repairs also a liability of the seller? Were her actions, based upon the belief that the smoke was a result of a defect in the machine, reasonable under the circumstances? Did Mary have the right to withhold payment of the last payment on the purchase? To do so she would be obliged to establish some legal right similar to set-off. Could she argue that the salesperson's statement that the machine was "the finest model that the company had produced" constitute a more extensive warranty than the contract warranty? Would consumer protection legislation give her the right to raise this claim? If she cannot establish the right to withhold the last payment, an action by the seller to recover the remaining $100 would probably be successful. Case 7 Wily Willie sold kitchen gadgets door to door. One of his products was a tomato slicer that he stated would slice tomatoes ―paper thin.‖ His sales display included a picture of a tomato cut into slices of a uniform one-millimetre thickness. The caption on the picture stated: ―Look at what our slicer does to a firm ripe tomato!‖ The photograph was of a very firm variety of tomato, noted for its uniformity. The instruction sheet that accompanied the gadget stated that the user should ―select only firm tomatoes that have not fully ripened.‖ Users were cautioned against using fully ripe or over-ripe tomatoes. Charlie purchased one of the tomato slicers at a price of $19.95 and attempted to slice a tomato for his lunch. He ignored the instruction sheet and simply selected a tomato from his refrigerator. The gadget mashed the tomato instead of slicing it. Charlie tried to slice a second tomato and, when the machine mashed the second tomato as well, he became angry and smashed the slicer. He then sought out Willie, who was at the next house, attempting to sell his products to Charlie‘s neighbour. Charlie threw the smashed slicer at the salesman‘s feet and demanded his money back. When Willie refused, Charlie turned to the neighbour and said: ―Don‘t buy anything from this crook! The junk he sells doesn‘t work!‖ Discuss the legal issues raised in this case and advise Charlie and Willie of their rights.

Answer: A number of different consumer protection and other issues are raised in this case. The first point to note would be the statement Willie makes that his device will slice tomatoes "paper thin". Is this a false representation of fact or merely a statement to illustrate the comparative slicing ability of his machine vs. the ordinary kitchen knife? If this is a written statement, does it violate the Competition Act, false advertising provisions? If the machine truly works on a firm tomato, the courts might view the statement as simply a comparative one, with "paper thin" to be considered a 1 mm. thickness as shown on the advertisement. The remainder of the advertising copy might also be considered as a definition of "paper thin" as well. Willie's statement, consequently, may not constitute a violation of the provisions of the Competition Act. The next issue is whether the purchaser was given sufficient notice of the limitations of the machine. Was adequate notice or warning given before or at the time of the sale? If it works when used as directed, then it is unlikely that it was misrepresented as to it performance. If it was, then Charlie would be entitled to his money back. In the case, however, Charlie destroyed the device, and in doing so also ended his opportunity to recover the price paid. His statement to his neighbour might very well be a slander of goods or actionable slander by Willie, since he called Willie a "crook". Case 8 Adrienne had been annoyed with the paint peeling from the iron railing on the stairs of her front porch. She had purchased some inexpensive paints in the past, and each time, after two or three months, rust had bubbled up from beneath the paint. Exasperated, she returned to the hardware store. On this occasion, the store had a glossy cardboard end-of-aisle display of a premium-priced paint made by Protecto Paints Ltd. Printed on the display were the words ―stops rust,‖ and on the labels of the cans were the words ―prevents rust.‖ Adrienne bought the paint and set out to apply it to the railing. The directions called for the removal of all prior paint and primer. For the most part, she was successful in removing the prior paint, but not the primer beneath. After two years, the rust returned, flaking the paint. Adrienne informed the consumer ministry, who brought suit against Protecto Paints. An internationally recognized expert on paint gave evidence that no paint known to the industry can stop rust indefinitely. The ability to stop rust ends when the seal is broken, and some paints keep a seal better than others. The expert advised the court that the Protecto formulation was the finest known to the industry, using the finest possible ingredients. Render a decision on behalf of the court. Answer: This case may be considered in terms of product labeling. Were the statements false? In what context should they be taken? Under what circumstances, and for how long? The legislation under which the complaint may have been brought would probably be the Consumer Packaging and Labeling Act. If the label information was in fact false, the manufacture might be guilty of false labeling. The label stated that the paint 'prevents' rust, but also sets out instructions that must be adhered to for the paint to prevent rust. Based upon the expert evidence the paint would prevent rust as long as the paint seal was not broken, the manufacturer Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-355

might, therefore, successfully argue that the statement was accurate provided the paint surface was properly prepared and not damaged. Case 9 Luther Green was employed by an aircraft maintenance and repair company to repair and modify aircraft airframes and interiors. Green possessed the necessary Department of Transport licences to perform the type of work for which he was engaged. Since much of the work involved metal repair and refinishing, a certain amount of the work consisted of grinding and polishing, using power grinders and finishers. While engaged in the grinding of a metal seat bracket in a large jet aircraft, Green decided to change grinding wheels on his power grinder in order to speed up the shaping of the part. He replaced the fine grit wheel on his grinder with a coarse grit wheel that bore the following warning on the package: ―DO NOT USE AT MACHINE SPEEDS IN EXCESS OF 6,000 RPM.‖ Oliver Brown, a fellow employee, picked up the grinder after Green had completed the grinding work on the seat bracket, and began the grinding of a part of the wing assembly. He set the machine speed first at 5,000 rpm, but later increased the speed to 9,000 rpm, a common grinding speed. No sooner had the speed increased then the grinding wheel disintegrated, causing injury to Brown and a nearby worker. What consumer-protection issues are raised by this incident? What rights (if any) would Brown have at law?

Answer: From a consumer protection point of view, this case concerns the duty of the manufacturer to warn the user of any inherent dangers associated with the product. The duty must, however, be considered in light of its contemplated use. Grinders and other devices of a similar nature are, to a degree, inherently dangerous and some knowledge and skill in their use is necessary, otherwise danger and injury may result. The question that might be asked is: Is a warning necessary to the user of the grinding wheel? If so, what type of warning should be given? Is a warning on the package sufficient, or should the grinding wheel also bear the same warning? In this case, the manufacturer did provide a warning on the package. Was this adequate notice to a skilled workman? Brown was a user of a machine without notice of the warning on the package. As a skilled craftsman, was he on notice to determine the maximum safe speed for the grinding wheel before using it at high speed? To what extent does the skilled user have a duty of care where he knows that the likelihood of disintegration of a grinding wheel increases with the speed? How might the courts "balance" the duty of the manufacturer and the user in this case? Goods which possess inherent danger must bear warnings as to their hazards, and the manufacturer may be held liable if the goods are not marked in such a way that the warning reflects the degree of danger associated with the normal use. See: Lambert et al. v. Lastoplex Chemicals Co. Ltd. et al. (1971), 25 D.L.R. (3D) 121. Where the product is designed to be used by a skilled workman who is expected to be familiar with the hazards of using the product, the warning need not be as detailed or explicit. See: Austin v. 3M Canada Ltd. (1974), 7 O.R. (2d) 200. Case 10 Jean Hamilton admired a used car that Honest Harry had on display at his car lot. Hamilton took the car for a test drive and found the vehicle to be ideal for her purposes. When she inquired about the previous owner, the salesman told her that it was his understanding that the last owner had been an elderly Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-356

schoolteacher, who usually used the automobile only on weekends. The odometer on the automobile indicated that the vehicle had been driven only 80,000 kilometres. Hamilton purchased the automobile, but discovered a few months later that the vehicle had been used as a taxi before it was purchased by the schoolteacher. The automobile, in effect, had been driven 100,000 kilometres further than the odometer indicated, as it registered only five digits before returning to zero — the true distance that the vehicle had been driven was 180,000 kilometres. The automobile had given Hamilton no trouble during the time she had owned it, and she had driven the vehicle over 5,000 kilometres. She was annoyed, however, that the vehicle had had so much use, even though it still had a ―like-new‖ appearance. Hamilton brought an action for rescission of the contract when Honest Harry refused to take back the automobile and return the purchase price. Discuss the argument that each party might raise in this case. Render a decision. Answer: This case illustrates a common consumer type transaction where the parties lack accurate information concerning the previous history of the goods. The goods are used goods, which the seller offered as such, and which the seller accurately described insofar as his knowledge of the product was concerned. He was not aware of the extensive use of the vehicle by the owner prior to the school teacher. On this point, the question might be raised: To what extent does the seller have a duty to determine the past history of the used goods sold? The odometer registered 80,000 km., but unknown to both parties the device was on its second time around. Should the seller be obliged to warrant the accuracy of the equipment? Is the purchase a caveat emptor situation? What obligation does the buyer have to satisfy himself that he is obtaining value for his money? If the mileage on the vehicle was miss-stated, the seller may be guilty of innocent misrepresentation, and the contract open to rescission by the buyer when the true facts were discovered. The right to rescission, however, would depend to some extent on the circumstances surrounding the representation as to the mileage. If it was set out in the contract, it may be a warranty. See: Routledge v. McKay et al., [1954] 1 All E.R. 855.

Chapter 28. Law of Negotiable Instruments

Chapter Topics Introduction Historical Development of the Law The Bills of Exchange Act Bills of Exchange Liability of the Parties to a Bill of Exchange Cheques Promissory Notes Defences to Claims for Payment of Bills of Exchange Consumer Protection and Negotiable Instruments Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-357

Chapter Objectives After study of this chapter, students should be able to: • Differentiate among the various kinds of negotiable instruments. • Explain the Bills of Exchange Act. • Discuss claims for payments and the defences to certain claims. • Explain consumer protection related to negotiable instruments. YOUR BUSINESS AT RISK Negotiable instruments are paper promises creating rights and duties, and can represent enormous sums of money. Since our markets and transactions demand both efficiency and integrity, a full set of rules has been developed to govern them, and because certainty is an equally important market concern, these rules are not flexible or open to much interpretation. As a result, failure to understand rules of negotiable instruments can cause significant and irretrievable losses, sometimes for just a technicality. It is up to you to know the rules, not for the system to make special exceptions for ignorance. CHAPTER COMMENTARY The law of negotiable instruments has a long and interesting history, which explains in part many of the special features that attach to certain kinds of notes, and the reasons why special rights are sometimes vested in the holder. For this reason, as a part of the review of this material, the various instruments might be discussed in terms of their original purpose and present day use. For example, the cheque, which is a bill of exchange, is now widely used as a result of the growth of the banking system and commerce in general. While virtually everyone to-day is familiar with this type of negotiable instrument, prior to the middle of the 19th Century, only business persons used them regularly. The excerpt from the Federal Discount Corp. Ltd. v. St. Pierre and St. Pierre case provides a further review of the historical background of the bill of exchange, and in particular, the development of the special rights of a holder in due course. Because the law relating to negotiable instruments has its roots in the Law Merchant, it has associated with it a legal vocabulary of its own. Such terms as drawer, drawee, endorser, holder in due course, sight drafts, restrictive endorsements, bearer, and 'without recourse' have special meanings in connection with bills of exchange, and their significance should be committed to memory. A systematic approach to the topic might be to suggest that the students read the chapter, then prepare a list of definitions of the new terms. The text material may then be read again, using the list of definitions where necessary, as each of the different negotiable instruments are discussed. Most students are familiar with the cheque, which is a type of bill of exchange. It differs from the ordinary bill of exchange in that it is always drawn on a bank, and is payable on demand (except, of course, where the cheque is post-dated). The bank upon which the cheque is drawn is a special type of drawee, however, and need only make payment when it has sufficient funds on hand in the drawer's account to pay the face amount of the cheque. The significance of a certified cheque is discussed in the case excerpt from Centrac Inc. v. Canadian Imperial Bank of Commerce. The general lay-out of a cheque is as follows: Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-358

The bill of exchange resembles the cheque in many respects, as a comparison of the above lay-out with the illustration of a bill of exchange in the text will attest. Comparing the two illustrations, the similarities should become apparent. For example, the drawee in the bill of exchange is "Retail Co. Ltd. instead of the bank above, and the order of payment is similar as well. In the text illustration, the bill has provision for acceptance in the upper left hand corner, but this would not be necessary with a demand bill (such as a cheque), since payment would be expected on presentation. The promissory note is also covered by the Bills of Exchange Act, and differs from the bill of exchange in that it is a promise to pay, and it does not require acceptance, since the maker is the party who prepares and signs the promise. As the text indicates, it must meet the essentials of negotiability if it is to be treated as a negotiable instrument. These essentials are set out on the chart that accompanies this chapter. A promissory note, however, must be delivered before the maker becomes liable on it. The defences to the payment of a bill of exchange should be noted, because there are many reasons why a bill may not be legally enforceable against a party. These defences may be divided into the three categories set out in the text: (1)

real defences.

(2)

defect of title defences.

(3)

mere personal defences.

The Court Decision in the chapter may be helpful in understanding the nature of negotiable instruments. Re Maubach and Bank of Nova Scotia examines the cheque as a bill of exchange, and in particular the nature and effect of certification. While not a simple case to follow or understand, the law is stated by the judge as it applies to certification. The emphasis in the chapter is placed upon those negotiable instruments covered by the Bills of Exchange Act, but any class discussion should include a brief examination of the more recent developments Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-359

in the field of finance to settle debts. The "credit card," for example, might be a worthwhile instrument to examine in this regard, in view of its wide spread use in consumer purchases. Consumer protection legislation and its effect on transactions that involve negotiable instruments should also be discussed, to illustrate the general trend of the law toward the restriction of the special rights of holders in due course to non-consumer situations.

Review Questions 1. Why is acceptance of a bill of exchange important? Answer: Acceptance is important because it is the "signing" of the bill by the drawee that renders the drawee liable on it.

2. How does a cheque differ from the usual type of bill of exchange? Answer: A cheque is a bill of exchange that is always drawn on a bank and is payable on demand as a demand bill.

3. Define a bill of exchange, and indicate how it is determined to be "negotiable." Answer: A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, and requiring the person to whom it is addressed to pay either on demand or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person or bearer. The bill must meet these requirements to be negotiable.

4. What is the purpose of a bill of exchange in a modern commercial transaction? Answer: A bill of exchange in a modern commercial transaction is used to ensure payment by the buyer of goods, and to enable the seller to use the promise of payment (the bill of exchange) as a means of financing his own business by way of endorsement to others. It also reduces risk by replacing the need to exchange money.

5. Distinguish a sight bill from a demand bill. Answer: A sight bill has 3 days grace added for payment. A demand bill is payable on presentation.

6. Define a holder in due course, and explain how a holder in due course differs from an ordinary holder of a bill of exchange. Answer: A holder in due course is a person who in good faith, takes a bill of exchange complete and regular on its face, for value, before maturity, and without notice of any defect or prior dishonour. A holder in due course of a bill of exchange is subject only to real defences in any claim for payment.

7. Outline the procedure to be followed when a bill of exchange is dishonoured by non-payment. Answer: When a bill of exchange is dishonoured, the holder must give notice to the drawer, payee and any other prior endorser not later than the business day next after the dishonour occurs.

8. When a holder in due course of a promissory note attempts to enforce payment, what types of defences might be raised by the maker named in the note? Answer: Only a real defence (forgery, minority of maker, etc.) may be raised against a holder in due course.

9. Define a promissory note, and distinguish it from a bill of exchange. Answer: A promissory note is an unconditional promise in writing, signed by the marker of the note, to pay to, or to the order of, a specific person or bearer on demand, or at a fixed or determinable future time, a sum certain in money. It differs from a bill of exchange in that it is a promise rather than an order to pay.

10. Explain how an endorsement in blank differs from a restrictive endorsement, and the circumstances under which each might be used. Answer: An endorsement in blank turns the instrument into a bearer document. A restrictive endorsement restricts the negotiation to the person named in the endorsement. The former permits anyone in lawful possession of the instrument to negotiate it, the latter may be used to restrict negotiation to one person, or to prevent negotiation to anyone if the endorsement is restricted to read "for deposit only to the credit of _______."

11. Promissory notes which call for instalment payments often contain acceleration clauses. Why is this so, and what is the purpose of such a clause? Answer: If a promissory note calls for instalment payments, default on one payment would only entitle the holder to take action to recover the single payment. An acceleration clause causes the balance of the debt to become due and payable immediately on the default of a single payment.

12. Indicate the different treatment at law which is given a cheque certified at the request of the holder as opposed to a cheque certified at the request of the drawer. Answer: In both cases the bank becomes liable on the instrument, but in the case of a cheque certified at the request of the drawer, the drawer may return the cheque for cancellation at any time before delivery.

13. What is a defect of title defence? What type of holder of a promissory note or bill of exchange would this type of defence be effective against? Answer: A defect of title defence may be raised against a holder (but not a holder in due course). Defect of title defences include fraud, duress, undue influence, illegal consideration, total failure of consideration, etc.

14. Outline the various mere personal defences available. Indicate the type of holder that they might be raised against. Answer: A mere personal defence is a defence that may be raised against an immediate party. These include: set-off, absence of consideration, release, or payment before maturity.

Mini-Case Problems

1. X gave Y a post-dated cheque for $3,000 as payment for a well that Y drilled on X‘s farm. The cheque fell due in 30 days‘ time. Y negotiated the cheque to Z for $2,800, a few days after it was given as payment for the well drilling. Before the end of the month, the well ran dry, and X stopped payment on the cheque. Advise Z of his rights as the person in possession of the cheque.

Answer: Z is a holder in due course if he took the cheque complete and regular on its face before dishonour, for value, and in good faith without notice of any defect. Z as a holder in due course may give notice to Y not later than the business day next after dishonour and hold Y liable for payment. Z would also have the right to sue X on the cheque for payment.

2. B purchased an automobile from C for $5,000. B gave C a cheque for $5,000 that C, a minor aged 17, endorsed to D as payment for D‘s motorcycle that C had purchased. D presented the cheque for payment, only to discover that B had insufficient funds in the bank for payment, and the cheque was dishonoured. Advise D of the law in this instance. Answer: Assuming B is not a minor, B would not have a defence to an action for payment by D. Since C is a minor, D could not hold C liable on the cheque. D's only recourse is against B for the $5000.

3. McMullan opened an account at a bank and received a box of personalized cheques bearing his name and address. Later, he closed the account. Several months after he closed the account, he wrote a cheque on the account and gave it to a friend as payment of a loan he had received from the friend. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-362

Discuss the issues raised in this case. Answer: The cheque in this case would not be honoured by the bank. As McMullen no longer had the account open, the cheque would be returned to the friend. The friend would then be obliged to collect from McMullen. Note the possible criminal consequences if McMullen wrote the cheque knowing that he no longer had an account at the bank.

4. Duarant purchased a new automobile, giving a cash down payment and a promissory note for the balance. The automobile dealer assigned the note to a local finance company. The vehicle proved to be totally unreliable, and when the dealer was unwilling to take back the vehicle, Duarant stopped making payments on the promissory note. The finance company sued him for the balance owing. Discuss the issues that will be raised at trial. Answer: The purchase is probably a consumer purchase, and the note should be marked accordingly. If it is not so marked, it may be void as against the purchaser. If a consumer purchase, any defence that Durant may raise concerning the unreliability of the automobile may also be raised against the finance company.

Case Problems for Discussion Case 1 Subdivision Construction Ltd. was a developer of residential construction projects. Much of its construction work was contracted out to specialty firms. Joseph Walters Co-Carpeting Ltd. was one of the subcontractors and for many years supplied and installed all of the flooring and carpeting in the houses built by Subdivision Construction Ltd. Joseph Walters Co-Carpeting Ltd. billed on a per house basis, and in most months billed for perhaps a dozen houses. Harvey, the Accounts Payable Clerk at Subdivision Construction Ltd., prepared the cheques to pay the accounts, and had them signed by an authorized signing officer for the corporation. Because of the length of the corporate name of the flooring contractor, everyone in the office referred to the contractor as ‗Co-Carpeting Ltd.,‘ and Harvey used that abbreviated name on its payment cheques. Many months later, Harvey realized that he could defraud his employer. He registered a business name as ‗Co-Carpeting Sales,‘ and opened a bank account at his own bank in that name. From time to time thereafter he would prepare a cheque payable to Co-Carpeting Sales and include it in the group of cheques for Co-Carpeting Ltd. The cheque always fell within the mid-amount of the billing by CoCarpeting Ltd., and the signing officer signed the pile of cheques without noticing the different payee name. Harvey would deposit the cheque in his Co-Carpeting Sales account, and when the paid cheque was returned to Subdivision Construction Ltd. by its bank, Harvey would remove the cheque and destroy it. Several years later, an audit discovered Harvey‘s scheme, but by this time Harvey had spent all of the money and was virtually penniless. Subdivision Construction Ltd. then decided to take legal action against Harvey‘s bank for return of the money, which was calculated to be $200,000. Discuss the arguments of the parties, and render a decision. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-363

Answer: Students should note that in each case the cheque was signed by the authorized signing officer of the corporation. What are the positions of the two banks? Did either bank have a duty to query the cheques to Co-Carpeting Sales? Students might also attempt to find a basis for the case against Harvey‘s bank. Does one exist? The bank would be aware of the name of Harvey‘s employer and the fact that it was regularly issuing cheques to Harvey‘s company. Harvey‘s bank would argue that it received and deposited cheques properly made out to the account and deposited them in the account. The corporation might argue that the bank should have been alerted by the circumstances, and in failing to act, become a co-conspirator to the conversion acts of Harvey. Based on the facts, it may be difficult to find against the bank, but in a case with slightly different facts (the cheques were simply made payable to Co-Carpeting‘ and not Co-Carpeting Sales) the court found the bank liable, as it accepted cheques with a name slightly different, and deposited them in the ‗Sales‘ account. See: Westboro Flooring and Décor Inc. v. Bank of Nova Scotia et al. (2004) 71 O.R. (3d) 723. Case 2 Custom Canoe Ltd. offered canoes for sale by way of a newspaper advertisement. Carlo, age 17, responded to the advertisement, and visited the Custom Canoe showroom. There, he saw a canoe that fitted his needs, and he wrote a cheque for the full amount of the canoe. He took immediate delivery, put the canoe on the roof of his car, and drove home. The next day, he set out on a whitewater canoe trip that would take up his full two weeks vacation. In the meantime, Custom Canoe Ltd. deposited Carlo‘s cheque in its bank, and its bank duly presented it for payment at Carlo‗s bank. Because Carlo had insufficient funds in his account, the bank returned the cheque ‗NSF.‘ After Carlo had set out on his vacation, he realized that he had insufficient funds in his account to cover the cheque, but decided to leave the matter until his return home. While on vacation, the canoe did not perform as well as expected, and on several occasions was damaged by rocks in the river. Carlo pondered what he should do about his purchase that was now seriously damaged. Advise the parties. Answer: Students should note that a minor cannot be liable on a negotiable instrument. Custom Canoe Ltd. accordingly cannot sue Carlo on the negotiable instrument. It also faces the contract problem concerning the nature of the goods. A canoe is clearly not a necessary, and Carlo would be free to repudiate the contract. He must, however, return the canoe. He would probably not be responsible for the damage to the canoe, as the damage that occurred would likely be treated as expected ‗wear and tear‘. Case 3 Casey purchased a used four-wheel-drive truck from Sam‘s Off-Road Vehicles for $26,000. The vehicle was licensed as a commercial vehicle, but Casey intended to use it primarily as transportation to and from his employment at a local manufacturing plant. Apart from this type of driving, he expected to use it occasionally in his part-time work as a fishing guide. He signed a promissory note to Sam‘s Off-Road Vehicles for $25,000 that called for payments of principal and interest of $1,000 per month over a 30-month term. Sam‘s Off-Road Vehicles immediately sold the note to Easy Payment Finance Co. for $24,000. A few days later, Casey was notified by letter to make all payments on the note to Easy Payment Finance Co. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-364

