Legal Fundamentals for Canadian Business 3E Richard A Yates Solution Manual by Ace Test Banks

INSTRUCTOR’S RESOURCE MANUAL To Accompany

YATES

LEGAL FUNDAMENTALS FOR CANADIAN BUSINESS Third Edition

Prepared by Mitch Houg, Esq. B. Comm, LLB

CONTENTS Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10

The Canadian Legal System ....................................................................... 1 Torts and Professional Liability ................................................................ 18 Formation of Contracts ............................................................................. 38 Enforcing Contractual Obligations ........................................................... 56 Legislation in the Marketplace.................................................................. 78 Agency and Employment ........................................................................ 100 Methods of Carrying on Business ........................................................... 124 Property ................................................................................................... 150 Ideas and Information ............................................................................. 172 Electronic Commerce and International Trade ....................................... 190

Instructor's Manual Chapter 1

The Canadian Legal System Teaching Suggestions I usually take about 2 to 3 hours of a 12-week course (3 hours per week) to go over this portion of the text. I start by looking at Civil law. I mention briefly the history (Justinian's Code and Code Napoleon) and then examine the importance of the Code, emphasizing how it sets out general principles of law that judges then apply to the cases before them and the relative lesser importance of case precedents, which are persuasive rather than binding in such a system. Then I go through the history of the development of the common law of England. (I have found that unless I go over the history students have a difficult time understanding the relationship between common law, equity and statutes.) If time permits I mention William the Conqueror, emphasizing the on-going struggle for power between the council of nobles and the king, which led to the struggle between parliament and the king. I discuss the development of the three common law courts, the writ system, the development of the Court of Chancery, and the law of equity to relieve the harshness and inadequacies of the common law. That this developed from the practice of petitioning the king who then gave the job to his chancellor and eventually to vice chancellors constituted in the form of the court of chancery. I usually give examples of equitable remedies such as the injunction to illustrate the difference. I then point out the victory of parliament over the king in the English Civil war with the result that Parliament becomes the supreme law making power. Thus statutes override judge made law. I note at this stage the passage of the Judicature Acts merging the courts. I bring the process into Canada by first looking at the BNA Act which creates the dominion of Canada and gives Canada a constitution like that of the United Kingdom. I closely examine (using examples) the division of powers between the federal and provincial governments under section 91 and 92 emphasizing that these are not exclusive water tight categories but sources of power resulting in some practical overlap of law making powers. I point out what happens in the event of conflict between federal and provincial jurisdictions and that the BNA Act is still in force in Canada in the form of the Constitution Act (1867). We then look at the Constitution Act (1982), which ended the last remaining tie to the British Parliament (not to the Queen) and enacted the Charter of Rights and Freedoms. I spend some time discussing the development of human rights legislation at the provincial and federal levels pointing out that these statutes didn't protect people from government and also giving examples of human rights abuses by the Canadian government. I usually start by pointing to the limitations of the Charter -- that it only applies to government, that parts can be overridden (Section 33) and that reasonable exceptions are allowed (Section 1) I then look at each area of the Charter so that the students get a feeling for what is covered, though I don't typically look at the sections in detail. Finally I emphasize that the Charter is constitutionally entrenched (the supreme law of Canada) and that it cannot be easily changed. I usually conclude by pointing out the importance of the Charter and that it gives more power to the courts at the expense of

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parliament limiting the idea of supremacy of Parliament. I also mention the problems that followed Meech Lake and Charlottetown accords, the failed referendum to amend the constitution, the resulting problems in Quebec and the separation referendum. I then turn my attention to the courts. I illustrate the court structure in my province (B.C.) similar to the one included in the text. I point out the difference between appeal courts and trial courts and also the difference between the criminal and civil function. I look at the federal level courts and provincial level courts and the relationships between them. I then look at the function of each court body in some detail and also introduce the idea of administrative tribunals. (Often I separate the discussion of administrative tribunals and government regulation and leave it until the end of the course where the students are better able to understand the legal principles.) I then go through the civil litigation process at the superior court level. I point out the delays and the pressure exerted by each process to get the parties to settle and avoid a trial or at least to reduce the maters that have to be examined at trial. I also look at the trial process itself and what follows: the process of enforcing a judgment and the various remedies available. I also look at the criminal process to a limited extent and end by looking at alternatives to the litigation process. My examination of ADR concentrates on the advantages and disadvantages of negotiation mediation and arbitration compared to the litigation process and to some extent the option of laying a criminal complaint. Obviously the presentation of this information is primarily by lecture and I find the time well spent as it lays a foundation for building the rest of the course material. Chapter Summary History Knowledge of law is vital for business Definition: law consists of rules enforceable in court or by other government agencies Law and morality should not be confused Quebec uses the Civil Code Other provinces use common law Common law is based on cases Judges are bound to follow cases (stare decisis) Common law was developed by the common law courts in England Equity was developed by Court of Chancery Statutes are passed by Parliament or legislatures Our law is based on a combination of common law, equity, and statutes The Law in Canada BNA Act creates Canada with constitution like Britain’s Constitution Act (1867) (BNA Act) divides powers between federal and provincial governments Federal law to be followed where provincial and federal laws conflict Statute created by first, second, and third reading in Parliament and Royal Assent Statutes published and online Regulations also qualify as law

Chapter 1 - The Canadian Legal System

Constitutional law Constitution Act (1982) gives Canada independence from Britain Federal and provincial statutes protect human rights Charter protects individuals and businesses from rights abuses by government Section 1 limitation allows for reasonable exceptions Section 33 limitations allow opting out of sections 2 and 7-15 Charter protects fundamental freedoms, democratic rights, mobility rights, legal rights, equality rights and language rights Charter limited to government actions The Courts Court structure varies between provinces Provincial court, Small claims, Family, Criminal Superior court highest trial court in province Superior court of appeal final court of appeal in province Right to Trial by Jury guaranteed by Charter Supreme Court of Canada highest court in Canada Federal Court deals with disputes in federal arena Litigation Service of Notice of Civil Claim commences process Notice of Civil Claim identifies facts and issues Response to Civil Claim defines area of contention Discovery process: discloses documents, examination for discovery produces statements under oath Payment into court and offers to settle encourage settlement Class actions involve many plaintiffs represented in one procedure At trial, the plaintiff goes first, then the defendant The case must be proved “upon balance of probabilities” Judge instructs the jury in law, but the jury decides facts Damages and other remedies awarded The plaintiff (now judgment creditor) must enforce judgment ADR Alternatives to litigation provide advantages Negotiation avoids conflict Mediator helps parties to reach a decision Arbitrators make binding decisions ADR provides flexibility Administrative Law Dealing with regulatory bodies Administrative decisions must be within jurisdiction and compliant with Charter Procedural fairness required in administrative hearing Court may review process Criminal law In a criminal action the state prosecutes the accused Power to make criminal law resides exclusively with federal government