Before the first payment was due, Casey discovered that the truck was in need of extensive repairs and returned it to Sam‘s Off-Road Vehicles. The company refused to take back the truck and return Casey‘s $1,000 down payment. Casey then refused to make payments on the promissory note. Some months later, Easy Payment Finance Co. brought an action against Casey for the amount owing on the note. On what basis would Easy Payment Finance Co. claim payment? What defences might be available to Casey? Render a decision. Answer: An important question that must be answered in this case is whether the purchase of the truck represents a consumer purchase. What effect does the fact that it is licensed as a commercial vehicle have on the type of purchase? Does it matter if it is used in his part-time business as a fishing guide? The determination of the nature of the purchase has important implications to Easy Finance. If the truck is not a consumer purchase, then Easy Finance Co. may successfully claim that it is a holder in due course of the note, and enforce it regardless of the contract dispute between Casey and Shady Sam. Casey's only recourse in that case would be to take action against Shady Sam for breach of contract (unless the purchase was a caveat emptor situation). The only way that Casey might bring the Easy Finance Co. into the matter would be by showing that it was not a holder in due course because of its close association with the seller. (See: Federal Discount Corporation Ltd. v. St. Pierre and St. Pierre (1962), 32 D.L.R. (2d) 86.) If the truck was a consumer purchase, then Easy Finance Co. would not be a holder in due course, and any defence to payment which Casey could raise against Shady Sam would apply to Easy Finance Co. as well. Case 4 Hanley Supply Co. sold Roberts Retail Inc. a quantity of goods for $10,000 on 30 days‘ credit. As agreed by the parties, Hanley Supply Co. drew a bill of exchange on Roberts Retail Inc., naming itself as payee. The bill was payable in 30 days‘ time. Roberts Retail Inc. accepted the bill and returned it to Hanley Supply Co. Hanley Supply Co. then endorsed the bill to Smith Manufacturing to cover its indebtedness for goods purchased from the company. Smith Manufacturing, a small firm, endorsed the bill in blank to Brown, the company‘s office manager as a retirement gift, rather than wait until the bill became due to obtain the funds. Brown, on receipt of the bill, delivered it without endorsing it to her friend, Jones, whom she owed a sum of money. Jones, in turn, endorsed the bill and sold it to Doe for $9,000. On the due date, Doe presented the bill for payment, and it was dishonoured. Advise Doe of his rights. Explain the liability (if any) of each of the parties. Answer: The acceptance of the bill of exchange by Roberts Retail Inc. rendered it liable for payment to the holder. When the bill was presented for payment by Doe, who was a holder in due course, and dishonoured by Roberts Retail Inc., Doe must give notice of dishonour to all other endorsers by the business day next after the dishonour. See: Bills of Exchange Act, s. 97). Prior endorsers must follow the same procedure. Note, however, that Brown is not an endorser as he received the bill endorsed in blank and delivered it to Jones Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-365

without endorsing it. Since all prior endorsers, the drawer, and the drawee are liable on the bill, Doe may look to them for payment. All of the parties (except Brown, who was not an endorser) gave value for the bill, and each may hold the prior endorser liable if they should be obliged to pay. In the end, if this process is followed, Hanley Supply Co. will be obliged to pay, and must look to Roberts Retail Inc. for payment. (See: Bills of Exchange Act s. 95-101. Case 5 Carla bought a number of products from Scoville Limited in a single mail order, and enclosed a cheque for $130 with the order, drawn on the Bank of Hamilton. In the interval between mailing the order and the arrival of the products, Carla noticed a few of them (totalling $65) were available locally at a much lower price. On the day the products arrived, she visited her bank and was pleased to see that her cheque had not yet been cashed. She placed a stop-payment order on her cheque. In filling out the request slip, she placed the words ―goods unsatisfactory‖ in the box allotted for the reason for the request. She decided she would send back the half of the order that she had now bought more cheaply elsewhere, and assumed that Scoville would send her a new invoice for $65. The Bank of Hamilton failed to immediately enter the request into its computer system, and as a result, on the arrival of the cheque a day later, it paid Carla‘s cheque out of her account in the normal manner. Carla discovered this error in the course of using an automated cash machine a few days later, and asked the bank to correct the error. The bank put $130 back into Carla‘s account and told her that they would collect back the $130 that they had paid Scoville‘s bank, The Bank of Manitoba. The Bank of Hamilton returned the cheque in the clearing system, now marked ―Payment Stopped,‖ and demanded $130 from the Bank of Manitoba. The Bank of Manitoba refused the stopped cheque and would not make payment back, stating that by accepted banking convention, too much time had elapsed between acceptance by The Bank of Hamilton and the return of the item. While this had been going on, Scoville Limited had received the goods returned by Carla and had mailed her a refund cheque for $65, for as far as they knew, they had been paid in full. Carla was pleased. Clearly a computer error had sent her a $65 cheque rather than a $65 invoice, and she ignored the whole matter. Assume another week passes. Discuss the events that follow, and the positions of the parties, with respect to the law of negotiable instruments as it is written. In advising the banks, what would you suggest that they add to their standard form account-operation agreements? Answer: Students should note that Carla's cheque is a promise of payment only, in the sense that if honoured by her bank the holder will receive the money. When Carla stopped payment on his cheque the debt remained unpaid. Under the Bills of Exchange Act, if payment is stopped, it is a dishonour of the cheque when it is presented for payment by the holder. However, in this case the cheque was honoured, and it was not until several days later that the Bank of Hamilton realized that it had failed to comply with its stop payment order. Since the Act provides that notice of dishonour must be given not later than the next business day, it was too late for the Bank of Hamilton to give notice of dishonour to the Bank of Manitoba and all prior endorsers Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-366

(Scoville Limited) were free of liability. The Bank of Hamilton in this case could not look to Carla for payment as it had failed to comply with his stop payment order. Case 6 Transport Corp. entered into an agreement to purchase three trucks from a competitor, Delivery Inc. Payment was made by way of a cash payment and a promissory note for $120,000, bearing interest at 6 percent, and due in ten months from the date of issue. The note provided that the principal was repayable in 12 monthly payments of $10,000 each, with the interest payable at the end of the 12 months. The note did not contain an acceleration clause in the event of default. Transport Corp. made the first monthly payment of $10,000. At that time, Delivery Inc. suggested that the note be replaced by a new promissory note that contained an acceleration clause, as this proviso had been discussed during negotiations, but omitted in error when the transaction was finalized. Transport Corp. agreed to do so, and a week later they forwarded by mail a new promissory note for $110,000 on the same repayment terms and containing the requested acceleration clause. A covering letter stated that the new note was given in accordance with an agreement to have it replace the existing promissory note. Before the next monthly payment became due, a dispute arose over the condition of some of the purchased vehicles, and Transport Corp. refused to make the monthly payment when it became due and payable. During the course of the discussion that followed, Delivery Inc. threatened to implement the acceleration clause and sue for the balance of the debt owing. Transport Corp. replied that the second promissory note had been signed by the office receptionist in error, so the note was not enforceable, as it was not signed in the corporation‘s name, nor was it signed by an officer of the corporation. It also informed Delivery Inc. that the receptionist was a 17-year-old minor. Discuss the issues raised in this case. Advise Delivery Inc. as to its rights (if any) and its position on the debt owed by Transport Corp. Answer: The second promissory note, if signed in error by the receptionist (who was a minor) would clearly not be enforceable against her in her personal capacity. It would not be enforceable against the corporation if it was not signed by the corporation or by an officer of the corporation, but this would not relieve the corporation of its payment obligations. If the original note was still in existence, the note might still be enforced, but only in accordance with its terms. Transport Corp. may be entitled to a claim under the contract if (for example) the vehicles were misrepresented or if there was a breach of warranty, but this would not entitle Transport Corp. to withhold payment under the promissory note. Case 7 Sugar Confectionery Ltd. borrowed a sum of money from its banker, the Big Business Bank, to purchase certain production equipment. The promissory note that the bank prepared and that James Anawak, the president of the corporation, signed, reads as follows: April 1, 2020 I hereby promise to pay on demand to the Big Business Bank, Metro Branch, the sum of Fifty Thousand Dollars ($50,000) together with interest thereon at 10 percent per annum calculated from April 1st, 2020, until the date of payment. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-367

Value Received James Anawak President The bank placed the $50,000 in the Sugar Confectionary Ltd. bank account, and the corporation drew a cheque on the amount to pay the equipment supplier. Some months later, the shareholders of Sugar Confectionary Ltd. removed James Anawak as president of the company and elected Jane Bellamy in his place. Shortly thereafter, the Big Business Bank endorsed the note to Big Finance Company in return for the sum of $48,000. On September 1st, Big Finance Company contacted Sugar Confectionery Ltd. and demanded payment. Sugar Confectionery Ltd. refused to pay and stated that it was not indebted to Big Finance Company or, for that matter, to any other creditor. Discuss this situation, evaluate the claim of Sugar Confectionery Ltd., and outline the nature of the arguments the parties might raise if the matter should come before a court. Render a decision. Answer: From the promissory note, the only person liable on it would appear to be John Smith, since the company name appears at no place on the instrument. The Big Business Bank was aware of the fact, however, and placed the funds in the company bank account. The question that may be raised here is: Was Big Finance Company aware of the fact as well? After all, it made its demand for payment to the company. If it was aware of the transaction, could it claim to be a holder in due course? Sugar Confectionery Company is attempting to avoid liability by arguing that it did not sign the note. It was the intention of the parties, however, that the loan be a loan by the company from the bank, and the company received the proceeds. Big Finance would probably argue that both the company and the bank were aware of the transaction which was evidenced by John Smith's signature, even though the company name did not appear on the note. John Smith would probably argue that to hold him personally liable on the note would be a gross injustice to him, since he received no personal benefit, and the company would be unjustly enriched if it was able to avoid payment. The Bills of Exchange Act s. 131 provides that a person (or corporation) who does not sign a bill of exchange incurs no liabilities under it. This section would be referred to by the company to avoid liability, and on a strict interpretation of the Act, the company would not be liable. Some cases, however, have looked at the intention of the parties, and have held that where it was clear that the parties intended the company to be liable, then extrinsic evidence could be introduced to establish this fact and hold the company liable for the debt. See for example: Allprint Co. Ltd. v. Erwin (1982) 38 O.R. (2d) 13. Many cases, however, run to the contrary, and have held the signer personally liable on the note. See for example: Holz v. G. & G. Parkdale Refrigeration (1980) 117 D.L.R. (3d) 185. If only Smith is held liable, he may be able to claim against the company for the money advanced to it by the bank. Case 8 Ascot was in the process of negotiating the purchase of an oil painting from The Macey Art Gallery. As a result of a number of telephone calls to the gallery owner, he eventually convinced the owner to sell the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-368

painting to him for $1,000. He prepared a cheque in the amount of the purchase price and signed it. However, because he was uncertain as to the exact spelling of the gallery‘s name, he left that part of the cheque blank. He placed the signed cheque in his office desk drawer, with the intention of making a telephone call to the gallery later in the day for the information necessary to complete it. Ascot determined the gallery‘s name while at lunch, but when he returned to the office, he discovered that the cheque had been stolen. Hines, a fellow employee of Ascot, had taken the cheque, filled in the cheque payable ―to bearer,‖ and used it to purchase items at a store where Ascot frequently shopped. The store owner accepted Ascot‘s cheque without question, as he was familiar with his signature, and later presented it to Ascot‘s bank for payment. Within minutes after the bank had paid the cheque, Ascot telephoned to have the bank stop payment. Advise the parties of their respective rights (if any) and liability (if any). Answer: The cheque in this case was incomplete, but signed by Ascot before it was stolen. The cheque appeared to be complete and regular on its face when presented for payment. Both the shop owner and the bank recognized the signature as genuine. Ascot did not notice the cheque missing until after the bank had made payment. The question is: what should be done? The bank paid the cheque as a genuine instrument. Should it suffer the loss? Should the shopkeeper? Hines was the culprit in the case - should he not be liable? Absence of delivery of an incomplete instrument is a real defence, good against all holders, but was Ascot negligent in leaving the cheque in his desk? Probably not. Does it make any difference that payment had been made? Ascot would be entitled to recover the amount from the shopkeeper, who in turn, could look to Hines for payment. For a example of a case where a bill was stolen and negotiated: See: Baxendale v. Bennett (1878), 3 Q.B.D. 525.

CHAPTER CHARTS

Chapter 29. Security for Debt Chapter Topics Introduction Forms of Security for Debt Statutory Protection of Creditor Security Summary of Priorities between Security Interests Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-371

Chapter Objectives After study of this chapter, students should be able to: • Distinguish between the various forms of security for debt. • Describe the statutory protection available to creditors. • Explain the chief rules that establish priority between competing interests of creditors.

YOUR BUSINESS AT RISK A credit relationship may be an essential term in a sale or service contract, or it may be a contract in itself, fundamental to the capital structure of your firm. As is the case in many advanced areas of the law, technical rules often prevail, and the equity (fairness) argument is difficult to make if you have not made the effort to learn the rules. Given the power of compound interest, firms can quickly find that they have either committed to too much debt, or too little security, and they are caught by repayment obligations they agreed to without full knowledge of their scope or limit. By the same token, prudent firms that know their rights as debtor or creditor are in a position to use this knowledge to their competitive advantage. CHAPTER COMMENTARY In addition to the land mortgage described in Part 5 of the text, this chapter explains a number of other commonly used legal instruments to secure debt. Most of these instruments use chattels as the subject matter of the security interest, and are in widespread use to finance consumer and business purchases. One of the most common forms of security, and one of the oldest, is the chattel mortgage, which is often employed by finance companies and banks to secure personal loans. Any discussion of the instrument, however, should emphasize the importance of registration in accordance with the provincial registration procedures in order to protect the mortgagee and his or her priority over subsequent encumbrances or purcha sers of the chattels. The conditional sale agreement is also worth examination in class, as it is a common method of selling goods on an instalment basis. The simplicity of this form should be noted, but again, the importance of adherence to the provincial registration requirements should be stressed, as these establish the seller's rights on default or on disposal of the goods by the buyer. Bills of sale, and the assignment of book debts, represent two other forms of security that are used to secure debt, but to a lesser degree than the chattel mortgage or conditional sale agreement. The assignment of book debts naturally has a use limited to business organizations with accounts receivable. The instrument is not used to secure consumer debt. The registration requirements for personal property security vary from province to province, a point which should be explained. Particular emphasis should be placed upon personal property security legislation in each province and its application to the various forms of underlaying security. The general trend toward a simplified personal property security registration system should be examined carefully, as those provinces with the system in effect (eg: Ontario) employ a single registry for most security interests, and a single document to register all types of personal property security. It should be noted, however, that not all forms of security are covered by these systems. Some are quite specialized in nature, and, as a result, require special procedures for registration and enforcement. The variously-named construction lien acts are examples of legislation that covers these types of security interests. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-372

A different system is used for the securing of bank security interests under the Bank Act. The use of this security interest is, however, limited to the types of security specified in the Act. The Court Decision, Bank of Montreal v. Demakos illustrates the problems that may arise with credit cards where a supplementary car is issued and used irresponsibly by the supplementary card holder. As the judge concludes, the primary card holder is responsible for the debts of the supplementary card holder. The discussion cases at the end of the chapter deal with a number of different situations to enable students to examine and discuss credit devices and their use in business.

Review Questions 1. Why was legislation for mechanic's lien (sometimes referred to as construction lien) necessary? Answer: Legislation was necessary to give contractors and subcontractors some means of protection for the labour and materials they apply to property. No protection was available under contract law, and a security interest was created by statute to protect their interests.

2. What must an "owner" of property which is under construction do to protect against mechanics' lien claims attaching to the property? Answer: Usually an owner must hold back a part of all advances made to the contractor as a fund to pay any liens that might be filed by sub-contractors. The amount varies from 10-15% and must be held for a time period of from 30-60 days (depending upon the province). The hold back replaces the land as security for any liens.

3. Describe the procedure that a chattel mortgagee may follow to recover the debt, if default should occur. Answer: A chattel mortgagee may seize the goods, and after waiting a required time to allow redemption, may sell the goods if the debt is not paid. A chattel mortgagee may also foreclose on the chattel.

4. How does a conditional sale agreement differ from a chattel mortgage? Answer: A conditional sale agreement differs from a chattel mortgage in that the seller retains title and the buyer gets possession of the goods. The conditional sale security instrument only arises out of a sale transaction.

5. Explain how a conditional seller may realize on the security if default in payment occurs. Answer: Depending upon provincial legislation, on default, the conditional seller (who has title to the goods) may repossess and sell them. The buyer is given a short period of time to pay the debt and redeem the goods before the seller may sell them. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-373

6. Describe the procedure that a bank must follow to secure a loan under s. 427 of the Bank Act. Answer: To secure a loan under s. 427 the borrower must sign a form and deliver it to the bank to vest the lien in the bank. The bank must also file a notice of intention to receive the security with the Bank of Canada.

7. What is the purpose and effect of an assignment of book debts? Identify the circumstances where registration must take place. Answer: An assignment of book debts is a means by which a creditor takes the debts owing to the debtor as security for payment of a debt and permits the creditor to collect the accounts and apply them to the merchant's indebtedness. Registration is necessary to protect the assignee's right to the debts.

8. Why must a bill of sale be registered in certain circumstances? Identify the circumstances where registration must take place. Answer: A bill of sale is a contract in which the title to goods passes to the buyer but possession remains with the seller. Since the seller retains the goods (at least temporarily) the buyer must register the bill of sale as notice of his title to the goods.

9. Outline the special types of security instruments that may be issued by corporations as security for debt. Answer: Corporations may issue bonds or debentures as security for debt.

10. Define: bond; floating charge; debenture. Answer: A bond is a debt instrument which pledges the assets of the corporation as security for the debt. A floating charge is an equitable charge that does not attach to any specific asset until and unless default occurs in the debt. A debenture is usually an unsecured subordinate security issued by a corporation.

11. What types of assets may be used as security by chartered banks for loans made under s. 427 of the Bank Act? Answer: A bank may make loans under s. 427 to manufacturers, wholesalers, retailers, shippers and dealers in products of agriculture, of the forest, sea, lakes, quarry or mine, and on goods and merchandise manufactured or otherwise.

12. Describe the effect of Personal Property Security legislation on chattel mortgages and conditional sales agreements in those provinces where such legislation has been introduced. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-374

Answer: Personal Property Security legislation provides a standardized registration for both types of security instruments using a central computerized registry that may be checked from anywhere in the province.

13. What is a bank credit card? In what way does it secure a debt? Answer: In most cases, the bank makes payment to the merchant or service supplier for the goods or services supplied to the credit card holder, then looks to the card holder for payment.

14. How does a chattel mortgage differ from a pledge or pawn of a chattel? Answer: A debtor pledges only the title to the goods as security for the debt under a chattel mortgage, and retains possession. Under a pledge or pawn, the possession of the goods passes into the hands of the creditor.

15. Outline the general procedure that a sub-contractor would follow to secure payment under mechanic's lien legislation. Answer: An unpaid sub-contractor must normally file or register a lien claim against the property at the land registry office within a specific period of time after the last work is done. He must then institute legal proceedings (again within a specific time period) in order to have the claim heard by the courts and judgment rendered. The court may sell the land if payment is not made as ordered.

16. What procedure must a chattel mortgagee follow to preserve the mortgage security against subsequent encumbrances or purchasers? Answer: A chattel mortgagee must promptly register the mortgage in accordance with the provincial registration procedure.

Mini-Case Problems

1. X purchased an automobile under a conditional-sale agreement from Y. Y registered the agreement in accordance with the provincial security registration requirements. X sold the automobile to Z without revealing the fact that it was subject to a conditional-sale agreement. X defaulted on the payments to Y. Advise Y of his rights at law. Answer: Title to the automobile is in Y. On default, Y may repossess the automobile from Z and sell the automobile for the balance owing (assuming less than 2/3 of debt paid - Ontario example). X would be liable for any Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-375

deficiency if the automobile sold for less than the amount of the debt. Z must look to X to recover his money.

2. A engaged B to build a garage for her on her property. B constructed the garage with materials purchased on credit from C Co. A paid B. B did not pay C Co. Advise C Co. of its rights. Answer: C Co. may claim a lien against A's property for the unpaid account, provided the claim is registered on the title to A's property within the statutory time limits. C Co. would also have a right of action against B for the unpaid account.

3. Alymer had a credit card with a $25,000 credit limit. He arranged for a supplementary card on his account for Annya, his 18-year-old daughter. Annya used the card to purchase goods worth $3,000, but Aylmer disapproved of her purchases. He demanded that she return them, but Annya refused to do so. An identity thief obtained details from Annya‘s card and ran up another $25,000 in charges. Who is responsible for payment of the card account, and in what proportions? Answer: Invariably the card contract provides for joint and several liability between the account holder and all other cardholders, meaning that both Alymer and Annya may be held liable for her purchases on the card. Usually this is also drafted widely enough that the account holder is liable for all debts incurred (including those by an identity thief) until such time as the stolen card and identity have been reported. In practice, and usually by an explicit term, the liability is capped or excluded when theft is promptly reported.

4. A corporation borrowed $200,000 from a commercial lender by way of a mortgage on its plant and building. The corporation later borrowed $1,000,000 from a bank, and as security for the loan gave the bank a debenture containing a floating charge. The corporation later defaulted on the payment of both the loan and the debenture. The total corporate assets are $1,000,000. Discuss the rights of the security holders and shareholders. Answer: The $1,000,000 debenture crystallizes and descends on default upon the available assets. The plant and building are not available assets (at least the first $200,000 of them) to the debenture holders at the time of crystallization, because these assets the subject to the earlier mortgage. If the plant and equipment are worth more than $200,000 the surplus is available to the claim of the debenture holders. If the plant and equipment are worth less than $200,000 (meaning that the mortgagee‘s claim is partially unsatisfied) then the mortgagee and the debenture holders must contest their priorities. Absent any special terms of the earlier mortgage that created a ―debenture-like‖ security interest to cover a shortfall of the assets under mortgage, the mortgagee (to the extent of the shortfall only) would rank as an unsecured creditor, behind the debenture.

Case Problems for Discussion Case 1 Yvonne purchased a 2 hectare building lot in a rural township that permitted property owners to place house trailers or mobile homes on their land as dwelling houses. Instead of building a house on her lot, she decided to purchase a mobile home. Because the lot was in a rural area, and not serviced by municipal water and sewer, it was necessary for her to drill a well, and install a septic system. To fund these two projects, she arranged for a mortgage on her lot in the amount of $25,000 with the local bank. The mortgage was duly registered on the title. Shortly thereafter, Yvonne arranged for the purchase of a mobile home from Mobile Home Sales Inc., a local business that was prepared to sell her a mobile home on the basis of the $10,000 down payment and a chattel mortgage on the mobile home in the amount of $30,000. The chattel mortgage was duly registered in accordance with provincial personal property security legislation. Yvonne moved the mobile home to her lot, removed the wheels, and placed the structure on concrete block supports. She also had the water supply and septic system attached to the mobile home. A few months later, Yvonne lost her job, and found she was unemployed. The mortgage on her lot and the chattel mortgage on the mobile home fell into arrears. The bank instituted foreclosure proceedings on the property, claiming the mobile home as a part of the real property. Mobile Home Sales Inc. wished to seize the mobile home, claiming it was a chattel. Discuss the competing claims. What would you expect the court‘s decision to be? Answer: When the mortgage was arranged and registered, the only asset then existing was the lot itself, contemplating perhaps its improved condition of water and septic service. The only other assets over which the mortgage will extend are other future fixtures. It is unlikely that the mobile home would be considered to me a fixture. Even if it is considered to be a fixture it has been secured by a chattel mortgage, which takes priority by virtue of it being a purchase money security interest in the mobile home. The court should find in favour of Mobile Home Sales Inc. Case 2 In order to start a cartage business, Morgan purchased a 3-year-old truck from Used Trucks Ltd., a local truck dealer, for $15,000. Morgan paid $5,000 down, and financed the balance of the purchase price by way of a conditional-sale agreement for the remaining $10,000. The agreement was duly registered in accordance with the provincial personal property security legislation. Business was good, but several months later the vehicle experienced a break-down, and Morgan had the vehicle transported to Ali‘s Auto Service to have the vehicle repaired. After a careful examination of the problem with the truck, Ali‘s Auto Service reported that the truck would require a new transmission as well as extensive engine repair. Morgan instructed Ali‘s Auto Service to proceed with the repairs. A week later, Ali‘s Auto Service reported to Morgan that it had replaced the transmission, and repaired the engine. The cost of the repair amounted to $6,300. Morgan was not in a position to pay for the repairs, and Ali‘s Auto Service informed Morgan that it would not release the truck to him until he paid their account. Without the truck, Morgan was unable to carry on his business, and unable to make his payments to Used Trucks Ltd., or to Ali‘s Auto Service for the repairs. When Used Trucks Ltd. and Ali‘s Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-377

Auto Service realized that Morgan was unable to pay them, each decided to exercise their security rights. Discuss the nature of the claims, and how the claims may be resolved. Answer: Ali‘s Auto Service would retain possession until the repairs are paid, or until expiry of the statutory waiting period, after which Ali would sell the truck to satisfy his account. A lien for repair takes priority over a purchase money security interest. This is not indicated in the text, however students should recognize that repair work done in good faith of payment is an act which preserves the asset in the interest of all owners and security interests, and deserves this sort of priority. Accordingly, Used Trucks Inc. is in no better position than Morgan himself, and must pay out Ali‘s Auto Service if it wishes to enforce its own claim to the security. The best resolution would be for Used Trucks Inc. to pay out Ali, add the cost of repairs to its own credit account, and return the truck to Morgan so that he may once again be productive and pay the credit account. A sale of the truck serves the interest of Ali; however a sale does little to help Used Trucks Inc. and nothing for Morgan. Case 3 Baxter owned a block of land that fronted on a large lake. On May 1, he entered into a contract with Cottage Construction Company to have a custom-designed cottage constructed on the site. Cottage Construction Company fixed the contract price at $100,000, $20,000 payable on the signing of the agreement, and the balance on the completion of the contract. Baxter signed the contract and urged the building contractor to begin construction immediately. On May 1, he gave the contractor a cheque in the amount of $20,000. Cottage Construction Company entered into the following subcontracts for the construction work:

(a) A $6,000 contract with Abe Excavation to excavate and prepare the foundation, the work to be completed on June 1. (b) A $30,000 contract with Larch Lumber Com-pany for materials, the last to be delivered by July 1. (c) A $20,000 contract with Ace Framing Con-tractors to provide labour only to erect and close in the cottage by July 20. (d) A $10,000 contract with Roofing Specialty Company to install and shingle the building roof by July 20. (e) A $10,000 contract with Volta Electrical for wiring and electric heating equipment, the work to be completed by August 1.

Cottage Construction Company agreed in its contract to have the cottage completed and ready for occupancy by August 6. Work progressed on schedule, and each subcontractor completed its work on the agreed finish date. By August 1, the cottage was almost ready for occupancy — only the door trim and eavestroughing remained unfinished. On August 1, the proprietor of Cottage Construction Company approached Baxter and asked him if he might receive the balance of the contract price, as he wished to use the funds to pay his subcontractors. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-378

Baxter gave him a cheque for the remaining $80,000, confident that the contract would be completed. On August 2, a dispute arose between Cottage Construction Company and Ace Framing Contractors over the terms of the contract between them, and Cottage Construction refused to make payment. Ace Framing Contractors registered a construction lien against the cottage lot later the same day. All of the other subcontractors immediately became aware of the lien claim, and registered liens on August 3. The next day, Cottage Construction Company was found to be insolvent, without having paid the subcontractors. Discuss the legal rights (if any) of the various subcontractors, Baxter, and Cottage Construction Company. You may assume the lien preservation period in this province is 45 days. Indicate the probable outcome of the case. Answer: This case concerns the application of the mechanics' or construction lien legislation to a construction situation. The first matter to be determined is the validity of the various lien claims. Were all liens registered within the time period specified in the Act? Using a lien preservation period of 45 days, the contract of Abe Excavation is outside the time period for filing a lien, if the last work was done on June 1st. The remaining liens would be in time. This would entitle the subcontractors to claim against the holdback, but Baxter, in error, did not holdback the required 10%. He would, as a result, be obliged to pay the amount over again in order to free the property of liens. Since the amount of the liens would exceed the amount of the holdback, the subcontractors would be obliged to claim for the balance as creditors in the bankruptcy of Cottage Construction Company. It should be noted that under the legislation in some provinces, Cottage Construction Company would be expected to hold the money received as trust money until the subcontractors were paid. The failure to do so would be a breach of the Act in most provinces. Case 4 The Mammoth Housing Corporation required capital in order to finance certain land acquisitions for its proposed housing projects. The corporation made a $2,000,000 bond issue to acquire the funds necessary for working capital and to cover a 20-percent down payment on the purchase of a large block of land that it purchased for $5,000,000. The balance of the land transaction was in the form of a first mortgage back to the vendor for $4,000,000. Once the land was acquired, Mammoth Housing Corporation entered into a building contract with High Rise Construction Company to construct a large apartment building on the site. The contract was for the sum of $15,000,000, which Mammoth Housing Corporation expected to finance by a construction loan of $18,000,000 from Apartment Finance Limited. The money was to be advanced as construction of the building progressed. The building mortgage was registered as a second mortgage, on the understanding that the part of the funds remaining after the building was constructed (plus the corporation‘s working capital) would be used to discharge the first mortgage. After the contractor had completed $1,000,000 worth of work on the building, and after Mammoth Housing Corporation received a $1,000,000 advance on the building mortgage, Mammoth Housing Corporation decided to stop construction due to a sudden decline in demand for apartment units in the city. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-379

Assuming that the bonds issued contain a floating charge, and assuming that the contractor files a construction lien against the property for $1,000,000, discuss the rights of the various creditors if Mammoth Housing Corporation decides to abandon the project and allow its bonds and mortgage obligations to go into default, even though it has cash in the amount of $1,000,000 and assets (excluding land) in the amount of $500,000. Answer: The land is subject to a first mortgage in the amount of $4,000,000, and a second mortgage in the amount $18,000,000, of which only $1,000,000 was advanced. The lien registered against the property is in the amount of $1,000,000. If the corporation allows the mortgages to go into default, and does not pay the lien claimant, the lands may be foreclosed by the first mortgagee (or the second mortgagee), or sold by the courts to settle the claims of the lien claimant. Assuming the land is sold for $5,000,000 the first mortgagee would receive $4,000,000 and be paid in full as first claimant to the money. The second mortgagee may be able to claim the remaining $1,000,000 in priority over the lien claimant, depending upon the province. The bond holders would have a secured claim against the assets under the floating charge, and would be entitled to the $500,000 in assets. The bond holders may also be entitled to the cash as well, leaving a short-fall of $500,000. This would leave the bond holders and the lien claimant as the only parties to be unsatisfied in their claims, although the bond holders would receive 75% of the amount of their bond face value. If the second mortgagee was entitled to priority over the lien claimant with respect to the land proceeds, and the bond holders entitled to the cash in the corporation, the contractor as the lien claimant would receive nothing. Case 5 Betty Blaine, owner of Ad Consult Ltd., acquired five new computers and two laser printers from Computing Supplies Inc., a major wholesale supplier of word-processing equipment to business and institutions. Each piece of equipment was acquired pursuant to a lease that Betty signed on behalf of her company. The cost of each computer was $2,700, and the printers were $3,600 each. Betty‘s Company was required to pay $75 monthly for each computer lease and $100 monthly for each printer, for three years. In addition to the monthly payments Betty‘s company was to make, Betty was required by Computing Supplies Inc. to sign a personal guarantee for payment on each lease in the event that her company should default. The wording of the guarantee stated that Betty would be liable to make payments under the lease even if the lease turned out to be void or voidable against her company or its creditors. Shortly after the acquisition of the computing equipment, Betty borrowed a sum of money from the bank for some improvements to her offices. As security for the bank, she executed a general security agreement over all assets of her business. After about a year of making regular payments on the computer leases and to the bank, Betty‘s business began to slow down considerably. She struggled to make the payments for a few more months, but eventually found herself unable to continue. First, Betty failed to make payments on the leases. The following month she defaulted on her bank loan. The bank immediately seized the computing equipment, and the other assets of the business, pursuant to the terms of its general security agreement. In the legal argument that followed, it became apparent that the bank had registered its security agreement under provincial personal property security legislation, but Computing Supplies Inc. had not Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-380

registered any of its leases. Identify the legal issue or issues that have arisen, and the arguments that each party will rely upon, including the legal principles upon which they are based. Render a decision. Answer: The bank in this case has acquired security on all of Ad Consult Ltd. assets. The bank may, on default, seize the assets pursuant to its security instrument and provincial legislation, but can it seize the leased equipment? The company clearly does not have title to the computer equipment as it is only leased, but does the leasing company have a duty to warn other creditors of the lease? If the lease allows Betty to keep the equipment at the end of the lease, is it more than a lease? Students might discuss the different nature of these documents and the liability of Betty who has personally guaranteed the lease payments. If the leases of the equipment were true leases of chattels, and provincial legislation did not require registration, then the bank would probably not succeed, as the company would not have title to the goods. However, if the leases were not true leases, but provided for the purchaser of the goods (i.e.: hire-purchase agreements) then registration would be required, and the failure to register would entitle the bank to claim priority over the unregistered lessor. In the case of First City Capital Ltd. v. Hall et al. (1993) 11 O.R. (3d) 792, where the facts were similar to the latter case, the Court of Appeal held that the failure to register gave the bank priority to the chattels over the lessor. Case 6 Hazel purchased a sewing machine from the Easy-So Company under a conditional-sale agreement that required her to make 36 equal monthly payments of $15 each in order to fully pay for the machine. EasySo Company assigned the conditional-sale agreement to Easy Finance immediately after the agreement was signed by Hazel. Easy Finance registered the agreement in accordance with the provincial legislation pertaining to security instruments of this type, and notified Hazel of the assignment. Hazel used the machine for several months, during which time she found that the machine required constant adjustment by the seller. Eventually, Hazel came to realize that the sewing machine was unsuitable for her purpose. She arranged with Easy-So to take back the machine as a trade-in on a different type of sewing machine that the dealer also sold. Hazel paid the cost difference of $100 and took the new machine home. Without advising Easy Finance of the change in the transaction, Easy-So Company sold the trade-in model to Henrietta for $350 cash. Some time later, Hazel defaulted in her payments to Easy Finance, and the finance company repossessed her sewing machine. When the finance company indicated that it intended to sell the machine to satisfy the debt, Hazel demanded the return of the machine on the basis that it was not the sewing machine described in the conditional-sale agreement. When Easy Finance confirmed the error, it traced the machine covered by the conditional-sale agreement to Henrietta, then seized the proper sewing machine. Both Hazel and Henrietta brought a legal action against Easy Finance for a return of their respective sewing machines. Advise all parties of their legal position in this case and indicate the possible outcome. What is the legal position of the Easy-So Company? Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-381

Answer: This case illustrates the difficulties that may arise where the parties change the security without advising the creditor. The conditional sale agreement retains the title to the goods in the vendor, and in this case, the contract concerning this was assigned to the finance company. The effect of the trade-in of the machine, and the subsequent sale of the machine by the seller covered by the agreement result in the secured goods passing into other hands without knowledge of the security interest claimed in the goods. Does the buyer have an obligation to search for any liens or claims against such goods? The seller might have implied authority to resell the goods. See: Hare & Chase of Toronto Ltd. v. Commercial Finance Corporation Ltd. (1928), 62 O.L.R. 601. This may affect the right of the finance company to recover the goods sold to Henrietta. The security interest of the finance company in the machine that was acquired by Hazel would not apply to the new machine. This may mean that the Finance Company cannot claim the new machine on default. The finance company, however, would be entitled to claim the balance owing under the agreement. Case 7 Casey, a resident of the United States, visited Canada on his sailboat. While in Canada, he sold the boat to his friend Donald, who resided in Toronto, Ontario. The friend purchased the sailboat for $10,000. Some time later, Donald purchased a power boat from a dealer and used the sailboat as a trade-in to cover part of the purchase price. The dealer made a search for security interests under the provincial Personal Property Security Act and found no claims against the sailboat. The boat dealer sold the sailboat some time later to Morgan, under a conditional-sale agreement, and registered the security interest. Morgan later sold the sailboat to Kidd for $8,000 and moved to the province of Alberta. Kidd did not make a search for creditor claims at the time of the purchase. He had paid over the money unaware of the boat dealer‘s registered security interest in the property. The conditional-sale agreement went into default when Morgan neglected to make a payment to the boat dealer. However, before the dealer could find the boat, Customs and Excise claimed that the sailboat had been illegally brought into Canada, and the property in the goods, as a result, had vested in the Crown. Discuss the rights of the parties, including the Crown, in this case. Answer: The important point to note in this case is that property in the goods vests in the Crown where the goods are illegally brought into Canada. Could Casey give good title to Donald? Could Donald give good title to the dealer? What is the position of the dealer who sold under a conditional sale agreement to Morgan? Kidd's purchase without making a search would normally mean that his purchase was subject to the rights of the conditional seller. When the boat was seized, Kidd would have a right against Morgan for breach of warranty of title. This would proceed back down the line of title to Donald, who would be obliged to find Casey and recover from him. Since the dealer did not have title, under his conditional sale agreement his right to repossess may not exist. See: Smith v. Goral, [1952] 3 D.L.R. 328.

Introduction Historical Background Insolvency versus Bankruptcy Bankruptcy Legislation in Canada Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Chapter Objectives After study of this chapter, students should be able to: • Explain the reasons that underpin the need for bankruptcy legislation. • Describe the actions of a debtor that constitute acts of bankruptcy. • Describe the steps in bankruptcy proceedings. • Describe the outcomes in bankruptcy for both debtors and creditors. YOUR BUSINESS AT RISK Situations of insolvency and bankruptcy are the most stressful of business circumstances. Even so, critical decisions must be made quickly, decisions that can lead to the preservation, recovery or termination of the business. These decisions can determine the extent to which assets will be exposed to bankruptcy proceedings and the personal liability of directors and parties related to the business. In approaching this topic, the first warning is to realize that the legal definition of bankruptcy is far broader than the accounting definition of liabilities in excess of assets.

CHAPTER COMMENTARY Bankruptcy is a federal matter, and the principal legislation is the Bankruptcy and Insolvency Act, which governs bankruptcies in general. The purpose and intent of the legislation is explained in the case quote from Re Buell. However, students should note that the new legislation places greater emphasis on the opportunity for a debtor to make a proposal to creditors in order to save viable businesses, and time is allowed for the debtor to do this before bankruptcy proceedings may be taken against the debtor's assets. The Act sets out the rights of the receiver, trustee, debtor, creditor, etc., and the method for the distribution of the debtors' assets amongst the creditors. From a procedural point of view the steps are more or less straight forward. The priorities are set out in the text. Case 3 of the Case Problems for Discussion may be used as a class exercise to review the priorities and the distribution of assets to a variety of creditors. Case 4 is concerned with fraudulent activity on the part of the debtor, and Case 5, illustrates a situation where the creditors have taken upon themselves to divide the debtors' assets. Students should note that the Bankruptcy and Insolvency Act provides for a proposal and three kinds of bankruptcy proceedings: voluntary, summary, and creditor-initiated (by way of a petition). Regardless of how the proceedings begin, the general thrust is the same, because the purpose of the law is to have a trustee collect the debtor's assets and dispose of them, then distribute the proceeds from the sale to the creditors. The distribution, however, recognizes certain priorities amongst the creditors, as the text indicates, and subject to Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-383

certain initial restraints gives secured creditors the right to realize on their security outside the bankruptcy proceedings. Another point to emphasize is that the bankruptcy legislation is also designed to prevent fraud, and to this end, penalties are included in the Act for a number of specified activities known as bankruptcy offences. A debtor that commits any of these offences is normally not given a prompt discharge, and depending upon the seriousness of the offence, may be subject to fines or penalties. The Court Decision, Re Pufahl (Bankrupt) illustrates a situation where an individual has made several assignments in bankruptcy, and the court uses its power to deny a discharge based upon the bankrupt‘s past performance. In class discussion, it should be pointed out that the primary purpose of the legislation is to permit the honest but unfortunate debtor to make a new start, free of debt, by surrendering his existing assets to his creditors. The new Act also gives the debtor a greater opportunity to make a proposal in order to save the business if restructuring of the debt would render the business viable.

Review Questions 1. Describe the role of the Superintendent of Bankruptcy in bankruptcy proceedings. Answer: The Superintendent administers the Act, and has the power to investigate alleged offences under the Act.

2. Under what circumstances could a person have assets which exceed their liabilities, yet be bankrupt? Answer: If a person has debts in excess of $1,000 and commits an act of bankruptcy, a creditor may commence bankruptcy proceedings against the debtor.

3. In what way (or ways) does bankruptcy affect the rights of secured creditors? How would they recover their debts if the security which they hold is insufficient to cover the amount owing? Answer: Subject to any proposal the debtor may make that would affect the creditor‘s rights, secured creditors may realize on their security from the secured assets. If the sale of the assets provides insufficient funds to cover the debt, the secured creditors may claim any balance as general creditors.

4. Describe the acts of bankruptcy which would entitle a creditor to institute bankruptcy proceedings. Answer: The acts of bankruptcy as found in s. 42 (1) of the Act.

5. Outline the requirements a creditor must satisfy in order to institute bankruptcy proceedings against a debtor.

Answer: To institute bankruptcy proceedings, a creditor must satisfy the court that the debtor has debts of at least $1,000 and has committed an act of bankruptcy within the past six months.

6. If a debtor makes a proposal to his or her creditors, then fails to comply with the proposal at a later date, what steps may be taken by the creditors? Answer: If a debtor fails to comply with the terms of an approved proposal, the default constitutes an act of bankruptcy [s. 42 (1) (i)], and a creditor may then proceed to petition the court for a receiving order.

7. What is a "preferred" creditor, and how does this status affect the right to payment? Answer: A preferred creditor is entitled to payment according to a list of priorities in the Act, s. 136 (1).

8. Why are "inspectors' appointed by the creditors at the first meeting of creditors in bankruptcy proceedings? Answer: Inspectors are expected to give instructions and supervise the trustee in the collection and distribution of assets of a bankrupt estate.

9. What should a person who finds it impossible to carry on business any longer without incurring further losses do? Answer: If the business cannot be made viable by restructuring the debt, the person should advise his creditors of his financial condition, and cease any business activity that would result in greater losses.

10. Under what circumstances would a debtor be permitted to make a voluntary assignment for the benefit of his or her creditors? Answer: A voluntary assignment may be made where the debtor wishes to make an assignment of his assets for the benefit of his creditors. The assets are assigned to an official receiver who then proceeds as if the matter is an ordinary bankruptcy. 11. Outline the order of priority to payment of preferred creditors in a bankruptcy. Answer: The order of priority is set out in s. 136 (1) of the Act, and the list is described in the text.

12. Explain the duties of an undischarged bankrupt. Answer: An undischarged bankrupt must not engage in any business without disclosing that he or she is an undischarged bankrupt. An undischarged bankrupt must not purchase goods on credit except for necessaries (and then only for amounts under $500), and may not become a director of a corporation.

13. What is the effect of a discharge on a bankrupt debtor's obligation to pay his or her creditors? Answer: A discharge releases the bankrupt person from all debts except those arising from wrongdoing or from marital obligations.

14. Why is an insolvent person not necessarily a bankrupt? Answer: To be a bankrupt, a person must commit an act of bankruptcy.

Mini-Case Problems

1. Alexander was insolvent and attempted to hide from his creditors his only asset, a valuable painting worth $10,000. Assuming that he is two months in arrears on his apartment rent of $1,000 per month, owes his housekeeper back wages of $1,000 for one month‘s work, and owes unsecured creditors $12,000, what would the unsecured creditors receive in cents on the dollar if the trustees‘ fees and the costs of the bankruptcy were $2,000? Answer: Since Alexander has committed an act of bankruptcy by attempting to hide the painting, and owes his creditors over $1,000, any creditor may institute bankruptcy proceedings against Alexander. If the painting is sold for $10,000, the preferred creditors (trustee, landlord and housekeeper) would be entitled to:

Trustee Housekeeper Landlord

$2,000 $1,000 $2,000 arrears + 3 months accelerated rent - $3,000

Total preferred creditors: $ 8,000 Unsecured creditors claims would total $12,000 Funds available for unsecured creditors = $ 2,000 Each would receive:

$ 2,000 = 16.67 cents on the dollar. $12,000

2. Baker owed $3,000 to Able, $42,000 to Alice and $1,000 to Henry. All of the debts were in default, but Henry believed that Baker had assets that would cover the debts. What steps could Henry take to obtain payment of his debt? Answer: Henry should first make a formal demand for payment to ensure the unpaid accounts are not as a result of an oversight. If this demand goes unheeded, he may petition the bankruptcy of Baker on the basis that Baker has Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-386

debts totaling in excess of $1,000, and he is no longer paying his liabilities as they generally become due. At this point, Baker (or any of his other creditors who may not wish to see him bankrupt, perhaps to prevent disruption of his affairs) may settle Henry‘s account. Failing that, the operation of the Act will compel disclosure of assets available to settle the accounts of each of the creditors.