Chapter 1 - The Canadian Legal System

Provinces have power to enforce statutes creating provincial offences or quasicriminal law Provincial offences and criminal law are very similar Federal criminal law is found in Criminal Code and other federal statutes Criminal standard “beyond a reasonable doubt” Prosecution must prove not only the act took place but also intent. Due diligence is the only defence to strict liability offence Note Charter of Rights protections in criminal process A private citizen has less power to arrest than a police officer Justice can issue a search warrant, arrest warrant, and summons to appear Police can arrest or issue an appearance notice Accused must be brought to judge within 24 hours of arrest Summary conviction for minor offences Indictment for serious offences Prosecutor has choice with hybrid offences Accused can choose trial before provincial court judge, superior court judge, or judge and jury Plea-bargaining can avoid trial Criminal trial similar to civil trial Note suspended sentence and absolute discharge. Aiding, acting as an accessory, counseling, and conspiracy are also crimes Questions for Review 1.

Why is it important for a business student to understand the law and our legal system?

Answer: The law and our legal system set out and enforce the rules of interaction that govern business relationships. 2.

Define law and distinguish between substantive and procedural law.

Answer: Law as used in this text is defined as the body of rules enforced by courts or by other government agencies. Substantive rules are the normative rules that govern behaviour, while procedural rules are concerned with how the normative rules are enforced and how remedies are obtained. 3. Explain the origin and function of the Constitution Act (1867) formerly the BNA Act, and its importance with respect to how Canada is governed. Answer: The BNA Act was an act of the English Parliament that created Canada as an independent nation and established and empowered our various institutions. For our purposes the primary importance today are the provisions in the Constitution Act 1867, as it is now called, that divide the power to make law between the federal and the provincial legislative bodies. (Primarily found in Section 91 and Section 92) 4.

Explain parliamentary supremacy and its place in our legal system.

Answer: As a result of the English civil war where parliament prevailed over the King, Parliament became the supreme force in our system. Thus a rule passed by parliament will override any judge made law. .

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5. Indicate the importance of the Constitution Act (1982), and explain why it was important to the development of Canada. Answer: The provisions of the Charter of Rights and Freedoms found in the Constitution Act (1982) are the most significant component of the Act. The Charter protects people and businesses in Canada in their relations with government, and because it has constitutional status it is the supreme law of Canada. All legislation passed must conform to its principles. It can also be argued that it has modified the traditional role of parliament, giving the courts power to declare statutory enactments passed unconstitutional and void where they are inconsistent with the Charter provisions. 6.

How are individual human rights protected in Canada?

Answer: The rights of individuals in their relationships with private organizations and other individuals are protected by specific provincial and federal human rights statutes. The statutes establish commissions or other bodies that hear complaints of discrimination and other abuses and have the power to provide remedies. 7. Explain the significance of the Charter of Rights and Freedoms and identify three limitations on its application. Answer: By enshrining certain rights in the Constitution, the Charter empowers the courts to declare void federal or provincial laws that are in contravention of the Charter, The limitations are threefold. First, the Charter only applies to our relations with government and government agencies. Second, Section 1 allows for reasonable exceptions when government statutes do contravene rights set out in the Charter. Third, under Section 33 certain provisions of the Charter can be overridden by parliament or the legislature. 8.

Describe the basic rights and freedoms protected in the Charter.

Answer: Section 2 protects basic freedoms such as freedom of religion, the press and expression. Sections 3-5 protect democratic rights including the right to vote and to seek elected office. Section 6 guarantees the right to enter leave and reside anywhere in Canada. Sections 7- 14 set out such legal rights as the right to be told the reason for arrest and the right to a fair trial. Section 15 sets out the right to be treated equally without discrimination. Section 23 also sets out certain French and English language rights. 9.

Describe the court structure in place in your province.

Answer: this will vary from province to province. 10. Contrast the nature and function of the provincial court and superior trial court in your province and distinguish between the roles of trial courts and courts of appeal including the Supreme Court of Canada. Answer: This also may vary from province to province, but essentially the provincial court will deal with less serious criminal matters, family matters and civil claims falling within the small claims monetary jurisdiction. The superior courts will include the higher trial level court dealing with more serious criminal and civil matters and the provincial court of appeal. The procedure in the superior courts will be more involved generally than will be the case in the provincial court of the province.

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11. Explain the purpose of the Federal Court, and the role it plays in the Canadian judicial process. Answer: The Federal Court is composed of a trial and appeal division and deals primarily with disputes arising from those matters that are assigned to the federal government under the Constitution Act (1867). 12.

How is a civil action commenced?

Answer: A civil action is begun when a Notice of Civil Claim or Notice of Action is issued. 13. Explain the nature and role of a Response to Civil Claim, a Counterclaim, and the discovery process. Answer: The Response to Civil Claim is the response to the Notice of Civil Claim and sets out the facts alleged by the defence in the action. The Counterclaim is issued by the defence and is in effect a Notice of Civil Claim on their behalf when they claim the plaintiff was is liable for damages suffered by the defendant. The discovery process involves the disclosure of documents held by both sides to the other and the examination of the parties under oath all designed to get information out on the table to assist the parties to settle the matter without a trial or at least to make the trial much more efficient. 14. Contrast the process and the requirements of proof required in a civil as opposed to a criminal action. Answer: The process in both requires disclosure to the other side and encourages settlement or plea bargaining. The standard of proof required in a civil action is that the matter be proved on the balance of probabilities and in a criminal matter the case must be established beyond a reasonable doubt - a much higher standard. 15.

Compare the roles played by a judge and a jury in a trial.

Answer: When a jury is present in a civil or criminal trial the function of the jury is to determine questions of fact. (That is, what took place between the parties or what happened.) The judge decides questions of law (the legal rules and how they apply to the case in question or what should have been done). In a trial involving a judge alone the judge must decide matters of law and of fact. 16.