3. Shelley was in financial difficulty, and made a voluntary assignment in bankruptcy. At the time she owned a $100,000 property subject to a mortgage in the amount of $70,000, and had personal unsecured debts of $40,000. How will the assets be distributed if the property was sold for $93,000, and trustee fees were $3,000? Answer: From the $93,000 proceeds of the sale, the first $70,000 is paid to the mortgagee, leaving $23,000. The next $3,000 is paid to the trustee for administration before any balance is given over to the unsecured creditors. As a result $20,000 is available to the unsecured creditors, or a repayment shared proportionally among all unsecured creditors of 50 cents per dollar of debt owed.

Case Problems for Discussion Case 1 For many years, Commercial Canners Ltd. supplied Gibson Food Wholesale Ltd. with canned food products. These were usually shipped directly to the Gibson Food Wholesale Ltd. main warehouse, but occasionally the goods were directed by Gibson Food Wholesale Ltd. to a storage warehouse owned by Pierson Storage Inc., where Gibson Food Wholesale Ltd. leased storage space. Gibson Food Wholesale Ltd., unfortunately, ran into financial difficulty, and was eventually forced into bankruptcy by Pierson Storage Inc. who had been unpaid on its storage charges for many months. A number of other suppliers of Gibson Food Wholesale Ltd. were unpaid creditors, including Commercial Canners Ltd. When Commercial Canners Ltd. was notified of the bankruptcy, it examined its records and discovered that in the 2 weeks prior it had shipped 100 pallets of canned goods to Gibson Food Wholesale Ltd., and 80 pallets of canned goods to the Pierson Storage Inc. warehouse. Commercial Canners Ltd. valued the canned goods at $200 per pallet (average) for a total value of $36,000. Commercial Canners Ltd. contacted the trustee in bankruptcy, and discovered that 50 pallets of its canned goods were still in the Gibson Food Wholesale Ltd. warehouse, and 80 pallets were in the Pierson warehouse. The trustee also advised Commercial Canners Ltd. that Pierson Storage was claiming a lien on all Gibson Food Wholesale Ltd. goods in its warehouse. Advise Commercial Canners Ltd. How will the claim likely be resolved? Answer: Under the Bankruptcy and Insolvency Act, supplier deliveries in the 30 days prior to the bankruptcy may be reclaimed by the supplier. However, these are to be goods delivered to the bankrupt, as opposed to goods merely sold to the bankrupt. There is no doubt therefore that Commercial Canners can reclaim the 50 pallets still present at the Gibson warehouse of the 100 that were delivered to those premises. The second question is Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-387

whether Commercial Canners can reclaim the 80 pallets delivered to the Pierson Storage Inc warehouse. The answer is likely not, given the lien that Pierson claims over the Gibson goods stored at its premises constitutes a position as a secured creditor. Commercial Canners will then rank as an unsecured creditor for the value of the 50 unpaid and unrecovered pallets delivered to the Gibson warehouse, as well as all 80 pallets in the Pierson warehouse, for a total of $26,00 at $200 per pallet. Case 2 Martin Electrical Limited carried on business as an electrical contractor for many years. Martin was the sole shareholder of the corporation. Three years ago, the corporation purchased a warehouse building for $1,500,000. The building was financed in part by a mortgage loan on the building from Martin‘s spouse in the amount of $1,250,000. A year later, Martin purchased a fleet of new service trucks for $350,000, financing them via a conditional-sale agreement to the truck dealer, who subsequently assigned it to Auto Finance Ltd. Over the past year, business gradually began to slow down for the corporation, and in an effort to help the corporation meet its debts, Martin personally loaned the corporation $300,000, in return for a promissory note for the amount loaned. When business did not improve, Martin realized that the business could not continue, and notified his creditors that operations would cease. The principal creditor, Big Business Bank, who was owed $250,000 secured by a chattel mortgage on inventory and a unsecured line of credit of $300,000, joined unpaid suppliers (who were owed $450,000) in a bankruptcy petition. Accounts receivable in the amount of $150,000, inventory of $300,000 in stock, and cash in the bank of $10,000 were the only other assets of the corporation. Martin, as an employee of the corporation was owed unpaid wages of $30,000. The trustee in bankruptcy fees would probably be $50,000. If the property and assets were sold for the amounts as indicated, determine how the claims of the creditors would be assessed by the trustee. What objections might be made to some of the creditor‘s claims? Answer: The purpose of this case is to illustrate a distribution of assets to the creditors in a bankruptcy. The first point to note here is that the secured creditors may realize on their security outside the bankruptcy proceedings.

Claims of secured creditors:

(a)

Warehouse value:

$1,500,000

Mortgage to Martin‘s spouse Claim satisfied Surplus equity:

$1,250,000

(b)

$ 350,000

$ 250,000 (available to unsecured creditors)

Truck fleet value:

Chattel mortgage

$ 350,000

Claim satisfied Surplus equity:

(c)

Inventory value:

Bank chattel mortgage Claim satisfied Surplus equity:

$ 300,000 -

$ 250,000 $ 50,000 available to unsecured creditors

Total assets available to remaining creditors: Surplus on secured assets Accounts receivable Cash Total

$ 300,000 ($250,000 + $50,000 above) $ 150,000 $ 10,000 $ 460,000

Unsecured creditors claims with priority: (1) Trustee fees: (2) Martin‘s wages

$ 50,000 $ 30,000 $ 80,000

Balance available to general Unsecured creditors

$ 380,000 ($460,000 - $80,000 above)

Unsecured creditors claims: Bank line of credit Suppliers accounts Martin‘s promissory note Total unsecured claims

$ 300,000 $ 450,000 $ 300,000 $1,050,000

Payment to unsecured creditors = $380,000 divided by $1,050,000 = 36.19 cents per dollar of claim. The objections that may be raised to these claims centers on Martin and Martin‘s spouse. Their claims may be challenged on the basis that these are fraudulent preferences designed to keep assets out of the hands of other creditors. However, the argument will likely fail. The mortgage transaction was a rational step, taken three years prior to the financial difficulties of the firm. So long as the personal loan was in fact advanced, the promissory note did not create a preference over other creditors. Martin‘s claim for wages is based on a statutory priority, and may stand as long as he actually performed the work for which the wages are claimed. Case 3 Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-389

For many years the Acme Company carried on business as a manufacturer of consumer products. In 2018, it embarked on an ambitious program of expansion that involved the acquisition of a new plant and equipment. Financing was carried out by way of real-property mortgages, chattel mortgages, and conditional-sale agreements, with very few internally generated funds being used for the expansion. The general decline in demand for its product line as a result of the poor economic climate placed the company in a serious financial situation by 2020. As a result of a failure to pay a trade account to one creditor, bankruptcy proceedings were instituted. Acme did not object to the proceedings and did not make a proposal to its creditors. The trustee disposed of the assets of the company and drew up a list of creditors entitled to share in the proceeds. His preliminary calculations were as follows:

Sale of assets Sale of land and buildings Sale of production equipment Sale of trucks & automobiles Sale of inventory of finished goods Accounts receivable Cash

$350,000 35,000 25,000 30,000 45,000 $ 3,000 $488,000

Expenses and Creditor claims (all secured claims properly registered) First mortgage on land and buildings $290,000 Second mortgage on land and buildings 45,000 Third mortgage on land and buildings 40,000 First chattel mortgage on vehicles 22,000 Second chattel mortgage on vehicles 40,000 Bank claim under s. 427 of Bank Act 25,000 Unsecured trade creditors 60,000 Unpaid wages (ten employees at $300 each) 3,000 Unpaid commissions (1 at 1,500) 1,500 Bankruptcy expenses, fees, and levy 39,000 Unpaid municipal taxes 9,000 Equipment‘s conditional-sale agreement $ 10,000 $584,500 Calculate the distribution of the funds to the various creditors and calculate the cents-per-dollar amount that the unsecured trade creditors would receive. Answer: The purpose of this case is also to illustrate a distribution of assets to the creditors in a bankruptcy. The Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-390

first point to note here is that the secured creditors may realize on their security outside the bankruptcy proceedings. The first, second and third mortgagees may satisfy their claims in the following manner: Value of land and buildings $350,000 Less lst mortgage amount - $290,000 Balance $ 60,000 Less 2nd mortgage amount - $ 45,000 Balance $ 15,000

3rd mortgagee gets the $15,000 balance, and may claim as an unsecured creditor for the remaining $25,000. The chattel mortgagees with claims against the trucks and automobiles may exercise their rights in a similar manner. Viz: Value of trucks and automobiles $ 25,000 Less lst mortgagee's claim $ 22,000 Balance $ 3,000

The second chattel mortgagee would get the $3,000 balance and claim as an unsecured creditor for the remaining $37,000. The claim of the conditional seller ($10,000) would be satisfied from the proceeds of the sale of the production equipment, leaving a balance of $25,000. The claim of the bank ($25,000) against, say, the inventory ($30,000) would be fully satisfied, leaving a $5,000 balance for other creditors, etc. The remaining claims would fall within the priorities under the Bankruptcy Act. To satisfy the priorities, the following funds would be available:

Balance from sale of inventory Balance from sale of production equipment Accounts receivable Cash Total

$ 5,000 $ 25,000 $ 45,000 $ 3,000 $ 78,000

The preferred creditors, in order of preference (or right to the funds) would be: Bankruptcy expenses and levy Unpaid wages Sales commission Municipal taxes Total

$39,000 $ 3,000 $ 1,500 $ 9,000 $52,500

The remaining $25,500 ($78,000 - $52,500) would be divided between the unsecured creditors using the formula below with each creditor receiving: Total funds available x creditor's claim Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-391

Total unsecured creditors' claims

The amount owing to unsecured creditors would be: Unsecured trade creditors Balance of 3rd mortgagee's claim Balance of 2nd chattel mortgagee's claim

The cents on the dollar would be:

$ 60,000 $ 25,000 $ 37,000 Total $122,000

$25,500 $122,000

or, about 21 cents.

Case 4 Simple purchased a small business from a well-established proprietor for $200,000. To finance the transaction, he borrowed $150,000 by way of a mortgage on the premises, and he prevailed upon the proprietor to accept a chattel mortgage on the equipment for the balance. Both mortgages were duly registered. He then arranged with the trade suppliers to sell him his inventory on credit. The business was a high-volume, low mark-up type of business. A large amount of money passed through Simple‘s hands each day, even though the portion that represented his profit was small. During the first few months of operation, he purchased a new, expensive automobile, refurnished his apartment, and took a quick four-day holiday to Las Vegas, where he lost several thousand dollars at the gaming tables. When his suppliers began pressing him for payment of their accounts, he managed to pacify them by staggering payments in such a way that each received the payment of some accounts, but their total indebtedness remained about the same. He accomplished this in part by seeking out other suppliers and persuading them to supply him with goods on credit. A few months later, it became apparent to Simple‘s creditors that he was in financial difficulty, and several creditors threatened to institute bankruptcy proceedings. To forestall any action on their part, Simple paid their accounts in full. The threats of the creditors brought his desperate financial position forcefully to his attention, however. He promptly transferred $10,000 to his wife, and he placed a further $10,000 in a bank account that he opened in another city. A few days later, Simple purchased two one-way airline tickets for a flight to Brazil that was scheduled for the next week. Before the departure date, a creditor, to whom Simple owed a trade account in excess of $5,000, became aware of his plans and instituted bankruptcy proceedings against him. Discuss the actions of Simple and indicate how the provisions of the Bankruptcy and Insolvency Act would apply. What steps may be taken to protect the creditors in this case? Answer: Simple, while apparently a skillful salesman (he managed to convince the vendor and his suppliers to finance 100% of the business) is, nevertheless, a poor businessman at best, and at worst, fraudulent in his activity. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-392

Class discussion should identify acts of bankruptcy on Simple's part, and the actions of Simple that might constitute grounds for preventing his departure from Canada as an absconding debtor. Under the Bankruptcy and Insolvency Act, the funds hidden in the bank account, and the money transferred to his wife may be recovered by the trustee. Preferential payments to creditors who were aware of his financial condition might also be attacked. (See the Bankruptcy and Insolvency Act, ss. 42 (1). Under certain circumstances, Simple may also be prevented from leaving Canada for Brazil, particularly if his intention for leaving is to defraud his creditors. Case 5 Able carried on business as a service-station operator. In addition to repairing automobiles, he maintained a franchise for the sale of a line of new automobiles. He also sold gasoline and the usual lines of goods for the servicing of vehicles. Business was poor, however, and Able made a voluntary assignment in bankruptcy, in which he listed as assets:

Land and building New automobile (1) Gasoline and oil Parts, supplies, and equipment Accounts receivable Bank Personal assets (furniture, etc.)

$500,000 240,000 30,000 30,000 20,000 1,000 $19,000 $840,000

His creditors’ claims were as follows: First registered mortgage Second registered mortgage Registered conditional-sale agmt (cars) Due and owing to fuel supplier Due and owing to other trade creditors Municipal taxes owing Personal debts (unsecured)

$400,000 70,000 220,000 50,000 180,000 10,000 $ 100,000 $1,030,000

When the trustee went to Able‘s place of business, he discovered that: (1) the new cars had been taken by the manufacturer; (2) the fuel tanks had been emptied by the fuel supplier; and (3) Baker, an employee of Able‘s, was on the premises and in the process of removing an expensive set Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-393

of tools that he maintained had been given to him by Able in lieu of wages for his previous week‘s work. Discuss the steps that the trustee might take as a result of the discoveries. Answer: The facts in this case illustrate a situation where some of the creditors have taken upon themselves to seize assets of the debtor before bankruptcy proceedings have begun. It should be noted, however, that some creditors have this right. For example, secured creditors may realize upon their security outside the Bankruptcy and Insolvency Act. While the case does not so indicate, the first and second mortgagees might look to the land and building for the satisfaction of their mortgages, rather than proceed through the bankruptcy action. From the facts, the manufacturer of the new cars apparently sold them under a conditional sale agreement to Able, and on default, would be entitled to recover them, as title had not passed. The fuel oil dealer, however, would probably not be entitled to take back his fuel, but must rely on his claim as a creditor for payment. The trustee might recover the value of the fuel oil from the supplier under the circumstances. The employee, Baker, was caught in the process of taking a set of tools, which he explained had been given to him by Able in lieu of wages. If the tools had been given to him in full satisfaction of his wages prior to the assignment in bankruptcy, the payment "in kind" to the employee might be beyond the reach of the trustee. This would likely depend upon a number of factors, the most important being whether the wages owing and the value of the tools were approximately the same. The unusual method of payment may nevertheless, be open to challenge.

CHAPTER CHARTS

Historical Development Forms of Insurance The Nature of the Insurance Contract The Concept of Indemnity for Loss The Parties Associated with Insurance Contracts Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Chapter Objectives After study of this chapter, students should be able to: • Recognize the various forms of insurance. • Understand the nature of the contract of insurance and the concept of indemnity for loss. • Identify the parties associated with insurance contracts and their rights and duties. YOUR BUSINESS AT RISK The crippling risks of fire, liability for negligent acts and business interruption are self-evident, as is the need to protect against them. The contract of insurance is an equally obvious answer, but not enough business persons realize that it is a contract of utmost good faith. As such, all the protection that insurance represents may be lost if the insured has not revealed all material facts to the insurer. Even if the contract remains enforceable, there still may be significant exclusions and limitations to coverage. This requires the business operator to make sure he or she has professional assistance in the first place to obtain adequate coverage across all major areas of risk, and to understand the triggers and limits to compensation. CHAPTER COMMENTARY Most students have a basic knowledge of the concept of risk reduction through insurance, but most fail to realize that it is essentially a contractual relationship between the insurer and the insured, where disclosure of all material facts is important. For this reason, disclosure should be emphasized in the class examination of the nature of the insurance contract. The concept of indemnity for loss, rather than profit from a loss is also important, and in this respect the concept of insurable interest, contribution by insurers, the right of salvage, and the doctrine of subrogation should be stressed. Co-insurance, another concept, might be illustrated by way of example. See the text for the formula, and a sample calculation. On the matter of insurable interest, only the general rule is set out in the text, and it might be worthwhile to emphasize that in the case of life insurance policies the person who takes out the policy on the life of another need only have an insurable interest at the time the policy is taken out. This is provided under the insurance legislation of most provinces. See for example: the Insurance Act, R.S.O. 1990, c.I-8, s.155. The role and liability of insurance agents and brokers are also covered in this chapter, even though agency was dealt with earlier in the text. The liability of an agent to the purchaser of insurance differs from Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-396

that of most agents, and a review of the Fine's Flowers Ltd. case excerpt in the text outlines the duties of such an agent at law. The Whiten v. Pilot Insurance Co. Court Decision deals with the refusal of an insurer to pay a fire insurance claim, because it suspected arson. Students should note that no evidence existed of arson, and both the local fire chief, and the company‘s own expert investigator found no evidence of arson. Note that the court awarded punitive damages, as well as compensation for the loss.

Review Questions 1. Explain the doctrine or concept of salvage, and give an example of how it would apply. Answer: The doctrine of salvage is a means of preventing an insured from profiting from a loss where the insurer pays the insured the full value of the thing damaged. The insurer in this instance would be entitled to the damaged goods where such a payment is made, and the insurer may then sell the damaged goods to reduce the loss paid.

2. Explain an insurable interest as it applies to a contract of insurance. Answer: An insurable interest is an interest in property or the life of another which if damaged or destroyed would result in a financial loss. Except for life insurance, a person must have an insurable interest both at the time the policy is taken out and at the time the loss occurs.

3. Why is a contract of insurance a contract of utmost good faith? Answer: A contract of insurance is a contract of utmost good faith because full disclosure is necessary by the prospective insured in order that the insurer will be in a position to decide to assume the risk or fix a premium.

4. At what point in time does a life insurance policy become effective? Answer: A life insurance policy becomes effective at the time of its issue.

5. Describe the right of contribution, and by way of example, show how insurance companies use it to determine their liability. Answer: Contribution arises where an insured has insured a certain type of loss with more than one insurer. If a loss occurs, each insurer is only obliged to pay its share. For example: A insures a building for fire with two insurers. A fire occurs causing $10,000 damage. Each insurer need only contribute its share of the loss, i.e. $5,000.

6. What right of the insurer prevents an insured from making a profit from a loss?

Answer: An insured is not permitted to profit from a loss because the insurer has (1) a right of subrogation and (2) a right of salvage (3) a right to contribution from other insurers.

7. Is it possible for a creditor to insure the life of a person indebted to him or her? Explain. Answer: Yes, because the creditor has an interest in the life of the debtor (in the sense that it is important that the debtor remain alive to repay the debt).

8. Explain the concept of insurance, and indicate how it differs from wagering. Answer: Insurance is designed to reduce risk and to compensate persons for losses suffered by spreading the loss over a large group of others known as policy-holders. It differs from a wager in the sense that insurance only compensates for the actual loss incurred.

9. In what way does the right of subrogation ultimately benefit the insured? Answer: Subrogation ultimately benefits the insured by reducing the premiums paid for insurance. Because insurers may recover losses paid by claiming against the party causing the loss, the cost of premiums will be less.

10. What limitations or exceptions permit an insurer to avoid payment of loss claims caused by deliberate acts of the insured? Answer: Insurers are normally not required to pay claims for losses which are caused by deliberate acts of the insured. Insurers are also not required to pay where the insurance was obtained by way of fraud, etc.

11. What mathematical principles are used to determine premium rates for life insurance policies? Answer: Insurance premiums are based upon the chance of a person dying within a determined period of time. Since all natural persons will eventually die, the premiums are based upon the chances of a person of a particular age dying. These statistical "chances" are prepared in tables called actuarial tables.

12. A creditor insured the life of a debtor to cover the amount of the debt owed. Two years later the debtor died, having paid back over half of the debt. Is the creditor entitled to the full amount of the policy?

Answer: Yes. The creditor is the beneficiary of the full amount of the policy, and is entitled to payment of the full amount.

Mini-Case Problems

1. A homeowner insured her home for $50,000, knowing that its true value was $100,000. An accidental fire in her kitchen caused $10,000 damage. Her fire insurance policy contained an 80 percent coinsurance clause. Calculate the liability of the insurer. Answer: (Amount of Insurance Carried / Minimum Amount of Insurance Required) x Amount of Loss = Amount of Recovery by Insured ($500,000 / $320,000) x $100,000 = $156,250 The insurer is nominally liable for up to $156,250 for this loss on a $500,000 policy. However, as the damage is in reality only $100,000, the insurer will only indemnify up to that amount, meaning $100,000. Remember, an insured can only be restored by insurance, and may not profit from it.

2. Assume a situation identical to that described in the above question, except that damage caused by the fire exceeded $50,000. How would you calculate the liability of the insurer in this case?

Answer: (Amount of Insurance Carried / Minimum Amount of Insurance Required) x Amount of Loss = Amount of Recovery by Insured ($500,000 / $320,000) x $500,000 = $781,250 (overinsured) The homeowner is overinsured, and has been paying premiums for coverage that can never be accessed. The insurer‘s liability is limited by the policy to $500,000, and any further loss must be borne by homeowner. Instructors may wish to discuss what happens if the insured fails to maintain the requisite 80% policy coverage required by the co-insurance clause. Consider the following: the homeowners insures

the house for $300,000 to save on premiums. The house is worth $400,000, and the fire damage is $350,000. The equation becomes: (Amount of Insurance Carried / Minimum Amount of Insurance Required) x Amount of Loss = Amount of Recovery by Insured ($300,000 / $320,000) x $350,000 = $328,125 The co-insurance penalty to be borne by the homeowner will be the difference between the amount of the loss and the liability of the insurer, or $350,000 - $328,125, or $21,875.

3. A husband and wife took out life insurance policies naming each other as beneficiaries. The wife had a medical problem at the time, but did not reveal the true nature of the problem in her insurance application. Six months later, the wife died as a result of the particular medical problem. The insurer denied payment under the policy. Discuss. Answer: A contract of insurance is a contract of utmost good faith, and an applicant for insurance has an obligation to reveal all material facts that would affect her ‗insurability‘. She did not, and the insurer may not be required to pay the insurance proceeds.

4. Samuel insured his automobile for theft. He later claimed that his automobile had been stolen and damaged. The insurer was suspicious, and believed that Samuel had deliberately damaged the vehicle to claim the insurance proceeds. The insurance company refused to pay. Advise Samuel and the insurer. If Samuel should sue for breach of the insurance contract, what would be the arguments of the parties? Render a decision. Answer: The insurer may not refuse payment simply based upon suspicion of deliberate damage by the insured. If Samuel sued the insurer, the insurer would be obliged to show some proof that Samuel had deliberately damaged the vehicle, otherwise it would be obliged to pay. See: Whiten v. Pilot Insurance Co. case in text. 5. A freight train derailed as a result of debris left on the track by local hunters. It spilled hopper cars full of grain onto adjacent fields and destroyed sea-containers full of commercial goods being transported to an ocean shipping port. Discuss the insurance relationships, the parties, and the issues that might arise in this situation. Answer: In the first instance, this situation is one in which multiple parties may hold insurance against the commercial risk of transporting goods between vendors and purchasers. Students should be able to identify which parties have an insurable interest and what that might be. Here, the owners/vendors of the transported goods will have an interest as will the rail company. The ultimate purchasers of the shipped Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-400

goods may also have an insurable interest. The insurer may have rights of salvage to any of the spilled grain or goods. And, a right of subrogation may exist to the insurer if the individuals responsible for the derailment can be identified, although it is unlikely in these circumstances. There may be elements of contribution here depending on how many of the parties insured their interests with more than one insurer

Case Problems for Discussion Case 1 Acme Furnishings Ltd. operated a small manufacturing plant that was housed in a warehouse building that was owned by the corporation, and valued at $500,000. A recession in the house furnishings market forced the corporation to borrow $300,000 from its bank, using the building as security for the loan. Acme Furnishings Ltd. gave the bank a mortgage on the property, and as a part of the transaction, the bank required the corporation to insure the building for fire for its full value and include the bank as an insured. A year later, Acme Furnishings Ltd. was in serious financial difficulty, and the bank foreclosed on the mortgage, but did not evict Acme Furnishings Ltd. from the premises. A few months after the bank‘s foreclosure was finalized, a fire broke out in the plant, and the building was destroyed. The bank and Acme Furnishings Ltd. both filed claims for payment under the fire policy. Advise the insurer. Discuss the nature of the claims, and how the claims may be resolved. Answer: This case concerns insurable interest when a loss occurs under a fire insurance policy. Both parties had an insurable interest when the policy was taken out (Acme as owner, and the bank as mortgagee). However, when the bank forclosed on the mortgage, it became sole owner of the property. Acme ceased to have an insurable interest in the building after foreclosure, and cannot collect under the policy, unless it can establish that it had some form of insurable interest related to its occupancy. Based on the facts, only the bank would probably be entitled to payment. See: Rowe v. Fidelity Phenix Fire Insurance Co. of New York [1944] O.W.N. 387,600.

ase 2 Ashley carried on a gift shop business in a neighbourhood with many boutique shops. Her shop was part of a mini mall that housed several shoe stores, a dress shop, and a competing gift shop business operated by Helga. Helga resented Ashley‘s presence in the mall, and did her utmost to persuade patrons to not patronize Ashley‘s shop. One winter day, after a verbal dispute with Ashley, Helga took her delivery van, and crashed it through the front window of Ashley‘s shop, destroying much of Ashley‘s inventory. Helga‘s excuse was that she lost control of the van on the icy parking lot, and could not prevent the ―accident.‖ Ashley claimed on her insurance for the damage to her shop and for business interruption while inventory was replaced and the shop repaired. Her insurer paid Ashley for the $35,000 claimed loss in full. Ashley then took legal action against Helga in tort for damaging her business and the destruction of her inventory. If Ashley succeeds in her claim against Helga, and recovers damages in the amount of $40,000, discuss the rights and responsibilities of the parties.

Answer: This case raises the issue of subrogation under an insurance policy. Students should note that Ashley was paid in full for her loss by her insurer. If Ashley was successful in her tort action against Helga, she would be obliged to pay over $35,000 of the proceeds to the insurer. Note that Helga may not be able to claim any damages to her van from her insurer if she deliberately drove it through the window of Ashley‘s shop. Ashley‘s insurer, however, may be able to claim over against Helga‘s insurance company for the loss it paid out, on the basis of subrogation, since Helga was the cause of the loss suffered by Ashley. Case 3 Benton carried on a successful restaurant business in a large city. The restaurant had an excellent reputation. This was for the most part due to the skill of Benton‘s gourmet chef, Simmons. Benton realized that his business would be adversely affected if he should lose Simmons through accident or injury. For that reason he arranged for a life-insurance policy in the amount of $100,000 on Simmons‘s life, and named himself as the beneficiary. The annual premium in the amount of $500 was paid by Benton. Some months later, at the end of a busy day, Benton and Simmons became involved in a violent argument. Simmons left the restaurant saying, ―Don‘t expect me to work tomorrow. I quit. I‘ll be in to pick up my personal belongings at 8:00 a.m.‖ On his way home from the restaurant, Simmons was involved in a serious automobile accident and was killed. Benton claimed the $100,000 under the life-insurance policy. Should the insurer pay the claim? What defences might it raise to resist the demand for payment? Answer: This case hinges on the existence of a insurable interest of Benton in the life of his employee, Simmons. The general rule is that Benton must have an insurable interest at the time the insurance is taken out, and also at the time the loss occurs, but with life insurance, he is only required to have an insurable interest at the time the insurance is taken out. See for example Insurance Act, R.S.O. 1990, c.I-8, s.155. The argument available to the insurer might be related to the insurable interest of Benton. At the time the policy was taken out, did Benton have an insurable interest in Simmons? Would he have an insurable interest in an employee? As a general rule, an employer is considered to have an insurable interest in an employee, and Benton had such an interest at the time he took out the policy (Simmons was employed by him at the time). Benton therefore would be entitled to the proceeds of the policy. Case 4 Hector and Keech carried on a fishing business together as a partnership. Each partner‘s life was insured for $200,000 under an insurance policy that named the other partner as beneficiary. One afternoon, while the two partners were in their boat, fishing close to the shore, a sudden storm came up. Hector started the engine to run the boat back to harbour. Keech wished to remain and insisted that they ride out the storm. The two men exchanged words, and then both struggled for the controls of the boat. In the process, Hector was pushed overboard and into the water. Before Keech could turn the boat around, Hector had disappeared beneath the surface of the choppy water. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-402

Keech was charged with criminal negligence causing the death of Hector and was convicted. Because of the circumstances surrounding the death, he was given only a light prison sentence. On his release, Keech claimed the $200,000 under the insurance policy on Hector‘s life in which he was named beneficiary. Should Keech be entitled to the insurance proceeds? Answer: This case concerns the right of Keech to collect the life insurance on his partner notwithstanding the fact that his negligence caused his partner's death. The general rule of public policy is that a person should not be entitled to profit from his wrongful act. From the facts, Keech probably had an insurable interest and would otherwise be entitled to collect, but should he be entitled to do so under the circumstances? Should the court distinguish between criminal negligence and murder? According to the case of Lundy v. Lundy (1895), 24 S.C.R. 650, no distinction is made between murder and manslaughter, as both are criminal acts, but is this a true expression of the law? Murder is premeditated, but the negligence in this case was not planned. Should this make a difference? Where the act causing death is a criminal act, the insurer can normally resist payment on that basis. See: Latta v. London Life Insurance Co. (1977), 76 D.L.R. (3d) 265. Case 5 Rosa Rugrosa Flowers Ltd. carried on business as a florist. It operated a large greenhouse in which it grew most of its flowers during the cold winter months. To protect its business, the company contacted its insurance agent for insurance coverage against loss or damage by fire, and for theft of stock. Because the building was largely glass and steel, the agent placed its value at $25,000, when in fact its actual value was approximately twice that amount. The contents, also covered by the policy, were similarly undervalued. The insurance agent placed the insurance coverage, and a policy was issued that contained an 80 percent co-insurance clause in the event of fire damage. A few months later, on a cold winter night, vandals broke into the greenhouse, smashed some of the panes of glass by throwing potted plants against the sides of the building, and pulled the furnace flue pipe from the chimney. Smoke from the furnace filled the greenhouse, damaging most of the flowers and other plants. The vandals took with them equipment valued at $1,000. The company claimed the following amount from its insurer: Damage to building by vandals Smoke damage to plants, etc. Equipment stolen

$ 3,000 10,000 $ 1,000 $14,000

The insurer agreed to compensate the company for the stolen equipment in the amount of $1,000 and to cover the damage to the building. However, pointing to the 80 percent co-insurance clause in the fireinsurance policy, the insurer argued that it was only responsible for a part of the damage and the loss of Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-403

the plants, as the damage was caused by fire. A few days later, the vandals were apprehended by the police and admitted causing the damage. Unfortunately, they had sold the equipment and had spent the money before they were caught. The vandals had no personal assets. Discuss the rights and obligations of the parties in this situation. Explain how the loss should be borne. Answer: The stolen goods aspect of the case might be dealt with first, since the facts are relatively straight-forward on this point. The vandals had stolen goods which were insured against theft. The insurer therefore was obligated to compensate Rosa for the loss. This it did by payment of the $1,000. Since Rosa was compensated for the loss, the insurer was subrogated to her rights against the vandals, and could recover from them the value of the goods which they had stolen. Because the vandals had no assets, the money might not be recoverable from them at the time, but since a judgment of the court is enforceable for (at least) twenty years, the insurer might eventually recover its loss. The same approach may be taken with the $3,000 damage to the building by the vandals. The fire insurance policy claim might be dealt with in a somewhat different manner. Apart from the rights against the vandals for the fire damage, the co-insurance clause as it affects Rosa must be examined. Since Rosa had underinsured the property (for only one half its value) she, in effect, became an insurer herself in so far as the building was concerned. Could she validly argue that the fire did not damage the building, only the contents which were also covered under the policy? If the contents were insured separately under her policy, her argument might be valid, and the insurer obliged to pay the insured value of the damaged stock. The co-insurance clause would only apply if she had underinsured the stock as well. Case 6 Major Manufacturing Company produced a variety of children‘s toys in a small plant located in a multiple-unit industrial complex. Most of the products manufactured were either of a plastic composition or painted metal. Consequently, relatively large quantities of flammable solvents and paint products were stored on the premises. As a tenant of the building, Major Manufacturing Company carried fire and liability insurance on its operations in the amount of $10,000,000 as well as business-interruption insurance designed to compensate the company for any losses arising from the interruption of the operation due to fire damage. The fire policy agreement restricted the storage of flammable products to a single room of the plant area, and it prohibited smoking in that area. Containers of flammable products in the remainder of the plant were to be kept to a minimum, and no container was to be opened in the storage area. Employees in the plant followed the insurer‘s directions by taking the large storage drums out of the storage room onto an adjacent loading dock that opened to the street. Once outside the room and open to the air, they would open them and fill smaller containers from them for distribution to the various painting areas, then return the drum to the storage area. One day, while an employee was filling smaller containers from an open drum on th loading dock, the marketing manager was escorting a visiting executive from another company to the loading dock to smoke a cigarette. At the moment when the marketing manager opened the door to the loading dock, the Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-404

visitor lit a cigarette. Despite being open to the street, fumes in the immediate area ignited, and the resulting fire destroyed the entire complex. The visitor, the employee, and the marketing manager were all seriously burned in the accident, but there was no loss of life. Discuss the ramifications of this incident. Speculate as to how the loss may be determined, assuming that the building owner, all tenants, and the visitor‘s company were insured for liability, fire, and business-interruption losses. Answer: The fire loss was primarily due to actions of the visitor, but as escort (presumably aware of all things necessary to safely escort a stranger) the marketing manager has chief legal responsibility. What of any signage that should have been visible to the visitor, despite whatever guidance may or may not have been provided by the escort? If the visitor is to bear responsibility, their employer would be vicariously liable, with their own insurer drawn into the action. Assuming that the building owner and the other tenants are insured as well, all other insurers may be able to subrogate their claim as against either Major Manufacturing or the visitor‘s company as well. Case 7 Jennifer and Suzanne were the sole equal shareholders in the operation of a company that owned a department store. The owner‘s equity in the store amounted to $4 million. At age 52, both Jennifer and Suzanne knew that no one in either of their families had any interest in taking over their shares in the business in the event that either Jennifer or Suzanne died. At the same time, neither wanted to see the other saddled with a new partner should the family of the deceased sell the inherited half-share to someone undesirable. Accordingly, they made a buyout agreement, and resolved to buy insurance sufficient that, on the death of either of them, the survivor would have enough cash to buy up the deceased‘s shares in the company, and that survivor would then own the company outright. Carlyle, an agent for Solid Life Insurance Co., had been Jennifer‘s agent for the better part of 25 years. Carlyle wrote two policies; one on each life, with the other named as the beneficiary in the amount of $2 million. A medical exam was required, and in the course of Suzanne‘s examination, she was asked by the doctor if she had smoked in the last twelve months. She said that she had not. A year later, Suzanne was killed in an auto accident. After investigation, Solid Life Insurance Co. refused to pay because it had discovered that Suzanne had, in fact, been a smoker at the time the policy was issued. There was a policy available for smokers at the time of original issuance, but it carried a higher premium. Jennifer sued Carlyle (with Solid Life Insurance Co. as a co-defendant) in a suit for negligence. Identify the issues involved and render a decision. Answer: The protection of business partners through a buy-out agreement is common a practice, and these are normally supported by life insurance policies to provide the funds to purchase the deceased partner's share from his or her estate. Students should recognize that with life insurance it is necessary to have an insurable interest at the time the insurance policy is taken out. In this case both parties had an insurable interest. The issue here is the misrepresentation by Suzanne concerning her smoking. The question might be asked: was Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-405

this false information enough to allow the insurer to avoid the policy? Bear in mind she died as a result of an accident, and not a smoking-related health problem. If Carlyle knew Suzanne was a 'smoker', and wrote up the wrong policy, one might argue that he was negligent if Suzanne relied on him to arrange proper insurance coverage. If Suzanne was aware of the lower premium policy for non-smokers, and made a false statement to the examining physician, then perhaps both Suzanne and Carlyle were perpetrating a fraud on the insurer. In the case upon which these facts were drawn (Revard v. Mutual Life Insurance Co. of Canada and Mayers (1992) 9 O.R. (3d) 545) the Court held that the agent knew the nature and importance of the insurance and owed a duty of care to Jennifer to properly insure Suzanne. He was negligent when he failed to do so. The court held both the insurer and the agent liable. Case 8 Speedy Goliath had a poor driving record and found that insurers were reluctant to insure his automobile. Part of the reason for his high accident rate was the fact that he enjoyed using his automobile in car rally contests. By ignoring the driving rules in the races, he frequently became involved in minor accidents. When he purchased a new sports car, he decided that he might obtain a lower insurance rate if the ownership of the vehicle was placed in his friend‘s name. His friend consented to the arrangement, and insurance coverage on the vehicle was arranged. A short time later, while Speedy was driving his friend to work, he carelessly backed up and collided with a parked car. The owner of the parked car demanded damages in the amount of $4,000 for Speedy‘s carelessness, but the insurer refused to make payment. The owner of the damaged vehicle brought an action against Speedy as the driver of the automobile, and his friend as its owner. He obtained a judgment against them for $4,000. Discuss the position of Speedy, his friend, and the insurer in this case. Answer: In this case, Speedy is obviously using his friend in an effort to mislead the insurer as to the risk involved. Full disclosure of all material facts is required of the applicant for insurance, as the general rule of law is that the insured knows everything, and insurer knows nothing of the risk. Does a failure to disclose the identity of the true owner entitle the insurer to avoid payment of the claim? Would Speedy be the "owner" as purchaser of the vehicle, even though the registration was placed in his friend's name? Would the insured be liable for the damages if he had no title to the vehicle? What effect would such a ruling have on the liability of the insurer? In the case of Honan v. Gerhold; London and Midland General Insurance Co. (Third Party), [1973] 2 O.R. 341, in similar circumstances, the court held that a person in whose name an automobile was registered for the purpose of avoiding the true owner's creditors was not an owner under the Highway Traffic Act. He was therefore not vicariously liable for negligence in the operation of the vehicle. On this basis, if the insured was not liable, the insurer would not be obliged to pay on his behalf unless the insurance covered other drivers, etc. See also: Pooley v. Guillet et al. (1975), 58 D.L.R. (3d) 194. This case may be contrasted with the case of Hayduk v. Pidoborozny et al. (1972), 29 D.L.R. (3d) 8, in which the court held that more than one owner of a motor vehicle was possible, even if the vehicle was only in the name of one owner. Case 9 Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-406

Timber Limits Inc. owned an extensive tract of forested land from which it selectively cut particular species of trees on an ongoing basis for custom wood buyers. The company employed a full-time forester to manage and supervise cutting on the tract, and it had constructed two cabins on the property to be used by the forester from time to time during his travels throughout the property. The cabins were insured as ―seasonal dwellings‖ under the company‘s fire-insurance policy covering the buildings, and the endorsement on the policy provided that the buildings would not be covered for fire if either building was abandoned or remained vacant for more than 30 days prior to a loss. One of the cabins eventually became uninhabitable due to a leaking roof, and the company sent in a work crew to remove the furnishings, make the necessary repairs, and generally refurbish the cabin. Before the work could be completed, the work crew was directed elsewhere, and the cabin remained empty for several months. Before work commenced on the cabin, a member of the work crew was dispatched to examine the cabin and determine the materials needed to refurbish the interior. The worker examined the cabin and prepared a list of materials for completion of the repair, then left the premises. The next day the cabin was destroyed by a fire of undetermined origin, and the company applied for compensation for the loss under its policy. The fire-insurance company refused to pay for the loss, and Timber Limits Inc. instituted legal proceedings against the insurer. Discuss the basis of the arguments of the parties and render a decision. Answer: The facts of this case were fashioned to promote discussion of the insurer's liability under the terms of the policy. The insurer might argue that the cabin remained vacant for more than 30 days before the loss, and the building was not covered by the policy at the time of the fire. The insured might argue that the 'inspection' was sufficient to validate the policy, as the entry and examination of the building by the employee was less than 30 days prior to the loss. Because the building had been undergoing extensive repair the insurer would not be able to argue that the building had been abandoned. Judicial decisions over the years have been mixed on this issue, but given the nature of 'seasonal dwellings' and their sporadic occupancy, insurers are often satisfied with regular inspections of this type of property rather than actual occupancy on a continuous basis. If this should be the case, then the inspection a few days before the loss would be sufficient to constitute compliance with the 30 day vacancy provision in the policy.

CHAPTER CHART

Chapter 32. Restrictive Trade Practices Chapter Topics Introduction Nature of the Legislation Restrictive Trade Practices Mergers and Firms in a Dominant Position Conspiracies and Combinations in Restraint of Trade Offences Relating to Distribution and Sale of Products Reviewable Activities Offences Relating to Promotion and Advertising of Products Civil Actions Under the Competition Act Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Chapter Objectives After study of this chapter, students should be able to: • Identify restrictive trade practices. • Explain the legislation as it relates to advertising and the promotion of products. • Describe offences and ―reviewable activities.‖

YOUR BUSINESS AT RISK Competitive markets are in the interest of businesses and consumers alike. Some business practices strike at the heart of this policy objective, and have attracted legislative and regulatory responses. As the rules are not necessarily self-evident, and the penalties can be very severe (in addition to negative publicity), it is important for businesses to understand how to remain in compliance with competition regulation. CHAPTER COMMENTARY Restrictive trade practices legislation is designed to control those activities which prevent the forces of competition from operating effectively. The principal legislation is the Competition Act, and is covered in this chapter. Some of the sections of the Act are reproduced, but if a detailed examination of the various sections is desirable, copies of the Act or the relevant sections might be obtained, and distributed to the class for reading in conjunction with the text. In any event, the instructor should emphasize the criminal law aspects of the legislation, and the fact that for most of these activities, the criminal standard of proof is required of the Crown. In recent years the trend has been away from criminal penalty, and more in the direction of 'control', such as reviewable practices, and control over mergers. These changes should be noted as well. The definition of the word unduly, which is found in the description of most of the offences under the Act, is set out in the case excerpt from The King v. Elliott. The legislation in some respects requires considerable study in order that the various kinds of activity subject to the Act may be determined. The reviewable activities, in particular, should be carefully considered, as they represent a relatively new direction by the Federal government in the control of restrictive trade practices. At the present time, only certain activities are subject to review, but these could conceivably be expanded in the future, if new business activities develop that have the potential for restraint of trade. If the Act itself is reviewed, the importance of reading the definition section in conjunction with the restrictive trade practices must be stressed, otherwise students will acquire the wrong impression of the effect of the Act. The Commissioner of Competition v. Sears Canada Inc. Court Decision provides an example of a situation where the retailer allegedly used deceptive advertising in its sales of tires. Students should examine how the court determined that the advertising and sale practices of the retailer constituted a violation of the Act.

Review Questions 1. What activities are considered to be prohibited trade practices? Answer: Prohibited trade practices would include: resale price maintenance, price fixing conspiracies, predatory pricing, discriminatory discounts and bait-and-switch advertising.

2. Outline the implications of the Competition Act to an advertiser of goods. What types of advertising would likely be affected by the Act? Answer: The two main types of advertising affected by the Act would be misleading price advertising and false or misleading advertising about the product or its performance. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-409

3. What effect has the criminal nature of the law had upon the ability of the Crown to control restrictive trade practices? Answer: The criminal standard of proof applies to the Crown in the enforcement of the act. This standard is much higher than the ordinary civil law standard.

4. Mergers of corporations or businesses are not unlawful per se. Under what circumstances would a merger likely to be subject to review under the Competition Act? Answer: A merger would be subject to review where the merger is likely to be an abuse of dominant position or would lessen competition to the detriment of the public or be contrary to the public interest.

5. Why did the Canadian Government find it necessary to introduce restrictive trade practices legislation? Answer: Legislation was necessary because the Common Law was not capable of dealing with firms that possessed considerable economic power and were in a position to restrict competition.

6. What activities are not "prohibited", but "reviewable practices"? Answer: Reviewable activities would include abuse of dominant position, exclusive dealing arrangements, tied selling, refusal to supply goods, market restriction, and consignment selling.

7. Under what circumstances would an investigation under the Competition Act be instituted? Answer: An investigation would be instituted by the Director on the request of six persons, or may be instituted by the Director following a complaint by any individual.

8. Must a manufacturer of goods sell his or her products to all retailers? If not, why not? Give an example of a case where a manufacturer might lawfully refuse to do so. Answer: Normally a manufacturer must sell to all who wish to buy unless the product requires special servicing or installation expertise in which case the manufacturer may be justified in selling only through "authorized" dealers or those prepared to stock parts, maintain a service staff, etc. He may also refuse to sell to persons who use the goods as "loss-leaders."