Explain how a judgment can be enforced.

Answer: In a civil action, an award of damages can be enforced by seizing and selling the property of the judgment debtor. Normally, a hearing will take place to determine what assets the judgment debtor has and then steps will be taken to garnishee wages and bank accounts, and to seize other assets such as cars boats and other chattels and have them sold at auction. Real property can also be seized and sold to satisfy judgment. 17. Distinguish between negotiation, mediation, and arbitration, and indicate the advantages and disadvantages of alternate dispute resolution over litigation. Answer: Negotiation involves discussions between the parties where they try to reach a mutually acceptable settlement of their dispute. Mediation adds a neutral third party who tries to assist the parties to reach such an agreement. Arbitration involves a third party who is given the power to make a decision that is binding on both parties. In

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negotiation the parties deal with each other, in mediation a third party helps them reach a settlement and in arbitration the arbitrator decides and the parties are bound by that decision. In many instances ADR methods are more flexible, less costly, and less time-consuming than litigation. They are also private and less adversarial. Litigated cases protect the rights of the parties and follow precedent decisions. 18.

Explain the nature of regulations and their legal status.

Answer: Regulations are created by bureaucrats under the authority of statutes usually designed to implement the principles set out in the statutes. If they are properly passed and approved by the governor general in council (the cabinet), go no further than is authorized in the statute and are consistent with the provisions of the Charter, the Constitution Act (1867) and other constitutional enactments, they have the force of a properly passed statute. 19. Explain the nature of administrative tribunals and their relationship to our legal system. Answer: They include individuals or panels of government-appointed decision makers with authority to act under statutory power, but are required to follow certain rules of procedural justice. 20.

Distinguish between criminal and regulatory offences.

Answer: All criminal law is passed by the federal government and most, but not all, is contained in the Criminal Code of Canada and has a moral foundation. Regulatory offences are created under provincial legislation or special federal statutes and may also impose penalties but the object is to accomplish the purpose of the legislation as authorized under the Constitution Act (1867) rather than to directly enforce some moral standard. 21.

Explain the difference between a criminal and a strict liability offence.

Answer: A criminal offence requires the accused to be proven guilty beyond a reasonable doubt. This puts a considerable onus upon the prosecutor to prove their case including a mental element called mens rea. In a strict liability offence, once the facts have been established, the onus is on the accused to show they took reasonable steps to avoid the prohibited events from taking place. This is called due diligence. 22. Distinguish between summary conviction and indictable offences and explain the various options of the parties involved Answer: Generally, the summary conviction process involves more minor offences and involves a shorter, simpler process. The indictable process is used for more serious offences and often involves a pre-trial hearing known as a preliminary inquiry. As well, a person charged with an indictable offence often has the right to a trial by jury if they chose that option. There are a number of offences where the prosecutor has a choice and can proceed either way usually depending on the seriousness of what has happened and whether people have been injured. Similarly, the accused in a more serious matter usually can choose to proceed summarily or go the more complicated route.

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Questions for Further Discussion 1. Discuss the relationship between law, morality, and ethics. How does one determine what is ethical behaviour and what is not if you can’t use the law as the test? What would be the outcome if the courts tried to set a social or personal moral standard? Comment: Most will say that ethics and morality are the same. It has been suggested by some that morals are personal standards whereas ethics refer to the standards required of a group. Laws on the other hand are simply rules that are enforced in court or by other government agencies and may or may not reflect an ethical or moral standard. I usually use a Venn diagram to illustrate the point. One circle represents morality, the other the law and where they overlap is the area where law can be said to be a reflection of morality. Some laws have a moral component and others are unrelated to moral values. Some morals are enforced by laws, others are personal choices  The object here is to drive home the point that business people cannot be sure they are acting morally simply because their actions are within the law.  It is possible for an action to be immoral or unethical although lawful and it may also be possible for an action to be moral although prohibited by the law or even for a law to be immoral, although this would depend on the philosophical approach adopted by the parties to the discussion. For the courts to get any more involved in moral and social issues than they do would likely lead to more confusion and conflict than we already experience in our multi- dimensional society. 2. Canada has a tradition of Parliamentary Supremacy inherited from Great Britain. But that has been modified somewhat by the passage of the Charter of Rights and Freedoms. Explain how parliamentary supremacy has been limited by the Charter, how that affects the role of the courts, and whether these changes enhance or are detrimental to Canada as a democracy. Comment. This question is meant to encourage a discussion about the principle of the supremacy of parliament and how the passage of the Charter of Rights and Freedoms has affected it. It should be emphasised that the passage of the Charter and its constitutional entrenchment has shifted power away from Parliament to the courts, which can now hold that some actions by government are beyond their power and void. Thus Parliament cannot be supreme in the sense that its enactments will prevail in the courts if the courts have the power to override those enactments by declaring them invalid because of the provisions of the Charter. That is the start of the discussion, but of course, the students then should talk about the operation of Section 1 and Section 33 and given those limitation is there really a significant limitation on the operation of the supremacy of parliament in Canada? It can be helpful to encourage students to compare the situation in Canada, Great Britain and the United States. 3. The process leading to trial is long, involved, and costly. Most jurisdictions are trying to change the procedures to alleviate delays and costs. How successful are they and what other changes would be appropriate? Keep in mind the benefits of the