9. Why was it originally necessary to make the restrictive trade practices laws criminal in nature? Answer: The legislation had to be criminal in nature in order for the Federal government to have the law within its jurisdiction, otherwise the matter of control of business activities would fall within the jurisdiction of the provinces. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-410

10. Explain the following terms: bait-and-switch; loss leader; bid-rigging; exclusive dealing; predatory pricing; tied selling. Answer: (a) bait-and-switch: A selling technique where the buyer is enticed to the seller's place of business by an advertised low price product, and once there, told it is out of stock, but a higher priced model is available. (b) loss-leader: A selling practice which advertises a particular product for sale at a below cost price for the purpose of enticing people to the seller's place of business. (c) bid-rigging: A conspiracy in bidding where all bidders except one will bid for a job at a very high price to permit the one designated bidder to obtain the contract. (d) exclusive dealing: An agreement between a manufacturer and seller whereby the seller will have exclusive rights to the sale of a product in that area. (e) predatory pricing: A practice whereby one seller prices products very low for the purpose of destroying competition. tied selling: A selling practice whereby a manufacturer requires a purchaser of one product to also purchase other products of the manufacturer.

11. What is the significance of a price advertised by a manufacturer as a "maximum retail price?" How does this differ from a "suggested retail price?" Answer: It would appear that a manufacturer may fix a maximum price for a product, but may not fix a minimum price. A "suggested retail price" may violate the Act unless the manufacturer makes it clear that the seller is free to sell the goods at any other price he may wish to place on the goods.

Mini-Case Problems

1. A retailer advertised smartphones for sale with banner headlines that stated, ―Special Sale! Only $399 with trade-in of your old phone!‖ At his store he had three for sale at $399, but required an older working model of the same brand as a trade-in. At his shop he would also urge customers to buy a different brand of smartphone at $699, since his ―sale brand‖, in his opinion, was poor quality and not really worth buying. A customer went into the retailer‘s shop to purchase one of the special sale smartphones, but did not have a same-brand phone for trade-in purposes. Discuss the issues raised in this case. Answer: The advertising may be false and misleading and a violation of the Competition Act, since the advertising Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-411

does not stipulate that the trade-in must be of the same type. If he refuses to sell a $399 smartphone with the trade-in, he may be in violation of the Act. Circumstances such as this give rise to the advertising line ―terms and conditions may apply‖. The retailer's actions may also constitute "bait-and-switch" advertising due to the requirement related to the trade-in model, and failing to have any reasonable product quantity on hand to meet probable demand. The retailer appears to have no real intention of serving the customer at $399. per smartphone. 2. Workers‘ Clothing Co. conducted a promotional contest in which the prize offered was described as a new motorcycle with a retail value of $12,995. Investigation revealed that the motorcycle had a suggested retail price of $12,495 and was a new, but previous year‘s model. Discuss the implications of this information in light of the Competition Act. Answer: The advertisement is in error in terms of both price (value) and description. The ordinary person would expect the word 'new' to mean the current year's model. Since the advertisement is false and misleading it would violate the Competition Act prohibition relating to this type of advertising. (s. 52 of Act).

3. Alter Company Ltd. and Bounder Company Ltd. manufacture the same product, each under their own brand name. Alter Company Ltd.‘s product represents 46% of the domestic market, and Bounder Company Ltd.‘s product represents 48% of the domestic market. Alter Company Ltd. and Bounder Company Ltd. are considering a merger, with the merged company continuing to sell the two brands as separate products. What issues are raised by these facts? Answer: Students should recognize that a merger of these two companies would give the new company 94% of the market – a virtual monopoly. While mergers are not prohibited per se, it would be necessary for the companies to convince the Competition Tribunal that the merger would not lesson competition to the detriment of the public. Given the facts of the case it is unlikely that the Competition Tribunal would permit the merger.

4. MFG Inc. sold specialized medical equipment through wholesalers to hospitals. Wholesalers signed exclusive dealership agreements proposed by MFG Inc. that required all sales to hospitals to be at prices set by MFG Inc. Middleman Ltd., a wholesaler, sold several machines at less than the prices set by MFG Inc. On discovery, MFG Inc. cancelled their exclusive selling agreement with Middleman Ltd. and refused to supply equipment to it. Advise Middleman Ltd.

Answer: This is a case where the manufacturer attempted to control the price of goods sold by wholesalers through exclusive dealership agreements. Normally any attempt to control prices would constitute resale price Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-412

maintenance and a violation of the Act. Students, however, might consider some of the arguments that the manufacturer might raise such as special training required to operate equipment as justification for the exclusive agreements.

Case Problems for Discussion Case 1 Generics Ltd., a manufacturer of pharmaceutical drugs, marketed a generic relaxant drug that was dispensed by pharmacists under prescription. For many years the drug was sold under its brand name, and its use gradually expanded until it represented over half of tranquillizer market sales. A U.S. pharmaceutical manufacturer investigated the size of the Canadian market for tranquillizers, and decided to introduce its own generic product through its Canadian subsidiary, under its own brand name. In an effort to protect its market share, Generics Ltd. decided to provide its product to all Canadian hospitals on a free basis. This was done in expectation that patients who were given the drug in hospital would then request it by brand name from their physicians, or that physicians would simply continue to prescribe the same product that had been used in hospital. When the competitor discovered that Generics Ltd. was providing drugs on a free basis to hospitals, it lodged a complaint under the Competition Act. Discuss the nature of the complaint, the effect of the complaint, and the possible outcome. Answer: The competitor in this case would probably base its complaint on the apparent purpose of the free distribution of the drug to the hospitals. How would this represent a violation of this Act? Would the competitor not be able to make the same distribution to the hospitals on the same basis? Students should discuss this point. Students should also consider the nature of the relationship between the hospitals and the drug manufacturer. This is not related to price maintenance and the hospital is not restricted in obtaining similar drugs if it should decide to do so. Students might ask how does this violate the Act? Generics Ltd. would perhaps argue that it is simply a marketing strategy and not a violation of the Act. Case 2 A soft drink manufacturer entered into an exclusive dealership agreement with a large university whereby the manufacturer would supply its product line to the university cafeteria, coffee shop and snack bar. The manufacturer would also supply soft drink dispensing machines in all campus residence and classroom buildings. The agreement was to run for a period of five years, and provided that the university would not permit any soft drinks to be sold on campus except those of the manufacturer. In return, the university was paid a large up-front cash payment, and entitled to a percentage of the sales of all of the soft drinks sold on campus. A competitor of the soft drink manufacturer consults you for your opinion on this agreement between the manufacturer and the university. What issues are raised in this case? What advice might you give? Answer: In this case, the competitor would be concerned about the exclusive dealing provisions in the agreement Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-413

between the soft drink manufacturer, and the university. The agreement, however, is between the manufacturer and the university, and does not restrict the students from purchasing a competitors product, or bringing it on campus. Does it, nevertheless, represent an agreement in restraint of trade? This might be argued, since only the manufacturer‘s products are available on campus, and in campus coffee shops, etc. It would appear, given the facts, that it is not in restraint of trade to the extent that it would violate the Competition Act. Case 3 Retailers from time to time advertised widgets at extremely low prices as an advertising gimmick to attract customers to their stores, much to the annoyance of the marketing manager of World Widget Co. Ltd. To clarify its position on ―loss leaders,‖ the company decided to issue a price list and a memorandum to discourage the use of its product in this fashion. The new price list read as follows:

Standard Model

Distributor Net Price

Regular Dealer Price

Minimum Profitable Resale Price

Fair Retail Value

(each)

$21.07

$24.47

$29.95

$34.95

All widget distributors were advised by the company that the sale of widgets at prices lower than fair retail value would be investigated, and any sale at a price lower than the minimum profitable resale price might be considered a loss leader sale. The company indicated that it would ―assess such a sale as it related to the marketing of World Widget Co. Ltd. products.‖ The memorandum further stated that it was the opinion of the company that a person loss leads widgets when he or she sells the product at a gross margin less than the average cost of doing business plus a reasonable profit. In the months that followed the issue of the memorandum, the World Widget marketing manager noted that two retailers continued to sell widgets at very low prices. One of the retailers, a large retail chain, regularly advertised and sold widgets at a unit price that would amount to $21.00 each. Since the retailer was a purchaser at the distributor price of $21.07, the product was sold at slightly less than actual cost. The marketing manager stopped shipments to the retailer on the completion of his investigation. He advised the customer that no further shipments would be made until World Widget had some assurance that the retailer would not loss lead widgets. The retailer eventually agreed to notify all branch managers that widgets should be sold at the regular price, and loss leader selling would be discontinued. A copy of the memorandum was sent to World Widget, and on its receipt, shipments of widgets to the retailer resumed. The other retailer, who purchased widgets at $24.47 each, sold widgets at a price equivalent to $24.90. World Widget considered this to be loss leader selling and refused to make further shipments until the retailer agreed to stop selling widgets as loss leaders. The retailer eventually agreed to stop Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-414

selling widgets in this manner, and further agreed to sell the product at a price not less than the ―minimum profitable resale price.‖ Shipments of widgets were resumed when this agreement was reached. Assess the actions of the marketing manager in this case. Answer: This case introduces loss leader selling, as well as a second example of re-sale price maintenance. The case used as a fact source was the R. v. Philips Electronics Industries Ltd. et al. case (1966) 52 C.P.R. 224), although modified to raise a number of different issues. The first matter for discussion might be the determination of the definition in view of the fact that a loss leader is not clearly defined in the Act. The purpose of the loss leader exception might also be examined by way of class discussion. The condition under which the supplier agreed to restore delivery of the product should also be assessed. In the Philips case, the court held that loss leader selling was selling below cost. This would mean that the firm that sold the goods at slightly more than cost was not loss leader selling, and the manufacturer was not entitled to use this provision as a basis for refusal to supply goods. The agreement to re-sell the widgets at not less than the "minimum profitable re-sale price" would represent an attempt to maintain retail prices, if the dealer was influenced to do so by the manufacturer. In the instance where the goods were sold at slightly less than cost, the manufacturer was entitled to stop the supply of goods until the retailer agreed to stop loss leader selling, but again, the manufacturer could not influence the price above cost at which the seller might buy the goods. See the Philips case for further information on each of these points. Case 4 In an attempt to diversify its product line, World Widget Co. Ltd. purchased all right, title, and interest in an automobile ―jet-ignition unit with transistors‖ from a Miami, Florida, inventor. The unit consisted of a small metal container, two transistors, a small spring, and a blob of tar. The designer of the unit claimed that the device would give ―better automobile gas mileage, easier starting, and better performance.‖ In support of his claim, he provided 625 testimonial letters from users of the product who reported reduction in gas consumption ranging from 10 percent to 30 percent. World Widget engineers were skeptical of the performance claims made for the jet-ignition unit, but their concern was brushed aside by the general manager when he discovered that the selling price represented a 100 percent markup over cost. During 2019, the ―jet-ignition unit with transistors‖ had been advertised in Canada by the previous manufacturer through several metropolitan television stations, and World Widget arranged for continued television advertising for 2020. The advertising indicated that the product would increase automobile gas mileage by up to 30 percent and would improve engine performance. It was sold under a money-back guarantee if the product was returned to the manufacturer within 30 days of purchase. In January 2020, a motorist purchased a unit. When it was installed in his car, the engine would not start. He reported his experience to a government agency, which then tested the motorist‘s unit in a number of its own vehicles. The tests indicated that the unit had no noticeable effect on engine performance or fuel consumption. The agency informed World Widget of its findings. In the same month, another motorist wrote the company the following letter: ―I purchased one of your jet-ignition units recently, and I am very pleased with the change in performance of my automobile. Starting is much easier, and gasoline mileage has improved 10 percent. Two of my friends purchased ignition units and have obtained similar results. I heartily recommend your product.‖ Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-415

The company received no complaints concerning its product from purchasers, and no user requested a return of the purchase price under the money-back guarantee. Should the company continue to market the product? Answer: This case illustrates the type of product marketing that might come under the misleading or false advertising provisions of the Competition Act. The case raises the difficulty of assessing the validity of performance claims, which, though accurate, may be due to factors other than those claimed to be the ones responsible for the change in performance. On the basis of the unsolicited testimonial letters, was the mileage improvement claim of up to a 30% improvement in gas mileage misleading or false? Does it matter if the improvement is due to something other than the functioning of the product itself? (One explanation for the improvement might be that it was due to a change in the driving habits of the vehicle operator in an attempt to get as high a mileage improvement as possible). Would the offer of a money-back guarantee and the zero return rate support the manufacturer's position that the testimonials and claims were true? Why? The company should proceed with great care in the preparation of its advertising material if it intends to continue with the marketing of the product. In the case of R. v. Anthony reported in (1969) D.R.S. 185, a similar advertisement of a similar product resulted in a charge under the Act, and a conviction, on the basis that the advertisement was untrue and misleading, in that the claims were not based upon proper tests. Case 5 Hott Tubbs Limited carried on business as a spa tub retailer in a large metropolitan city. The general manager attributed much of the company‘s sales volume to the use of extensive advertising and frequent ―sales.‖ As a general practice, the store held four sales a year: a summer sale, a fall sale, a ―Home Show sale, and a spring sale. In addition, the general manager would occasionally hold a special sale if sales volume was below expectations for the year. Each sale normally lasted a month, although extensions were occasionally made to clear models that proved to be poor sellers. During the past year, the company held five sales, and each featured a standard type of spa tub at 50 percent off the regular price. On the last day of the final sale for the year, a customer entered the store and wished to purchase one of the advertised spa tubs. The regular price was stated as $7,000, and the sale price $3,500. The customer, however, argued that the regular price was really $3,500 for at least 5 of the previous 12 months. The general manager denied that $3,500 was the regular price and refused to sell the spa tub for $1,500. An investigation into the ordinary selling prices of similar spa tubs in the area found that prices ranged from $2,995 to $7,500, depending upon the quality of the construction, the size and the features. Discuss the issues raised in this case. Answer: The facts of this case raise the question: What is the ordinary price of a product that is advertised for sale at a particular price for five of the previous twelve months of the year, and at a higher price for the remaining seven months? Does it matter that the advertised regular price remains the same, but the goods are sold for Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-416

five months of the twelve at one half the price? Does the advertisement of the product at one-half price for such a long period of time mislead the public? In what way? What is the significance of the fact that the prices charged by other merchants ranged from $2,995 to $7,500? The important issue is whether the advertisement was misleading or deceptive. Was this the case? In the case of R. v. T. Eaton Co. Ltd. (1971), 4 C.P.R. (2d) 226, where goods were advertised for a 114 day period as "on sale," the length of time in effect established the sale price as the regular price, and the advertisement of the goods as being "on sale" was misleading and deceptive advertising. On this basis, the five month "sale" might have established a regular price of $3,500. The fact that the goods were ordinarily sold at the higher price at intervals between the sales, however, might distinguish this case from the T. Eaton case in that the court in the Eaton case dealt with a continuous sale of 114 days.

Case 6 Best Appliance Co. produces a complete line of small and large domestic kitchen appliances, about 30 different products in all, ranging from small electric toasters to automatic dishwashers and laundry appliances. Most of the small appliances are sold through wholesalers, while the larger appliances are sold directly to ―authorized dealers.‖ The authorized dealers normally carry only the larger appliance line consisting of about 12 different products, but the occasional dealer would carry the full line of both large and small appliances. In recent years, the company experienced problems with retailers selling its smaller appliances as ―loss leaders.‖ It considered either selling only through authorized dealers who would agree to carry the full line of products, or to dealers on a consignment basis (whereby the company would control the retail price). A third alternative would be to notify all wholesalers who carried the small-appliance lines that they must refrain from selling to retailers who used the company‘s products as loss leaders. Then, if the wholesaler failed to monitor retail sales and keep retailers from loss leader selling, the company would no longer supply them with stock. The company officers, who wish to have the legal implications of these proposals examined, ask for advice. Prepare a response to their request and include suggestions as to how they might deal with their problem. Answer: The problem which the company is attempting to deal with is essentially one of "loss leader" selling by retailers. The company should first ascertain if the small appliances are indeed being sold as ―loss leaders‖ (i.e.: priced at less than cost, and on a regular basis). If this should be the case, the company may be justified in not supplying retailers who use the products as loss leaders. It may not be possible, however, to require wholesalers to "police" the retailers and cease supplying retailers who loss-lead with the company products. If the products require some servicing, the establishment of a "full line dealership" would probably not offend the Competition Act, and allow the company to end loss leader selling by other retailers. The selling to retailers direct or on a consignment basis might be seen as an attempt to control the price of the product, and constitute re-sale/retail price maintenance contrary to the Act. Case 7 Gargantuan Gravel Corporation carries on business as a producer and supplier of gravel and crushed rock Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-417

for road-construction and building-construction purposes. It owns and operates pits and quarries located in a 160-kilometre radius of its head-office operation (which is located in a large metropolitan city). It supplies its products to approximately 55 percent of the users in that area. Crushed Rock Corporation, the second largest producer in the area, owns most of the remaining quarries. It holds approximately 42 percent of the market. The remaining 3 percent is controlled by 26 operators who own small gravel pits. These operators tend to sell to customers located in the immediate area of their pits, or supply only their own construction projects. For many years, Gargantuan Gravel followed a practice of setting its prices for gravel and crushed rock on January 2nd of each year. Crushed Rock Corporation usually established its prices a few weeks later, and the prices were the same or slightly lower than those set by Gargantuan. The 26 smaller producers normally followed price structures of the two larger firms.The asset values of both of the larger firms are in the multi-million dollar range. Both firms have extensive aggregate holdings and operate large fleets of trucks. Sales are proportionally large for both firms, and fall in the multi-million dollar range for each. The directors of the two large firms recently entered into negotiations whereby Gargantuan Gravel would acquire all of the shares of Crushed Rock Corporation. However, some of the customers of Gargantuan Gravel are concerned about the takeover of Crushed Rock Corporation, and the effect that it might have on them financially. Advise the customers of their rights and how their concerns might be dealt with if they elect to take action. Answer: The take-over of Crushed Rock Corporation would clearly place Gargantuan Gravel as the dominant firm in the immediate area, as it would have 97% of the market. The crushed rock/gravel business would appear to be a relatively 'local' type of business with competition limited to the local areas, and to those who possess a local source of supply. If this should be the case, then the take-over might very well attract an investigation under the Competition Act. Students should note that the take-over or merger is not unlawful in itself, but it would place the firm in a dominant position in the market, and thereby lessen competition. If the Competition Tribunal should determine that the merger would result in a lessening of competition it may prohibit or modify the proposed change. Case 8 Hewson Jewellers Limited were agents for, among other famous names, one of the finest of the Swiss watchmaker–jewellers. As Hewson was undergoing rough financial times due to an economic downturn, it decided for the first time in its history to have a general 50-percent-off sale. A newspaper advertisement was prepared, and to entice the public it mentioned by name a number of the product lines ―to be slashed by half.‖ The advertisement ran for one day in a national daily newspaper before it was discovered by the Canadian business representative and wholesaler of the Swiss firm. The representative–wholesaler, CanJewel Ltd., telephoned Hewson, and threatened to stop shipment of further stock, and to call Hewson‘s debt for stock previously shipped, unless the ad was stopped and the name of the Swiss line dropped from the copy. CanJewel reminded Hewson that ―image was everything,‖ and the Swiss line Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-418

must never appear to the public to be ―on sale.‖ CanJewel extracted a signed agreement from Hewson that all future advertising copy would be reviewed by CanJewel on behalf of the Swiss manufacturer. Hewson complied, and the second advertisement made no mention of the Swiss line. When government authorities became aware of the matter, a charge was laid under the Competition Act. State what the charge would likely be, upon whom it would be laid, and the possible defences. Render a decision on behalf of the court. Answer: The actions of the representative of the wholesaler for the watch manufacturer could probably be considered pressure to maintain the prices of the particular line of watches which he sold to Hewson Jewelers. If the manufacturer was behind the actions of Canjewel it would only be subject to the Competition Act if it had an office in Canada. The Crown would probably be successful in this instance. The defence that the price must be maintained to protect the image of the product would not likely be accepted as valid grounds for resale price maintenance. The advertising copy approval requirement and the fact that the second advertisement excluded the watch line from the sale would probably be evidence to support the allegation that CanJewel attempted to maintain the prices of the watches. See for example: R. v. Les Musts de Cartier Canada Inc. (1989) 27 C.P.R. (3d) 37.

Chapter 33. International Business Law Chapter Topics Introduction The Importation of Goods into Canada The Export of Goods from Canada International Trade Regulation International Trading Relationships International Contracts of Sale Arbitration of International Trade Disputes Enforcement of Arbitration Awards Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Chapter Objectives After study of this chapter, students should be able to: • Describe Canada‘s regulation of its imports and exports. • Describe the principles that underpin the WTO and NAFTA. • Distinguish between the major vehicles used to conduct international business. • Describe the elements of an international contract of sale. • Explain the process and advantages of arbitration of international business disputes.

Business transactions abroad introduce three new elements: a foreign party, another legal jurisdiction, and international rules that apply to the relationships between countries. Since each of these factors affects the business transaction, the element of risk increases significantly compared to domestic business situations. The first solid risk management tool is to understand the policy and application of these rules affecting international business transactions. CHAPTER COMMENTARY As a trading nation and traders in an increasingly global economy, Canadian business has become more involved in international business transactions, and international trading relationships. The international sale of goods represents a more complex legal and transactional process than the ordinary domestic sale. For this reason, Canadian business people must be aware of the legal aspects of doing business outside the borders of the country. Chapter 33 does not attempt to outline all of the legal ramifications of international business transactions. Instead, it attempts to provide a brief overview of international business laws, and how some of these laws may affect business transactions and international business relationships. Students should be made aware that the law is complex in this particular area due to the many varied types of transactions, relationships, and applicable laws, both Canadian and foreign. The Court Decision, Canada (Attorney-General) v. Suzuki Canada Inc. provides an illustration of the complex nature of classifying imported goods and the importance of determining the classification for duty (or duty free) status of the goods. Some time should be spent in class discussion of the topic of Commercial Arbitration in view of the fact that a great many commercial contracts and agreements provide for this method of dispute resolution.

Review Questions 1. How are arbitration awards enforced? Answer: The courts are frequently used to enforce arbitration awards, particularly where the countries have adopted the UN Commercial Arbitration Code.

2. Explain the different ways in which a Canadian firm may establish an international trading relationship.

Answer: Canadian firms may establish trading relationships by: (1)

contracts of purchase or sale.

(2)

foreign distribution agreements.

(3)

foreign sales offices.

(4)

branch plants.

(5)

joint venture agreements.

(6)

license agreements.