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current system; do they outweigh the disadvantages? In your discussion consider the advantages and disadvantages of alternate dispute resolution methods. Comment: the point to be emphasized here is that there are advantages to this complex and lengthy process. Each step is designed to get more information onto the table and to pressure the parties to settle their dispute without going to court. Emphasize how many disputes are settled out of court. There are several systems that are in place to make the process more efficient: e.g. having a trial based on depositions (no witnesses) or doing away with the discovery process. Discussion can revolve around the advantages of that compared to what will be lost. You might emphasize the quicker, cheaper process, but is it worth the loss of all that information? Does it lead to more cases going to trial or less? Is it more or less costly in the long run? Also the question encourages the review of ADR and how it can supplement and complement the legal system. 4. Government boards and tribunals may be considered an appropriate forum for dispute resolution. Is it appropriate for the courts to be able to exercise review powers over their decisions? Are there enough safeguards in place to protect the rights of people who are affected by administrative decisions? Comment: This question presents the classic problem of big government and the exercise of government power versus the rights and interests of the “little guy”. The advantage is that such tribunals are much more efficient than courts in dealing with the matters assigned to them, but that is usually at the sacrifice of one’s right to challenge the decision in court. What about the rules of natural justice and the Charter with the power of the courts to review? Why should the courts have the power to overturn such decisions when the very purpose of the tribunal is to take the matter out of the hands of the courts? The problem is to achieve a balance of government power and more efficiency as opposed to the danger of the abuse of such power and the right to go to the courts to ensure against such abuse. 5. Describe the essential difference between a criminal prosecution and a civil action, and discuss the advantages and challenges associated with each process. Consider when a business person might have to choose between them and what factors would affect that decision. Comment: The main difference is that the prosecution process is initiated and controlled by the crown rather than a private individual that is prosecuting the action. The status of the victim is little more than a witness. The rights and protections afforded to the accused should be emphasized including Charter rights and the requirement of proof beyond a reasonable doubt. All of these facts make it much harder to proceed against an accused using the criminal model. The advantage, of course, is that the victim does not have to bear the costs of the process and the police will bring their investigative expertise into the matter. In a civil model the person bringing the action against the wrongdoer will bear the costs and shoulder the burden of suing the wrongdoer. They will also have to do their own investigation work and gather sufficient evidence to proceed to trial. On the other hand it is not nearly so difficult to succeed and the business person can insure that such a civil action will

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proceed even where the case is weak. In contrast, in a criminal prosecution the business person has little actual say as to whether charges are proceeded with or even laid in the first place. Cases for Discussion 1.

Isen v. Simms S.C.C., 2006 SCC 41; [2006] 2 S.C.R. 349

Mr. Isen was the owner of a 17-foot pleasure boat. After a day of boating on the lake and loading the boat on its trailer in preparation for transporting it on the highway was securing the boat with the help of Dr. Simms. Mr. Isen was stretching a bungee cord over the engine when it slipped and hit Dr. Simms causing an eye injury. He and his wife sued in the Ontario Superior Court for $2.2 million. Mr. Isen brought an application before the federal court for a declaration that the federal maritime law applied and the Canada Shipping Act imposed a $1 million limitation on damages in this situation. Explain whether the limitation imposed in the federal statute should apply in this situation and why. Decision: The Court ruled that the actions giving rise to Dr. Simms’ injuries were not governed by federal maritime law, but rather, were governed by provincial law. Accordingly, the Canada Shipping Act was not constitutionally applicable in this case and Mr. Isen could not claim the benefit of the limitation of liability provided in that Act. While Parliament’s jurisdiction over navigation and shipping pursuant to s. 91(10) of the Constitution Act, 1867 includes the tortious liability of owners of pleasure craft for negligent launching into, navigation on and removal from Canadian waterways, the mere involvement of a pleasure craft in an incident is not sufficient to ground federal jurisdiction. Rather, the factual context must be examined to determine whether the allegedly negligent act is integrally connected with the act of navigating the pleasure craft on Canadian waterways such that it is a practical necessity for Parliament to have jurisdiction over the matter. Here, the securing of the engine cover for transport by highway had nothing to do with navigation of the boat on water and everything to do with preparing the boat to be transported on Ontario’s highways. Once the boat was being secured for road transport, it was no different than any other type of cargo that is transported on the highway, and the provincial legislature has jurisdiction. Therefore, the law concerning the standard of care and Mr. Isen’s liability should be that applied to other users of Ontario roads who make preparations to transport some form of cargo. 2. Ramsden v. Peterborough (City) [1993] 2 S.C.R. 1094, 106 D.L.R. (4th) 233 (SCC) This is a classic case dealing with freedom of expression. The City of Peterborough had passed a bylaw prohibiting the posting of any material on city property. The bylaw prohibited the posting of “any bill, poster or other advertisement of any nature,” on any “tree . . . pole, post, stanchion or other object . . .” within the city limits. Ramsden put up advertising posters on several hydro poles to advertise an upcoming concert for his band. He was charged with committing an offence under the bylaw. It is not disputed that he posted the bills on the hydro pole. Indicate what defences he might have to the charge and the arguments for both sides and likely outcome.

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Decision: First the court had to deal with whether such postering was a means of expression protected under the Charter. It was clear that postering is an inexpensive and historically accepted way to convey information whether it is advertising or political, social, or cultural commentary. As such, the court found that it was protected under Section 2(b) of the Charter. The court then had to decide whether the bylaw prohibition was a reasonable limit under Section 1. The purpose of the bylaw was not to curtail public expression in any particular area, but to control littering, considered a positive objective. The problem was that the bylaw went too far. It prohibited all postering. The Supreme Court decision quoted from the Ontario Court of Appeal judgment “as between a total restriction of this important right and some litter, surely some litter must be tolerated”. The court concluded that the bylaw imposed a limit on freedom of expression as protected in section 2b of the Charter and that the limitation could not be justified under section 1 as it “is overly broad and its impact on freedom of expression is disproportionate to its objectives.” 3. British Columbia Government and Service Employees’ Union v. British Columbia (Public Service Employee Relations Commission) [1999] 3 S.C.R. 3, 66 176 D.L.R. (4th) 1 (SCC) A female forest firefighter in British Columbia lost her job because she couldn’t run 2.5 kilometres while carrying a 35 kg pack, to satisfy a government imposed standard of fitness required for her job. She showed that this requirement clearly disadvantages women, who don’t have the same aerobic capacity as men. She also argued that there was nothing in her job that required this kind of performance. She made a complaint to the Human Rights Commission of British Columbia Consider the arguments on both sides. What do you think should be the decision? Decision: The arbitrator held in favour of the employee finding adverse effect discrimination. On appeal to the B.C. Court of Appeal this was overturned. On further appeal to the Supreme Court of Canada the decision of the arbitrator in favour of the firefighter was reinstated. The case is important since the SCC overruled the old adverse effect discrimination test and adopted a three-pronged test to justify discrimination on the basis of a bone fide occupational requirement (BFOR). To establish that the imposed standard is a BFOR the employer must show first that there is a rational connection between the standard and the practical requirements of the job, second that the particular standard was adopted in good faith believing it was necessary and third that the imposed standard was reasonably necessary to accomplish the legitimate work- related purpose. In this case the employee first established that the required standard effectively discriminated against her as a woman as women generally don't have the same aerobic capacity as men. Then the employer had to meet the three requirements stated above to establish that this was a BFOR. They did satisfy the first and second requirement - that such standards are generally necessary because of the practical requirements of the job and that they acted in good faith, but they failed to show that the actual standard imposed was necessary to accomplish the work related objectives. The arbitrator had concluded that the employer had failed to show that they would experience undue hardship if a difference standard were used. Thus the arbitrator's decision was restored

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4. Consolidated Fastfrate Inc. v. Western Canada Council of Teamsters S.C.C., 2009 SCC 53; 2009; 313 D.L.R. (4th) 285 Consolidated Fastfrate operated a freight-forwarding business with branches across Canada. Their business consisted of picking up freight in one province, consolidating it into containers, arranging for transportation to the destination province, and distributing that freight to various locations in the province. The business was managed and rates set at a regional or national level. The branch employees did not cross provincial boundaries, and third-party carriers transferred the containers between branches. A union representing the employees in branches in Alberta, Saskatchewan, and Manitoba applied to the Canada Industrial Labour Relations Board for certification, and in this action the union was applying for a declaration whether the employees should be federally or provincially certified. Explain the arguments for both sides and the likely decision. Decision: The Court ruled that the employees of Fastfrate Calgary are subject to provincial jurisdiction. The question whether an undertaking, service or business is a federal one depends on the nature of its operation. An undertaking that performs consolidation and deconsolidation and local pickup and delivery services does not become an interprovincial undertaking simply because it has an integrated national corporate structure and contracts with third-party interprovincial carriers. Fastfrate’s operations are entirely intraprovincial. Neither Fastfrate employees, nor its equipment, are involved in any actual interprovincial transport. Section 92(10)(a) of the Constitution Act, 1867 and the jurisprudence interpreting it do not contemplate that a mere contractual relationship between a shipper and an interprovincial carrier would qualify Fastfrate as an undertaking connecting the provinces or extending beyond the limits of the province. Rather, it is the carriers that physically transport the freight interprovincially that constitute federal transportation works and undertakings. There is no indication that contracting alone can make intraprovincial undertakings subject to federal jurisdiction. The operational reality of Fastfrate is that it depends on third-party interprovincial carriers to conduct its business. Fastfrate remains a shipper. Its presence at both the originating and terminating ends may mean that it can provide a comprehensive service to its customers, but this does not change the fact that it is still only a shipper using an interprovincial railway or trucking company As a result, the employees of Fastfrate are subject to provincial laws as to certification as s. 92(13) provincial head of power over “Property and Civil Rights” in the provinces includes labour relations. 5. Vancouver (City) v. Jaminer, (Dec 13 1999) (B.C.S.C.) as reported in Lawyers Weekly, Consolidated Digests, Vol.19. A city bylaw was enacted without notice to those affected. The bylaw prohibited rooftop signs extending above the roofline of a building to enhance the aesthetics of the urban environment. Jaminer erected such a sign, leased it out for advertising purposes, and was subsequently ordered to remove it by the city. He refused and the city applied to the Supreme Court of British Columbia for an injunction ordering the removal of the sign. Indicate both Charter and procedural arguments that might be available to both sides and the likely outcome. Which result is more efficient in business terms and should this be taken into consideration by the courts?

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Decision: The Supreme Court refused to grant the injunction. First, the defendant argued that the prohibition constituted an interference with his freedom of expression. The court agreed but found that this was a reasonable interference under Section 1 of the Charter. The object was to enhance the aesthetics of the city, to control urban development and for public safety and the bylaw went no further than necessary to accomplish those reasonable objectives. Second, the defendant also argued that they had not been given proper notice and a fair hearing before the decision was imposed upon them. The court agreed. Even though the bylaw didn't require such notice the SCC had decided in Baker v. Canada (Minister of Citizenship and Immigration) (1999), 174 D.L.R. (4th) that public bodies making decisions that affect the rights of people in this way were required to follow the requirements of procedural fairness and provide an opportunity to be heard before it was passed. Thus the bylaw itself had not been validly passed. Sample Examination Questions Multiple Choice Questions 1. Which one of the following statements is not accurate with respect to the Canadian legal system? a. The three major components of present Canadian law are the common law, equity and statutes. b. The traditional supremacy of Parliament to make law has been limited to some extent by the Charter of Rights and Freedoms. c. The full normal route of an appeal of a civil action is from a provincial trial court to a provincial Court of Appeal to the Supreme Court of Canada. d. The principle of stare decisis provides that courts within a province are bound to follow previous decisions by any other court in that province. e. The original Canadian Constitution is now known as the Constitution Act (1867). Answer: D 2. (Modify this question for your province) Which of the following is false with respect to our court system? a. A negligence action, where the extent of damage is $3500, would most likely begin in the B.C. Provincial Court, small claims division. b. The lawyer arguing before the B.C. Supreme Court could cite a British case, but the judge is not bound to follow it. c. A judge on the B.C. Court of Appeal is bound to follow the decision of a judge on the B.C. Supreme Court on an identical case. d. There is no monetary limitation on the B.C. Supreme Court, i.e. the case may involve any amount of money. e. The consequence of the merger of the common law courts with the courts of equity is that the courts now apply both the legal and equitable principles and remedies. Answer: C

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3. Which of the following is incorrect with respect to the Charter and Constitution? a. The B.N.A. Act (Constitution Act 1867) divides power between the federal and provincial governments b. The most significant accomplishment of the Constitution Act (1982) was to create a new court structure for Canada. c. The provisions of the Charter of Rights and Freedoms guarantees us rights and freedoms that restrict both federal and provincial government. d. Canada is no longer required to go to the Parliament of England for any constitutional change. e. Such rights as freedom of expression are now constitutionally guaranteed. Answer: B 4. With regard to the process of a civil law suit in a superior court, which of the following is false? a. The plaintiff must prove his case on the balance of probabilities, whereas a prosecutor in a criminal action has to prove his case beyond a reasonable doubt. b. A defendant in a civil action might also be charged in a criminal action for the same act, e.g. a battery. c. If the defendant makes a payment into court and the eventual award of damages is greater the plaintiff must bear all of the costs of the action. d. Failure of the defendant to enter an appearance can result in judgment being taken against him without the court having heard his side of the argument. e. If, in the examination for discovery, the defendant admits facts set out in the plaintiff's statement of claim, the plaintiff does not have to prove those facts at trial; he merely reads the admissions from the transcript of the examinations. Answer: C 5. Which of the following will not override a particular provincial common-law rule as articulated by a trial-court judge in a Small claims court in the province? a. A contrary subsequent ruling by the Court of Appeal of the province b. A new provincial statute to the contrary c. A contrary subsequent ruling by the Supreme Court of Canada d. A contrary subsequent ruling by an Appeal court judge in another province e. A contrary subsequent ruling by the superior trial level court of the province. Answer: D 6. Which one of the following statements is false with respect to Canadian constitutional law? a. The Charter of Rights and Freedoms sets out basic rights and freedoms of Canadians that cannot be limited in any way b. The Canadian Constitution can now be amended by Canadians without having to seek the cooperation of the British Parliament. c. The final word on the meaning of the provisions of the Canadian Constitution is left to the Supreme Court of Canada. d. The federal Parliament and the provincial legislatures have separate, exclusive legislative powers