3. How does the Special Import Measures Act affect foreign sellers? Answer: The Special Import Measurers Act controls the "dumping" of goods by foreign sellers.

4. Why was it necessary for Canada to pass an Export and Import Permits Act? Answer: The Export and Import Permits Act was passed to protect Canadian Manufacturers by controlling the flow of goods from countries where goods may be manufactured at extremely low cost.

5. Identify the usual documents required for an international contract of sale. What is the purpose of each of these documents? Answer: An international contract of sale involves not only the contract itself but a bill of lading (which is an agreement between the seller and carrier), an insurance contract (to compensate in the case of loss or damage) and a commercial invoice (required by customs officials, and which sets out the nature of the goods for customs tariff determination). Export permits or licenses may also form a part of the contract.

6. Outline the general thrust and purpose of the World Trade Organization. Answer: The World Trade Organization is an organization that involves over 128 countries, and has as its initial thrust the reduction of trade restrictions and trade disputes between countries.

7. Distinguish a bilateral trade agreement from a multi-national trade agreement. Answer: A bilateral agreement is an agreement between two countries. A multi-national trade agreement involves more than two countries.

8. What assistance does the Canadian government provide to Canadian firms that may wish to enter the international market? Answer: Assistance is provided by government agencies such as the Canadian Government‘s Program for Export Market Development and the Export Development Corporation.

9. Explain the difference between the Customs Act and the Customs Tariff Act.

Answer: The Customs Act sets out the powers and duties of customs officers. It also sets out the procedure to be followed by importers and the payment process for customs duty. The Customs Tariff Act sets out the duty rates payable on specific types of goods.

10. What are the advantages and disadvantages of a foreign trading relationship in the form of a joint venture? Answer: Joint ventures usually involve the creation of a corporation with the shares owned by the Canadian firm and the foreign firm. Risk may be reduced by the Canadian firm licensing the joint venture to manufacture goods under specific terms. Since both firms contribute capital, the risk is also reduced. Doing business with foreign nationals usually means that they have valuable knowledge of their own country's unique economy and business practices which they bring to the joint venture. The major risk is the possibility of nationalization of the firm by the foreign government.

11. What is the role of a customs broker in a transaction whereby goods are imported by a Canadian firm? Answer: Customs brokers are firms which specialize in dealing with customs officials on behalf of importers of goods. They are knowledgeable about customs matters and customs legislation.

12. Explain why commercial arbitration is used as a means of dispute resolution in international agreements? Answer: Commercial arbitration is a convenient and confidential means by which disputes arising out of a contract may be 'informally' resolved. It is also a more streamlined process, because it avoids the formalities of the courts and the delays associated with the legal process.

13. Why do most international trade contracts provide that arbitration will take place in a country other than the country of either of the contracting parties? Answer: In most cases the purpose is to have the dispute heard 'on neutral ground' where neither party has the power to affect the decision.

14. What is the effect of Canadian laws on the importation of goods into Canada? Answer: Canadian firms that import goods from abroad must comply with Customs and Excise legislation which imposes duties and taxes on certain goods, as well as licensing legislation which controls the importation of particular products.

Mini-Case Problems

1. A Canadian manufacturer that has been successful in supplying the domestic market with its products is considering the sale of its products in Europe. Since this would be a ‗first step abroad‘ it is Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-422

considering a foreign distribution approach. What are the advantages and disadvantages of this approach? What are the legal implications? Answer: Advantages of foreign distribution: low cost and risk, easier to terminate, few staff requirements. Disadvantages: lower returns, higher transport costs, little connection to foreign market, success dependent on foreign distributor. In terms of legal implications, the venture is based on a contract, rather than the establishment of a separate new foreign enterprise. The sales are uncomplicated export sales to the foreign distributor.

2. The Canadian manufacturer of a product wishes to expand the manufacture and sale of its product to China under an international joint venture agreement. What points or issues should be covered in the agreement to protect the Canadian firm? Answer: Students should show they have considered the full range of issues of ownership, royalties, quantity and quality of produce, duration dispute resolution, termination issues, assistance, sublicensing, territory, confidentiality, and rights to improvements.

Case Problems for Discussion Case 1 CRT Manufacturing Ltd. produced a line of specialized machine tools used in the production of parts for the automotive industry. The corporation‘s product line was well-known in North America for quality and durability, but virtually unknown in Europe. With the trend in the automobile industry towards the production of vehicles for a world market, CRT Manufacturing Ltd. decided to expand its operations to Europe. Management at CRT Manufacturing Ltd. has narrowed its approach to either a foreigndistribution agreement or a branch plant. A branch plant would require a significant capital commitment, as production equipment for the specialized machine tools would be expensive, as would be the training of employees in production methods. Since a certain amount of expertise would also be required on the part of the sales staff, the question of training would be important in order to sell the products in the new market. Advise CRT Manufacturing‘s management on the range of legal and contract issues that would be associated with the two proposed courses of action. Answer: Advantages of foreign distribution: low cost and risk, easier to terminate, few staff requirements. Disadvantages of foreign distribution: lower returns, higher transport costs, little connection to foreign market, success dependent on foreign distributor. The legal and contract issues for distribution are import regulations, customs and tariff duties, foreign law relating to distribution agreements. Advantages of branch Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-423

plant operation: lower transport costs, more control over operation, more contact with market. Disadvantages of branch plant operation: higher risk, greater capital commitment, training of local staff, harder to exit. The legal and contract issues in branch plant operation are foreign investment and capital flow regulation, foreign employment and labour law issues, and general differences in business law. Issues surrounding taxation of a foreign branch plant may be noted by students; however, this is not covered in the text.

Case 2 Using the facts in Case 1, if CRT Manufacturing Ltd. should further decide to investigate a joint venture approach to its European business expansion, what foreign law considerations arise? Given its unfamiliarity with the European market, which of the three approaches might be best for CRT, considering the legal issues that it may face? Answer: In the case of a joint venture, three approaches exist as options: product made in Canada by that partner and sold abroad by the other in a jointly owned firm; manufacture and sale of product made abroad by the joint venture; and licensing of intellectual property to the joint venture for the foreign partner to do both manufacture and sale. Under the first option, the considerations are those of a foreign distribution operation, simply with the addition of the Canadian partner now having an equity stake. Under the second, all considerations applicable to a branch plant apply, with the additional issues of: management and control of the enterprise among the participants and the division of their profits, as well as dispute resolution and eventual termination of the enterprise. Under the third, the terms of a licence are at issue, but the Canadian partner has its capital in joint venture also at risk. The eventual choice is more dependent on costs, trust, the importance of trade secrets and risk tolerance. Students will come to their own decision based on the further background facts they create and evaluate. Case 3 Kyoto Mfg. Inc. was a producer of sensitive measuring equipment for the steel industry. Kyoto was a Japanese company and had its principal place of business in Japan. Kyoto had no assets in Canada. A Canadian firm, Concepts Mfg. Limited, located in Vancouver, entered into a licensing agreement with Kyoto for the right to manufacture and market several of Kyoto‘s products in Canada. Concepts was to pay a royalty to Kyoto based upon a formula set out in the contract, and Kyoto was to provide technical support and know-how. Concepts was further entitled under the licence to receive information and support promptly whenever Kyoto made improvements to the products as the result of technological advances. Two of the clauses contained in the agreement stated, in part, the following: 4.1 The validity and interpretation of this Agreement and of each clause or part thereof shall be governed by the laws of Japan … 5.1 Any and all disputes arising from this Agreement shall be amicably and promptly settled upon consultation between the parties hereto; however, in case of failure of settlement, the disputes Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-424

shall be settled by arbitration in Tokyo, Japan, in accordance with the rules of the Japan Commercial Arbitration Association and the award shall be final and binding upon both parties. In no case shall any award against Concepts Mfg. Limited exceed all royalty fees due by Concepts Mfg. Limited at the date of commencement of the arbitration hearing. The parties co-operated under the agreement for several years, then a dispute arose as to the entitlement of Kyoto to certain royalties. Concepts alleged that Kyoto had failed to provide adequate technical support and advice concerning certain improvements it had made to its technology. Kyoto denied this allegation and insisted on receiving its royalty payments. Concepts responded by alleging fundamental breach of the contract by Kyoto. Following an unsuccessful attempt to resolve the matter, Kyoto submitted the dispute to the Japan Commercial Arbitration Association for arbitration. Both parties were sent notices concerning the names of the arbitrators appointed to the arbitration tribunal and the date, place, and time of the hearing. On the day set for the hearing, only Kyoto attended and made submissions. There was no correspondence from Concepts before or during the proceedings. The arbitration tribunal awarded Kyoto the sum of $150,000 in royalties to be paid by Concepts, together with interest and a portion of the costs of the arbitration process. Although Concepts was sent a copy of the award, it neither acknowledged its receipt nor made any payments in accordance with it. After six months of unanswered communication, Kyoto brought an action in the British Columbia courts for a declaration that the Japanese arbitration award was valid and enforceable in Concepts‘ jurisdiction. Kyoto argued that it had complied with all procedures necessary to have the award enforced in Canada. Moreover, the parties had a written contract to submit disputes to arbitration, that the subject matter of the dispute was not outside that contemplated to be settled by arbitration, and, further, that Concepts had never taken any steps to dispute either the jurisdiction of the arbitration or the merits of Kyoto‘s claim. Concepts argued that the award could not be enforced against it since the subject matter of the dispute, namely, fundamental breach of contract, is not a matter that can be settled by arbitration in its province. Rather, this is a question that could only be determined by a court. It further argued that to enforce the Japanese award would be contrary to public policy since it would allow a foreign company to receive benefits under the contract while, at the same time, preventing the Canadian company from seeking any remedy for its damages caused by the fundamental breach by the foreign company.

If you were the judge hearing this case, how would you decide and why? On what legal principles would you base your decision? Answer: The facts of the case problem are similar to those in Kanto Yakin Korgyo Kabushiki - Kaisha v. CanEng Manufacturing Ltd. (1992) 7 O.R. (3d) 779. The Canadian company's argument was not accepted by the court. The judge stated that fundamental breach should have been raised before the arbitration tribunal and the jurisdiction of the arbitration tribunal to hear the matter dealt with at that time. It was too late to raise the issue of the jurisdiction of the arbitration tribunal to hear a complaint of fundamental breach after the arbitration tribunal had rendered its decision.

Chapter 34. Environmental Law Chapter Topics The Common Law Environmental Legislation Responsibility for Existing Contamination Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Chapter Objectives After study of this chapter, students should be able to: • Describe the Common Law provisions in environmental protection. • Describe the principal elements of environmental protection legislation. • Identify the chief intersections between business activity and environmental concern. YOUR BUSINESS AT RISK We may think globally, but we still act locally, for ill as well as good. When businesses treat the environment carelessly in the disposal of effluent or waste, or directly harm other people, considerable liability can result. This liability is not only large in dollar terms, but it can extend to individual directors and officers as well as the company itself. The environment must also be considered early in the business planning processes, as many projects can be sidelined before they begin as a result of undesirable environmental impact. CHAPTER COMMENTARY The chapter on environmental law is included as an area of law that is of increasing importance to business generally. This is so because much of the law is statute law in form, and much of it is directed at business activities which the legislators believe are harmful to the environment. Nevertheless, it is important to note that the common law remains as a source of control or remedy where business activity damages the property of others. The limitations of the common law, however, have resulted in much of the environmental law taking the form of legislation which casts a broad net when environmental damage occurs or is discovered. Most of the legislation tends to place personal responsibility on directors and officers of corporations in addition to the corporation itself, and students should be made aware of this and the way in which the directors and officers may discharge their duties in this regard. The Court Decision, R v. Kingston (Corp. of the City) provides an example of the need for not only business, but municipal governments, to comply with environmental laws. The case problems at the end of the chapter provide students with the opportunity to consider environmental law under both Common Law and statute.

Review Questions

1. Why should mortgagees of industrial property be concerned when securing their mortgages on such property? Answer: Mortgagees may be concerned because if default occurs, and they foreclose on the property, as owners they might be required to clean up any environmental hazards on the property before they could dispose of it.

2. Where environmental damage is prohibited under legislation, what defence may be available to the directors and officers of the corporation? Answer: The only defence available would appear to be due diligence.

3. Why does the purchase of land previously used for industrial purposes pose a risk to the purchaser? Answer: The purchase of land formerly used as an industrial site may be polluted, and poses a risk because the owner is liable for the clean-up costs of any pollution.

4. Outline the various ways that legislation addresses environmental pollution. Answer: Legislation addresses pollution through prohibition of some activities and regulation or control of others (often through licensing).

5. To what extent does the legislation recognize the fact that environmental damage cannot be eliminated from certain industrial processes? Answer: The legislation recognizes that certain activities cannot be carried out without having some environmental effect (e.g.: farmers fertilizing fields or using pesticides). Because these activities are usually important, they are controlled to limit the damage to the environment.

6. Identify the remedies available to the court to control damage to a person's property by their neighbour's actions. Answer: At Common Law the remedies are usually an injunction and money damages.

7. Why was it necessary for governments to introduce legislation to control environmental damage? Answer: A broader, regulatory approach was needed to control or limit pollution levels where essential activities had to be carried on. The legislation was also necessary to overcome the limitations of the Common Law where the damage affected the public-at-large. Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-427

8. What steps may be taken by prospective purchasers of property to reduce the risk of facing an environmental clean-up order? Answer: Prospective purchasers of industrial or commercial property should have an environmental audit made to determine if any potential environmental hazards exist on the property.

9. "At Common Law, damage to property or the environment is actionable, but restricted in terms of the type of case that may be brought before the court." Explain. Answer: At Common Law only the landowner or riparian owner that is directly affected by environmental damage caused by another has a right of action against the person who commits the tort. The public-at-large, even though affected, may not take legal action.

10. Outline the method used by governments to ensure that large industrial projects such as hydro-electric dams or large land development undertakings result in a minimum of environmental damage? Answer: The normal approach is to undertake environmental assessments of the project and then hold public meetings, etc. for input from the public before the project is approved.

Mini-Case Problems 1. ABC Company stored steel drums of contaminated waste products behind its plant. Some of the drums leaked contaminants into the soil, and these contaminants eventually found their way into a neighbour‘s drinking-water supply. What are the rights of the neighbour? Answer: The neighbour might take action at common law (in tort) for the nuisance and seek damages. A complaint under environmental law might also be made to effect the clean-up of the pollution.

2. C was a director of the ABC Company in the above example. As a director, C rarely visited the plant, so he was unaware of the storage of the waste product behind the plant. However, a year previous, at a directors‘ meeting, he raised the issue of establishing a company directive to management that would require managers to ensure the safe storage of contaminants at all company plants. Advise C on whether a government examination of the plant site should take place. Answer: Once pollution is discovered there is usually an obligation to inform government authorities of the problem, and take steps immediately to clean up the pollution.

3. Ashley purchased a house in a rural area. A farmer operated a cattle farm behind her property, and for many years had stored cattle manure at the top of a small hill near her property. Some month‘s after Ashley had purchased the property, she had her well-water tested. The test indicated that the water was contaminated with e-coli bacteria. What advice would you give Ashley? Answer: The advice which comes too late is to check the quality of water on a rural areas before purchasing property, rather than afterward. Despite this, it remains the responsibility of the party responsible for contamination to clean it up, and the farmer is barred from pleading that Ashley has come to the nuisance through fault of her own.

4. Two motor vehicles were in an accident on a highway. Both vehicles leaked oil, anti-freeze and gasoline on the highway. Police at the scene directed a local municipal fire department vehicle to clean the mess from the highway to avoid the danger of a fire. The fire department tanker used its water supply to flush the roadway. This drained into the ditch, then into a stream, then into a wildfowl nesting area. Who should have responsibility for the environmental clean-up and damage in this case? Answer: On balance, it should be the fire department that is best placed to understand the potential for contamination and damage by chemicals, as many of their activities relate to dealing with such public hazards. Moreover, it is the fire department that had the last clear chance to propose an alternative course of action to the directions of the police, and in fact performed the final act that placed the contaminants into the watercourse. The fire department (and in turn, its municipality) should be held responsible for cleanup, on the basis of environmental law principles and general principles of tort. Note how this compares to liability of the truckers in Case 6, due to the larger inherent danger and hence greater liability attached to hazardous enterprises.

Case Problems for Discussion Case 1 Wilbur operated a farm on the outskirts of a small rural village. His farm was located near the water reservoir that supplied drinking water to the small community. Wilbur‘s farm was divided by a township gravel road that he used to travel to and from his crop fields. A small stream that fed the village water reservoir also crossed his farm property and the road that separated Wilbur‘s fields. The bridge over the stream was in poor repair, and in spite of requests by Wilbur to have the bridge repaired, the municipality did nothing. One day, while Wilbur was transporting his tank sprayer to his fields, the bridge collapsed, and Wilbur, his tractor, and tank sprayer fell into the stream. Wilbur was killed in the accident, and the tank sprayer ruptured, sending 3,000 litres of a potent carcinogenic weed killer into the stream. 50 litres of diesel fuel from the fuel tank of the tractor also leaked into the stream.

The village was immediately alerted concerning the contamination of their drinking water supply, and the clean-up was done under the direction of provincial authorities. Bottled water was supplied to the village, as was an expensive cleansing of the water reservoir. Eventually, the contamination was eliminated. Discuss the issue of responsibility for the clean-up costs, as well as liability under the provincial environmental protection legislation. Answer: The contaminants that entered the stream belonged to Wilbur, but it was the fault of the Municipality that caused the contaminants to enter the water supply. The weed killer would be a ‗controlled‘ substance, and Wilbur would presumably be licensed to use it (properly). However, it was the Municipality‘s fault that it entered the water supply, and the Municipality would probably be responsible for the clean up cost. Case 2 Haber Wood Products Ltd. had a permit from the provincial government to extract water from a nearby river for manufacturing purposes. It was also permitted to discharge the water, which now contained harmless chemicals, into the river. The discharge was continuously monitored for other contaminants to ensure that the discharge only contained the permitted harmless chemicals. MD Manufacturing Inc. also had a permit to draw water from the river, and under its permit it was entitled to discharge certain nonpoisonous chemicals into the river. The discharge water was also monitored. While the chemical discharge from each plant was harmless, and the combination was non-toxic to humans, higher concentrations of the resulting mixture were toxic to fish. Downstream from the two plants, Olsen operated a fish hatchery and fish farm. One day he discovered his entire stock of fish dead or near death. He immediately contacted the government ministry to determine the cause of his loss. Discuss, the issues raised in this case. How would liability (if any) for Olsen‘s loss be determined? Answer: This is a situation where both manufacturers discharged harmless chemicals into the river, and presumably neither would have committed an offence under the environmental protection legislation. Olsen, however, might be in a position to take legal action against the two manufacturers under the tort of nuisance for an injunction to stop the discharge into the river. Case 3 The Savellis purchased a rural house and lot located near the intersection of two highways. Adjacent to the intersection, Carlton Fuels Ltd. had operated a gas bar and service station for many years. Over time, spilled gasoline and other petroleum products may have seeped into the soil. The fuel tanks, however, had been removed some years before the Savellis purchased their home, and the service-station property had been sold to a plumbing-supply company that used the buildings and grounds to store plastic pipe and copper plumbing fittings. Some time after the purchase of their home, the Savellis began to notice a strange taste and odour in their drinking water. Their water supply was obtained from a well on their premises. Tests of the water supply indicated that the water was contaminated by gasoline.

Advise the Savellis of their rights at law and the possible course of action open to them. Answer: Under environmental legislation, the current owner of property that contains pollutants is generally responsible for the cost of clean-up. The Savellis may complain to the authorities responsible for the enforcement of the environmental legislation in the jurisdiction, and they may order the owner to clean up the pollution. Students may wish to consider an action in tort at common law, but the difficulty here might be establishing the source of the pollution and the limited powers of the court to order a clean-up of the source. Case 4 McDonald operated a small farm where he raised pigs for market. The farm was located at the outskirts of a small city, and was surrounded on three sides by rural housing developments. McDonald stored pig manure in the corner of one field until late in the autumn of each year when he used it to fertilize his crop fields. The manure pile was located behind Black‘s lot, and attracted an enormous number of flies and insects during the summer months. In addition, the pungent odour of fresh pig manure prevented Black from using his backyard for any kind of social or recreational purpose. Black complained to McDonald about the storage of manure next to his lot, but McDonald refused to change the location, as it was the most convenient storage place from his point of view. Black then took his complaint to the office of the Ministry of the Environment in the city, but was told that manure was not considered a hazardous waste in a farm setting, and was apparently being handled and stored in accordance with standard agricultural practices. Advise Black of his rights (if any) and the possible responses of McDonald to any action on Black‘s part. Answer: This case illustrates a situation where the enforcement authority determines that the particular material was not a hazardous product when stored in accordance with standard agricultural practices. This leaves Black with only the Common Law as his option. Black may be able to establish that McDonald has stored his farm manure in such a way that it constitutes the tort nuisance, as it has interfered with his use and enjoyment of his property. If successful, Black would be entitled to damages and an injunction to stop the nuisance. See text example: pp. 632633. Case 5 Gerry and Janet Weisberg had been married for 15 years and had operated a family business from their home. They lived on 50 acres of land just outside a small town, and their business consisted of breeding, training, and boarding German shepherd dogs. Formally, Gerry was the sole owner of the property and of the business. Janet, however, had been active throughout their marriage in the management and daily activities of the business. Since the Weisbergs frequently transported their dogs to shows, the veterinarian, or to handlers, they maintained three vans for this purpose. They also had a gasoline pump with an underground storage tank Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-431

installed on their farm to fuel the vehicles as a convenience for their business. The Weisbergs were having trouble maintaining the lawn above the tank. For several years the grass above the tank died despite repeated efforts to reseed and water the area each spring. They sought the advice of a landscaper who suggested that the problem might be gasoline spillage from the pump nozzle when the fuel tanks of the vehicles were being filled. This would cause the soil to be soaked with gasoline at the surface and would burn the grass roots. Gerry eventually called a pump-equipment service company who sent a representative out to the farm. On inspection of the equipment he discovered a crack in the underground tank which appeared to have been leaking leaded gasoline into the surrounding soil for quite some time. The company representative notified environmental authorities who came to the Weisberg‘s farm to test the surrounding soil. They found levels of soil contamination far in excess of approved standards, and they ordered the Weisbergs to remove the damaged tank and clean up the site. Partly as a result of the strain and financial burden that this incident placed on them, Gerry and Janet separated several months later. In the arguments that followed concerning the division of their property, the farmland and the business played a prominent role. Under the applicable family law legislation, all the property of the husband and wife, whether jointly owned or not, was to be pooled for the purpose of valuation, and the value then divided equally between the spouses. Assets were generally valued at fair market value as at the date of separation. The division of assets often required that some be liquidated in order to ensure that equal shares could be given to each spouse. The farm property was Gerry‘s primary asset. A year before the soil contamination had been discovered, Gerry had had the farm appraised at $1,750,000. After the separation, Gerry engaged the services of an environmental expert to prepare a report estimating the cost of cleaning up the site. The expert reported that a cost of at least $2,000,000 would have to be incurred in order to meet approved standards. Janet then engaged her own environmental specialist, who reported that the cleanup could be done at much less cost by using older technology. Her expert quoted a figure around $500,000. There was no question that the farm would have to be sold in order to equally distribute the value of the couple‘s property. Gerry‘s shares in the business were his only other substantial asset and had been valued two years earlier at approximately $250,000. Discuss the legal issues that arise in this case. Identify the arguments that the various parties may rely on and discuss their significance in the context of both environmental and business law. How would you resolve this matter? Answer: As owner of the property Gerry would be responsible for the clean-up. Since Gerry and Janet were separated, the property would be sold, but this may only be done after the environmental clean-up. Since the separation took place after the pollution was discovered, to determine the actual value of the property is important. As a general rule, the environmental authorities usually do not specify the specific method that must be used, but are prepared to approve any generally accepted method of clean-up. In this case, if the method proposed by Janet's expert is a generally accepted method its use might be permitted.