Chapter 1 - The Canadian Legal System

e. The federal or provincial legislatures may pass legislation contrary to some sections of the Charter of Rights and Freedoms if they say that they are doing so. Answer: A 7. Which of the following is not one of the requirements of natural justice? a. b. c. d. e.

Notice of the hearing An opportunity to present your side The rules of evidence be adhered to The decision be made free from bias That the evidence be heard by the person making the decision

Answer: C 8. A privative clause is which of the following? a. A privative clause is a provision in a statute attempting to prevent the courts from reviewing the decision of an administrative tribunal b. A privative clause is an attempt to restrict the decision-making powers of administrative tribunals to a closely confined area c. Privative clauses restrict certain people from participating in administrative tribunals d. The privative clause refers to the section of the Charter of Rights and Freedoms that prevents the Charter from applying to private or non-governmental matters e. A privative clause creates an actionable tort in various privacy statutes Answer: A Short Answer Questions 1. Explain what is meant by the phrase stare decisis? Answer: This means essentially “let the decision stand” and involves the process existing in the common-law system whereby a judge must follow another judge’s decision. This makes the law consistent and predictable. 2. What role does the decision made by an Ontario Court of Appeal judge have on a B.C Supreme Court judge? Answer: The decision is merely persuasive. It is not binding since that judge is not in the same court hierarchy (i.e. B.C. Court of Appeal, Supreme Court of Canada). 3. Explain the relationship between regulations and statutes? Answer: Often a statute will empower a particular government department to develop regulations to enforce the provisions of that statute: e.g. the Employment Insurance Act, Workers Compensation Act, etc. These regulations have the force of legislation if they are passed properly pursuant to the statutes.

Chapter 1 - The Canadian Legal System

4. Canada's Constitution is embodied in the British North America Act. Explain the accuracy of that statement? Answer: This is incorrect. Canada has a constitution similar to Great Britain, which is an unwritten constitution that includes a great many separate constitutional documents such as the Magna Carta, English Bill of Rights, etc. The British North America Act is just one of the elements of that constitution. The British North America Act is now referred to as the Constitution Act (1867). 5. Explain the origin of equity in our legal system Answer: Equity refers to that body of law created by the courts of chancery designed to compensate for the harshness and limitations of the common law. 6. What is the significance of the Constitution Act (1867)? Answer: It created the Dominion of Canada and it divides powers between the Federal and Provincial governments. 7. Explain the limitations on the application of the Charter of Rights and Freedoms? Answer: The Charter only applies to public matters such as government and the laws they create. This applies to the federal provincial and municipal levels of government and all government agencies. Also, Section 33 allows the opting out of some of the provisions of the Charter and Section 1 allows for reasonable exceptions. 8. Indicate the function and nature of a Notice of Civil Claim. Answer: The Notice of Civil Claim is the document where the allegations which must be established in the court action are set out. This gives notice to the defendant as to what case he must meet. It is not an argument, rather just a summary of allegations. 9. Explain why the Examination for Discovery can be so important in any court action? Answer: Often admissions are made in the examination for discovery process, which cause the action to be abandoned or clarify matters so as to encourage settlement. Since this information is taken under oath it can be used later at the trial. 10. Distinguish between mediation and arbitration. Answer: Mediation refers to a situation where a third party assists the two principle parties to come to an agreement. The decision and recommendations of a mediator are not binding on those parties. An arbitrator is also an independent third party who hears submissions from both sides, but acting much like a judge and in contrast to the very limited functions of a mediator, makes a decision that is binding on both parties.

Chapter 1 - The Canadian Legal System

11.

Indicate three of the requirements of the rules of natural justice. Answer: A fair hearing, notice, that the decision be heard by the decision-maker and that the decision-maker be free of bias.

12.

What constitutes a fair hearing? Answer: What constitutes a fair hearing will vary with the circumstances and it might be all the way from an opportunity to put your case before the decision-maker in person to merely the right to write a letter. In any case, it requires that you be notified as to a decision that's going to affect you and to be given an opportunity to put your case forward.

Essay Topics 1. Explain the relationship between common law equity and statutes in the development of our legal system. 2. Explain the role the British North America Act played in Canada's constitutional history. 3. Discuss the significance of the passage of the Charter of Rights and Freedoms in Canada's legal system. In your answer consider any limitation on its application. 4. One of the greatest weaknesses in our court system is the unreasonable delay when one person sues another. Discuss the validity of that statement. 5. Discuss the options that are available to a successful litigant in enforcing that judgment, against the loser. 6. Consider the alternatives to going to court and suing someone that are available and discuss the relative merits of these different courses of action. 7. Discuss what constitutes a fair hearing.

Instructor’s Manual Chapter 2 Torts and Professional Liability Teaching Suggestions I usually have only a two hour lecture to devote to the subject of torts and must be selective in what I cover. The key to teaching this subject is to use lots of examples. Whether you use actual cases or created scenarios, nothing illustrates the material or contributes to the students understanding of torts better than practical examples of each rule or principle. I start off by defining what a tort is: a social or civil wrong remedied through a civil action where a plaintiff sues a defendant seeking damages or some other remedy. I contrast a tort to a criminal wrong or breach of contract by pointing out that a criminal wrong involves an offence against the state and the process is a prosecution rather than civil litigation. This is a good opportunity to review the criminal versus civil process discussed in the first chapter. I also point out that the same conduct may result in a criminal prosecution as well as a civil action by using motor vehicle accidents with criminal charges and civil liability as an example. For contract law I point out that there is nothing inherently wrong with failing to do the action required in the contract, rather it is the failure to honour the promise that is actionable. And then I approach a student with a clenched fist and ask if there is anything inherently wrong with me hitting that student and they get the distinction. I then list the different types of torts including assault and battery, trespass, false imprisonment, fraud, defamation, nuisance and negligence. I also point out that this is not a complete or closed list. Finally, I emphasize the requirement of fault with respect to torts, either taking the form of an intention to do the act complained of or failure to live up to a required duty of care. I then take time to explain the concept of the reasonable person and point out that while it is used in many areas of law, it is vital in torts especially in the field of negligence. Students usually think of the reasonable person test as the application of an average and I have developed the analogy to par in a golf game to emphasize the difference between a standard based on the reasonable and the average. Par is an imperfect analogy but it usually gets students away from equating reasonableness with average. I also take time at this stage to discuss vicarious liability where an employer is responsible for the wrongful conduct of an employee committed in the course of his employment. The main goal here is to get across the idea that vicarious employer liability does not excuse the employee from liability (a mistake often made by students). Rather, I emphasize that both the employer and the employee are liable, although it is usually the employer who pays since they usually have the deeper pockets. I then spend the rest of the time going over specific individual torts and what I cover here depends to some extent on the specialty of the students. For example, if I am teaching broadcast or journalism students we spend more time on defamation whereas with mixed business students the emphasis is on negligence. In any case, the first thing I do is distinguish between intentional torts and negligence. As far as intentional torts are concerned I usually concentrate on assault and battery because the students like the

Chapter 2 – Torts and Professional Liability

illustrations and conflict and because of time limitations I leave the other forms of intentional torts to be studied independently by the student. With assault and battery I explain the difference explaining that battery requires actual contact whereas assault involves the perceived threat on the part of the victim of imminent physical contact. I talk about the importance of words and how they can make an innocent action threatening and what appears to be a threatening action innocent. I often spend most of my time talking about defenses. I explain what reasonable force means when discussing self defense and also look at consent. Here I concentrate on medical treatment. I always deal with the Malette v. Shulman case (see cases for discussion) where a medical doctor ignored the notice that an unconscious patient was a Jehovah Witness and contrary to her written stated instructions gave her a needed blood transfusion, which saved her life. I ask for a show of hands if the students are sympathetic to the doctor and why. A lively discussion usually follows and I can discuss the right of an individual to make their own decisions with respect to what kind of interference they wish to permit to their own bodies. We also usually discuss children and I point out that this right doesn't always extend to making those same decisions on behalf of others they are responsible for. If I have time I will mention what false imprisonment is, and explain the nature of trespass, nuisance, fraud and defamation but not in any depth, just requiring the students to read it in the text. I discuss as much of this in the first hour as I can and then turn my attention to negligence. The second hour is always devoted entirely to a discussion of negligence. I introduce negligence by pointing out that it is not a state of mind and not carelessness in that sense. Rather it involves a relationship between people where one fails to live up to required level of behaviour towards another, causing injury or damage. I then summarize what has to be established: that a duty to be careful was imposed (there is no general duty to be careful to everyone); what standard of behaviour was required; that damage or injury took place caused by the conduct complained of; and finally I look at the effect of contributory negligence. When discussing duty the most important case is Donoghue v. Stevenson, which establishes the principle of reasonable foreseeability. I usually go through this case quite carefully. I also take the time at this stage to point out that there are some difficult situations where the presence and nature of a duty to be careful is not always apparent. This involves the problem of careless words rather than careless deeds where this test can result in open ended liability. I also point out the problem of remoteness where the connection between action and result seems strained or just weird or unexpected. This used to be a difficult problem, but today both are dealt with by the principles set out in the Ann's case. It is important to point out that most normal cases will be dealt with simply by applying the reasonable foreseeability test developed in Donoghue v. Stevenson, but in problematic situations the Supreme Court has declared that the Ann's case principles will apply. The first part of the Ann’s test applies reasonable foreseeability (called proximity here), but it is the second part that is unique. The application of the question of whether there is any reason to reduce or change the nature of the duty. That is an application of social policy. By way of example, I then take a few minutes here to look at the Haig v. Bamford and Hercules cases. The examination of what standard of care is required is much more straightforward. I again explain what the reasonable person test means and how it works and point out that

Chapter 2 – Torts and Professional Liability

reasonable here does not mean average. I also explain that it is the reasonable person in the circumstances of the situation being examined: e.g. a reasonable doctor, a reasonable lawyer etc. I point out that the courts will look at risk of damage and the potential seriousness of those damages as well as the costs incurred in prevention in determining just what a reasonable person would have done in the circumstances. The best way to approach this is to give brief summaries of cases and examples to illustrate the points. I also discuss statutory modification of this standard by looking at the occupier's liability acts and innkeeper's acts in place in most jurisdictions. When discussing the requirement of damage it is important to emphasize causation here as well. That is, was actual injury caused by the conduct complained of? I use the example of someone driving without illuminated rear tail lights and getting into a head on accident. It may have been careless to drive without the working rear tail lights but that did not cause the damage or accident. It is also important to discuss the broadening out of the type of damages that are recoverable. In the past there had to be some sort of physical injury for damage to the person or property, but now economic loss and mental injury will also entitle the victim to compensation. I also review remoteness here and review the application of the Ann's case tests to these situations. I also discuss the thin-skull rule here; that you take your victim as you find him. Although you couldn't anticipate that the person whose hands you injured was a concert pianist, you are responsible for the greater damage nevertheless. Contributory negligence is also important to discuss. In the past it was all or nothing, but all jurisdictions, through statutory amendment, require that the responsibility for the accident be apportioned according to fault. This means that an injured party will face a reduction in their claim for damages in proportion to their own carelessness/contributory negligence. For example, if a pedestrian is equally at fault for stepping into the path of an oncoming car, the pedestrian will face a reduction of 50% in the amount of damages they are entitled to. Similarly, if the car in the collision suffered damage due to the collision, the owner/driver will face a reduction of 50% in their claim to recover the cost to repair that damage from the pedestrian. I also talk about the defence known as “voluntary assumption of risk”. This defence arises when a person voluntarily puts themselves in harm’s way and suffers harm. Until recently, if it was shown that a person did “assume the risk” then such a person’s claim would be dismissed. Because this is an all or nothing approach the Supreme Court of Canada has more recently ruled that such a defence is quite limited. To now succeed with the defence of voluntary assumption of risk the defendant must show not only that the plaintiff assumed the physical risk but also the legal risk by clearly waiving his legal rights (usually by signing a written waiver or release document before participating in the activity giving rise to the harm). If there is time I talk about product liability but I will be dealing with this subject more extensively under the Sale of Goods Act discussion later.