Case 6 Hazardous Waste Trucking Company carried on business as a transporter of industrial-waste products to licensed waste-disposal sites. Liquid Waste Disposal Company carried on a similar type of business, but handled only liquid waste. On a clear winter day, a transport truck owned and operated by Hazardous Waste Trucking Company collided on an icy patch of highway with a truck operated by Liquid Waste Disposal Company. The drivers of both vehicles had been operating their respective vehicles in accordance with the provincial Highway Traffic Act, and the patch of ice on the highway was totally unexpected. Both drivers had lost control of their vehicles on the ice, and their trailers that carried the waste products collided, causing their contents to spill on the highway. The contents of each trailer did not constitute a toxic waste in itself, but the mixing of the two products produced a toxic compound hazardous to fish and animals. A local fire department answered the accident call and flushed the substance from the highway, instead of simply containing the waste mixture. As a result, a small stream was contaminated by the runoff. Environmental inspectors ordered a cleanup, but both companies refused to do so, blaming each other and the fire department. The government arranged for the cleanup at a cost of $600,000. Discuss the issues raised in this case on the basis that the ―owners‖ of a contaminant under the environmental-protection legislation are responsible for any environmental damage that it may cause and the cost of any cleanup required Answer: The owners of the waste would be responsible for the clean-up costs, as the property belonged to them, and they would be jointly responsible for the resulting damage that it might cause under most environmental legislation. The carelessness of the municipal fire department may entitle the owners to claim over against the fire department because their negligence caused the material to enter the water course and contaminate it.

Chapter 35. Privacy Law Chapter Topics Privacy Legislation Anti-Spam Legislation Summary Key Terms Review Questions Mini-Case Problems Case Problems for Discussion Chapter Objectives After study of this chapter, students should be able to: • Identify situations in which Canada‘s privacy and anti spam laws apply. • Recognize the chief obligations imposed by privacy and identify situations in which Canada‘s privacy and anti-spam laws apply. • Recognize the chief obligations imposed by privacy and anti-spam legislation.

• Explain the business practices required to properly handle personal information and send electronic messages.

YOUR BUSINESS AT RISK Business operators are accountable to their customers and regulators for properly using and safeguarding the private information provided by customers, or generated in the course of business relationships. Businesses must also obtain consent from any person prior to sending an electronic message to that person that could be perceived as promoting commercial activity. Failure to obtain express consent from a person receiving a commercial message may result in substantial fines. CHAPTER COMMENTARY The chapter on privacy law is included to help students identify the rules and the business situations that create obligations around the maintenance of personal information of customers and communication with existing or prospective customers. With the advent of new technologies and the rapid rate at which technology changes around us, the responsibilities and risks facing businesses around privacy matters are growing exponentially each year. Students should understand that virtually every employee and manager in a business has responsibility for handling personal information of customers in accordance with PIPEDA or similar provincial legislation. Employers then, have a responsibility to proactively inform and train employees in best practices that will ensure organizational compliance with privacy laws. It may be a useful exercise to ask students to come up with best practice recommendations for businesses in various industries. The chapter also briefly outlines the difference between a business handling the personal information of its customers and the duty is owes to its employees for maintaining an environment that protects the employee‘s right to privacy. The employment relationship, although requiring proper handling of the personal information of employees, does provide the employer more leeway in structuring the workplace to serve its business purposes. Students should realize that this sometimes means a compromise or balance must be struck between the employees‘ right to privacy and the reasonable and demonstrable business purposes of their employer. The court decision Eastmond v. Canadian Pacific Railway has been included to illustrate the tests of reasonableness a court will apply to determine if the demonstrable business need of the employer outweighs the breach of its duty to protect the privacy of its employees. The CASL legislation has changed the landscape for businesses attempting to market their goods and services to prospective customers as well as communicating with existing customers. With far-reaching and substantial penalties for failing to comply, CASL requires express or ―opt-in‖ only consent by a recipient before a business can send that person a message that invites commercial activity. The rules also prohibit electronic activity and harassment such as email address harvesting, depositing malware and other interference with electronic communication. The CASL rules apply equally to businesses sending messages within Canada as it does to business sending electronic messages from outside Canada to recipients in Canada. Students should be encouraged to discuss the practical and legal challenges facing the agencies tasked with enforcing this legislation. Also, students should discuss ways in which any business can ensure compliance with the CASL rules to avoid the significant fines for contravention.

Review Questions

1. Business firms carry out three activities with respect to personal information that are regulated by PIPEDA. What are they?

Answer: The three regulated activities carried out by businesses and associated with personal information are collection, use and retention. Arguably, a fourth activity would be the destruction of the personal information once the purposes for which it was held have ceased.

2. Where a business intends to hold a customer‘s driver‘s license information, what arguments can be made in for or against photocopying the license itself?

Answer: A business should evaluate the use it intends to make of the drivers license information to determine if it needs a temporary or permanent record of the information. If the need is permanent, such as that of a financial institution or a regulated professional firm to fulfill ―know your client‖ requirements, a paper photocopy may be required for long-term storage. Permanent records can also be made and held using electronic storage of the drivers license information. Depending on the system chosen for storage, the business will have differing security considerations. For paper records, security features such as locks and segregated cabinets or rooms are needed. For electronic records, the technology used for safeguarding the information is important. Both types of records will require the business to set organizational access rules to control who in the organization has access to the information.

3. What are some different ways a business could provide so that its customers have an opportunity to clearly give or refuse their consent for the business to hold their personal information? What makes this necessary?

Answer: The most commonly used method to obtain consent around personal information is to ask customers to sign a paper consent form that sets out what information the business needs and why, how it will be used and disclosed and how it will be safeguarded. This consent process could also be done electronically on a website with a requirement that a customer read and accept the terms of the business‘s privacy and information use by checking a box before entering into any further dealings with the business. Consent that is implied simply by completing a business transaction (e.g. the act of completing an online purchase) would generally be considered insufficient to meet the requirements of PIPEDA or similar provincial privacy legislation without some further action required of the customer to expressly consent to the information use by the business. The federal PIPEDA legislation, Digital Privacy Act and various

provincial privacy acts make it necessary for businesses to obtain consent for the collection, use and disclosure of personal information of customers.

4. Describe the chief responsibilities of the federal Privacy Commissioner. Answer: The Privacy Commissioner is responsible for investigating complaints, conducting audits and pursuing court actions. In addition, he or she prepares public reports about the practices of organizations that handle personal information. The office conducts or supports research and publishing about privacy issues and promotes public awareness and understanding of these issues.

5. What are the essential elements of a lawful commercial electronic message?

Answer: To comply with the new CASL rules, a commercial electronic message is not lawful unless the receiver gave express or implied consent to receive it and the sender has included its full contact information, including its web or other electronic information, in the body of the message. In addition, the sender must provide a free and easy-to-use unsubscribe function to allow the receiver to withdraw consent to future messages. 6. Under Canada‘s Anti-Spam Legislation, can commercial electronic messages be sent to prospective customers on the basis that the recipient can simply opt out of receiving future messages?

Answer: No, the only valid consent under CASL is one that is an express act of the intended receiver. Prospective customers must explicitly ―opt-in‖ for the message to have valid consent. This type of consent would require the intended recipient to sign a paper form or tick a box on an electronic form or website. In certain limited circumstances, implied consent is valid for a temporary period. Implied consent would arise when a person had a pre-existing commercial relationship with a business or has previously supplied his or her email address to the business or has posted it in a public place, thus inviting contact. Implied consent must be replaced with express consent after a determined period of time.

7. What are the elements of the four-part test for reasonableness that can redeem a breach of privacy?

Answer: The four considerations of reasonableness for a breach of privacy are: 1. Is the action causing the breach demonstrably necessary to meet a specific business need? Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-436

2. Is the action likely to be effective in meeting the business need? 3. Is the loss of privacy proportional to the benefit gained? 4. Is there a less privacy-invasive way of achieving the same end? Students should note that these considerations are applicable only to an employment relationship and not to a commercial relationship between a business and its customers.

8. Why have requirements of privacy in consumer information been created now, when they have not been required in the past 500 years of commercial relations? Answer: New technologies for the creation, transmission and storage of information have made information of all kinds more accessible to everyone. This also facilitates access to such information by those who wish to abuse it for their own gain through identity theft, fraud or harassment. This reality has required a new discipline around the use of personal information for everyone‘s protection. 9. Under what conditions is a privacy breach notification required, and who must be notified? Answer: The Digital Privacy Act, a 2014 amendment to PIPEDA, created a positive obligation to notify the Privacy Commissioner where a situation of material breach of security has occurred around personal information holdings. Further, the individuals concerned must be notified where the breach of security around their information creates a real risk of significant harm, whether that harm could be physical, reputational, or financial. When the affected individual is notified about the privacy breach, sufficient detail must be provided to enable the person to take a proactive course of action.

10. What actions might be appropriate to help safeguard customers in the wake of a privacy breach? Answer: Before a breach, businesses are expected to implement safeguards including physical (locks, containers, and access control), organizational (restrict access to employees with a true ―need-to-know‖) and technological (network security features, password protection, and encryption). In the wake of a breach all of the foregoing come into play to close the continuing breach and prevent any further damage. Accurate back-up data will be required to restore customer data (if corrupted) and provide the means to reach out to those affected by the breach. Once contacted, customers require an accurate statement of what has been lost or compromised. Restoration may be financial compensation, providing alternate secure electronic credentials, credit monitoring, and insurance against any loss resulting from negligence on the part of the data-keeper.

Mini-Case Problems

1. Betacorp holds personal information about its customers. What limitations exist as to how Betacorp may use that information?

Answer: Betacorp may only use the information for the purposes it indentified to its customers at the time the information was collected unless it obtains consent from the customers to use it for some other purpose. Also, Betacorp may retain the personal information only as long as necessary to achieve the purposes identified. Once the purposes have been satisfied, the personal information should be carefully destroyed.

2. The All-Prov Insurance Company holds personal information about its clients, including health questionnaires and personal profiles. What rights does a client of All-Prov have regarding this information?

Answer: A client may request his or her information to determine its existence with the company as well as the way in which the company is using and/or disclosing the information. Once a client requests access to his personal information, the company must comply and grant access. The client may also challenge the accuracy and completeness of the personal information held by the company and require it be amended if it is inaccurate.

3. Marcus checks the public blogs of influential players in the banking and securities industries, and makes a custom list of their email addresses, which he sells to management consultants and headhunting firms. Is this practice regulated in whole or in part by either PIPEDA or CASL?

Answer: Neither PIPEDA nor CASL regulate this type of activity. The information being gathered does not meet the definition of personal information as defined by PIPEDA – name, date of birth, age, medical facts, ethnicity, earnings etc. The email addresses do not disclose any such personal information and were provided on the public blogs by the individuals themselves. There is also no contravention of the CASL rules as the email addresses Marcus was gathering were publically posted, thus inviting contact. Moreover, Marcus collected the addresses manually by searching blogs and not by using any kind of electronic address harvesting.

4. What should you do if you unsubscribe to email messages, but they keep coming from the same source? Answer: The first step should be to contact the company formally with a further request to stop the emails and to inform it that a complaint may be made under CASL if it does not comply with the request. Although this step is not required by the legislation, it would be a prudent one to mitigate the situation for both parties. Given the substantial fines of $10 million per occurrence for corporate offenders, this should be a sufficient Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-438

incentive to cease sending the emails. The formal steps would require a complaint to the Office of the Privacy Commissioner to launch an investigation with the sender of the messages. 5. The IT Director of your company believes some employee personal information may have been improperly accessed by a third party. What steps should you take, whom should you notify, and why? Answer: While PIPEDA only applies to federally-regulated employment relationships, employee data relationships are covered through application of similar provincial law. Any violation of privacy must be justified, and improper access by a third party can never be justified by the employer. The employer‘s liability is these circumstances is thus clear, and if there is damage, the only limitation on the employer‘s liability will be to show that it took and maintained all reasonable steps and precautions to prevent the breach in the first place. Like in the above question, the first remedial step is to stop any ongoing access or breach (through technology, processes, or access). Thereafter, the employees affected must be notified, and if there is a real risk of significant harm, the provincial privacy commissioner must be advised as well.

Case Problems for Discussion CASE 1 Evan joined ―Hearts‖, an on-line dating service, and provided his personal information to do so. After a number of months passed, he decided to cancel his membership. A year later, after Hearts merged with a competing on-line dating service, Evan started to receive emails and lettermail brochures from the new dating service. Are there grounds for a privacy complaint? What if Evan found a partner elsewhere in the meantime, who was less-than-understanding about the appearance of the brochures in the mail? Does harm matter? Are there any CASL implications?

Answer: At the time Evan cancelled his membership with Hearts, the purpose for which the dating service was retaining and using his personal information ceased. According to the privacy rules, a business should not retain personal information about a client once the need for it has ended. Hearts should have destroyed Evan‘s information safely and securely. Furthermore, Evan did not necessarily expressly consent to his information being disclosed or transferred to a new company at any time. This is a planning issue for businesses to consider. When clients sign consent forms for the collection and use of their personal information, it would be prudent practice to include a statement seeking the client‘s permission to transfer that information to any successor business that might merge with or otherwise acquire the business collecting the information. Such a transfer of information would likely be acceptable only if the successor business were to use the personal information for the same purposes disclosed to the clients when the information was initially collected. The CASL rules may also apply to this situation. Evan did not give the new business express consent to send him commercial messages. Implied consent cannot be construed to exist either as Evan had cancelled his membership, thus ending the commercial relationship with Hearts. The new company never had a commercial relationship with Evan under which it could claim implied consent. Under the new Digital Privacy Act, harm does matter. It is unclear here whether Evan has suffered any actual harm although a relationship breakdown may fall into the category of covered harms. The new business would have a duty to notify Evan if it breached its duties to protect his personal information to allow Evan to take steps to prevent the harm.

CASE 2 At an Agricultural Exhibition and Fair, Calvin sets up a dozen small tables at the exhibition, each with a free raffle for a small prize, for guessing the number of jelly beans in different size jars. Calvin was paid by the County Fair Board and the Municipal Tourism Office to use the raffle to build a database for a tourism promotion campaign. Over the nine days of the fair, Calvin obtained 25,000 sets of names, addresses and email addresses. Some weeks after Calvin compiles the database, his laptop containing the data is stolen. Discuss the range of privacy issues that arise in this scenario.

Answer: When Calvin set up his raffle and collected personal information from individuals, he failed to disclose to them the true use and purpose for which he was collecting the information. The ―clients‖ may have assumed the only purpose for providing their information was to contact them in the event they won one of the prizes in Calvin‘s contest. Calvin, the Fair Board and the Tourism Office all breached their duties under PIPEDA to disclose the true purposes for which the information was being collected. Moreover, the retention of the personal information on Calvin‘s personal laptop would be unlikely to meet the requirements for proper safeguarding and all three parties may bear some responsibility for this breach. Calvin, the Fair Board and the Tourism Office may use the defense that the individuals who gave their personal information were not technically clients and therefore they did not owe a duty toward them in relation to the information collected. It is doubtful a court would accept this argument given the collectors failed to disclose the proper purpose and use of the information. There does not appear to be a breach of CASL rules here as the email addresses were manually collected and not electronically harvested. However, no express consent was given by the intended recipients to receive CEMs from the Fair Board or Tourist office. As none were actually sent, no breach has occurred in that regard. The students should also explore whether any subsequent emails sent from the Tourism Office would actually be considered CEMs. Under the definition of a CEM, an email would only offend the rules if it encourages participation in commercial activity. Although emails from the Tourism Office would certainly invite participation in commercial activity in the town, the Tourism Office itself is not a commercial entity and would not gain anything. It would be the town‘s other business that would benefit although they did not send the messages. Any sharing of the personal information by the Tourism Office directly with local businesses for the purposes of soliciting customers would be a breach of privacy rules as no consent was given by the contestants for this type of use of their information.

CASE 3 Patel‘s Cameras and Electronics is small retail business with twelve part-time employees. It has always had security cameras in its public retail and showcase area. Recently, a review of purchase and sales records revealed inventory shrinkage that had to be occurring in the storeroom area, rather than shoplifting from the retail area. Patel installed more cameras ―in the back‖ to catch the thief. Patel‘s employees eventually noticed the cameras and complained. What would the basis of this complaint be, and if you were to judge its merits, what other information would you demand to know?

Answer: As this is a relationship of employment and not a commercial activity between the parties, PIPEDA does not apply to this situation. However, provincial laws virtually all provide that employees have a right to Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-440

safeguarded privacy by their employers in their workplace. The laws seek to find a balance between the employees‘ right to privacy and the employer‘s legitimate business concerns. Patel‘s employees would assert that the hidden cameras ―in the back‖ represent an invasion of their privacy by spying on them and thus represent a breach of the employer‘s duty to protect that privacy. Patel would argue that theft has become a legitimate and serious issue in his business affecting his profitability and viability. It is important to note that Patel‘s business is not a federally regulated business and, therefore, the case law providing the PIPEDA fourpart test does not strictly apply here. A judge will be looking for a reasonable and demonstrable purpose for Patel to install the cameras and breach the privacy of his employees. The judge would further evaluate the balance of rights and needs in this situation: the need for Patel to stem his losses due to theft with the rights of his employees to their privacy. The considerations in the four part test, although not directly applicable to this non-PIPEDA workplace, would still be persuasive for the judge in weighing the arguments of the parties to determine the proper balance of rights:  Are the cameras needed to prevent the theft? 

Will they be effective in stopping the theft?



Is there a proper balance between the employees‘ loss of privacy and the elimination of theft to Patel?



Could Patel use a less invasive method to stop the theft?

CASE 4 Greta‘s Garden Inc. is an online retailer based in Massachusetts selling seeds, gardening tools and apparel. Mary, who loves to work in her garden, has made numerous purchases from Greta‘s Garden over the years. She looks forward to the emails she receives regularly from Greta‘s Garden announcing sales and special promotions. After Mary moves to an apartment following her husband‘s death, she realizes she will no longer need to purchase items from Greta‘s Garden. Mary checks her most recent email to see how she might unsubscribe from the mailing list. Unable to find a way, Mary phones the toll free number for customer service. The representative she speaks with informs Mary that she should send a notice in writing to the customer service department. Mary prepares a brief note explaining her new circumstances and sends it to the address provided. Mary receives no acknowledgement and the emails keep arriving. How could Mary proceed if she wishes to complain about this situation? What would be the basis of her complaint and what rights and obligations do the respective parties have? Discuss the likely outcomes. Answer: Mary would need to lodge a complaint under the CASL rules with the Office of the Privacy Commissioner to investigate the situation with Greta‘s Garden. Mary would assert that Greta‘s Garden did not provide an easy to use unsubscribe function, as required by CASL, to allow her to stop the commercial emails from coming to her. She will further assert that her attempts to communicate with the company using the means of correspondence it suggested were ignored. Greta‘s Garden may assert that it had implied consent to continue its emails to Mary on the basis that it had a pre-existing commercial relationship with her. It may also claim that it is beyond the jurisdictional reach of the Canadian CASL legislation being an American company sending the messages from Massachusetts. This last argument will prove to be a challenging part of the enforcement of CASL. Although the legislations states that it applies to CEMs both sent within Canada and received by Canadian recipients from outside Canada, the practicality of enforcing these rules on foreign situate offenders will be difficult. On the facts, Greta‘s Garden is in breach of the recipient unsubscribe requirements of CASL and could, if an investigation confirmed the breach, be liable for a $10 million fine as Willes, Contemporary Canadian Business Law, 12e © 2020 Copyright by McGraw-Hill Limited Instructor‘s Manual 1-441

a corporate entity. If any breach has occurred, the CRTC will administer penalties imposed on Greta‘s. Enforcement and collection, however, may be difficult. CASE 5 Karen‘s software lab is designing an app which monitors room temperature, time of day, and movement of occupants in a house, in order to manage the thermostat and furnace for optimal comfort and fuel savings. Many of the app features rely on third-party processing of the data collected in the app. As Karen is best positioned to know what her app does and what she needs the app to accomplish, what should she keep in mind when working with her lawyer to create an appropriate data privacy policy?

First to be remembered is that the data is collected through a commercial activity (the app) and is personal information about the people in the house, even if not uniquely identifiable. These two elements almost certainly bring this data within federal and provincial privacy statutes, and Karen must bear in mind the resulting legislated responsibilities:  Accountability — An organization is responsible for personal information (PI) under its control and shall designate an individual accountable for the compliance.  Identifying Purposes — The purposes for which PI is collected shall be identified and documented at or before the time the information is collected.  Consent — The knowledge and consent of the individual are required for the collection, use, or disclosure of PI, except where inappropriate (with high standards for disclosure) and subject to withdrawal of consent.  Limiting Collection — The collection of PI shall be limited to that which is necessary for the purposes identified by the organization. Information shall be collected by fair and lawful means.  Limiting Use, Disclosure, and Retention — PI shall not be used or disclosed for purposes other than those for which it was collected, except with the consent of the individual or as required by law. PI shall be retained only as long as necessary for the fulfilment of those purposes.  Accuracy — PI shall be as accurate, complete, and up-to-date as is necessary for the purposes for which it is to be used.  Safeguards — PI shall be protected by security safeguards appropriate to the sensitivity of the information.  Openness — An organization shall make readily available to individuals specific information about its policies and practices relating to the management of PI.  Individual Access — Upon request, an individual shall be informed of the existence, use, and disclosure of their PI and shall be given access to that information. An individual shall be able to challenge the accuracy and completeness of the information and have it amended as appropriate.  Challenging Compliance — An individual shall be able to address a challenge concerning compliance with the above principles to the designated individual(s) responsible for compliance