Chapter 2 – Torts and Professional Liability

I find myself hard pressed to cover this much in a two-hour class and leave the students to read the rest of the chapter including the discussion of various types of business torts and insurance. Chapter Summary Introduction A tort is a private or civil wrong Tort as distinguished from crime and contract Employer can be vicariously liable Intentional torts Deliberate conduct Assault and battery Intentional torts involve deliberate acts Battery involves physical contact Assault involves apprehended physical contact Threatened contact must be immediate, possible, and unwanted Informed consent is an effective defence Self-defence using reasonable force is an effective defence There are a number of criminal offences that correspond to assault and battery Consent or self-defence will not always justify the use of physical force False imprisonment Complete restraint without authority is an actionable tort Restraint can be physical or submission No false imprisonment where there is authority to arrest Trespass Trespass involves voluntary conduct without authority. Trespass may take place directly or indirectly Trespassers may be ejected using reasonable force Trespass may also be criminal Responsibility to trespassers modified by statute. Injunctions can be used to stop trespassers Nuisance Nuisance involves unusual use of property interfering with a neighbour. Defamation Defamation involves a published derogatory false statement Defamation may involve innuendo Slander is verbal; libel is written and easier to prove Broadcasted defamation is libel by statute Derogatory statements made in Parliament or courts are protected (Absolute privilege)

Chapter 2 – Torts and Professional Liability

Derogatory comments made pursuant to duty are protected (Qualified privilege) Derogatory comments made as fair comment on public matter are protected Libel may also be criminal Negligence Negligence involves inadvertent conduct causing loss Reasonable person: better than average but less than perfect Negligence requires duty of care Existence of duty determined by reasonable foreseeability Note application of Ann’s case principles The standard of conduct required is determined by reasonable person test. Reasonable care is determined by risk, cost, and potential of loss Expertise claimed effects reasonableness of conduct. Note the use of circumstantial evidence Special standards imposed by statute or common law Breach of duty must have led to loss or damage. Where the victim is also negligent, loss is now apportioned Where the victim voluntarily assumed both the physical and legal risk, there is no remedy Where the connection is tenuous or the results unexpected, social policy may be applied to reduce or modify duty Responsibility can be imposed even where an unusual occupation or condition causes victim greater loss than normal When a manufacturer is sued, negligence must be established Product Liability Advantage of strict liability when suing in contract but note privity problem Manufacturer can be sued in negligence. But breach of standard of care must be established Circumstantial evidence often used to show carelessness In some jurisdictions manufacturer can also be sued in contract Note prevalence of class actions in product liability cases Professional Liability Professional liability to clients based on contract. Professional liability to others based on tort and Ann’s case test Duty may now be modified or eliminated on policy considerations. Court unwilling to expose professionals to unlimited liability Higher standard of conduct required of experts Standard practice of profession may not be good enough Fiduciary duty requires good faith and clients’ interests to be put first Disciplinary bodies subject to rules of “due process” Professional risk is reduced by insurance. Negligence may also be criminal

Chapter 2 – Torts and Professional Liability

Other Business Torts Other business torts include: - Fraud - Product defamation - Inducing breach of contract - Passing Off -Trespass to chattels and conversion Note increased emphasis on privacy rights Questions for Review 1. What is a tort? Distinguish between a tort and a crime and explain when a tort can also constitute a crime. Answer: A tort is a civil wrong actionable through civil litigation. A crime also involves wrongful conduct but offends society and is prosecuted criminally. A breach of contract involves conduct that is not inherently wrongful but made wrong by the agreement between the parties. 2.

Explain vicarious liability and any limitation on its availability.

Answer: Vicarious liability holds an employer responsible for torts committed by an employee along with that employee. The employer is responsible only for those torts committed in the course of the employment. 3.

Distinguish between intentional and inadvertent torts.

Answer: Intentional torts such as assault and battery trespass and false imprisonment involves conduct that is voluntary in the sense that the wrongdoer intends to do what is done (though not necessarily the consequences). An inadvertent tort involves conduct that is not intentional but rather accidental where the accused did not intend to do what he did. 4.

Explain what is meant by a reasonable person and the reasonable person test.

Answer: The concept of the reasonable person is used in many situations. Usually the concept is used to determine a standard of conduct by which a party’s actions are judged to determine liability. The standard imposed does not require perfection, but is a higher standard than average. It can be said to be the conduct expected from a prudent person being careful. 5.

Distinguish between assault and battery, and explain any defences.

Answer: Battery involves unwanted physical contact whereas assault involves the apprehended threat of such contact. The defence of “self-defence” permits the victim to use as much force as is necessary or reasonable to defend themselves from such a threat or actual contact. If excessive force is used that action constitutes an actionable battery.

Chapter 2 – Torts and Professional Liability

Explain what is required to establish a false imprisonment.

Answer: For a false imprisonment to take place there must be complete confinement of the victim against their will. This confinement can take the form of physical restraint or by a person submitting to the authority and control of the other party. In the latter case no cell, handcuffs, or other forms of confinement are required. 7. Why is trespass to land considered an intentional tort? Under what conditions does a trespass occur? What is a continuing trespass? Answer: Trespass to land involves a willful act in that the defendant must have intended to be where they were. It is not required that the trespasser knew that he was on another's property or that he was trespassing, only that his conduct of getting to that location was the result of willful and voluntary conduct on his part. He must have intended to be where he was whether or not he knew he was trespassing. Trespass can occur when an individual comes on another's property or indirectly when something is thrown on another's property, or if a building is built on another's property. This latter situation is called a continuing trespass. 8. Explain the obligation of an owner or occupier of land for injuries suffered by a trespasser and others using that land. Answer: At common law the landowner was only responsible to injuries to a trespasser when those injuries were inflicted intentionally or recklessly on the trespasser. Unlike trespassers, at common law an owner had a duty to take “reasonable steps” to ensure that others using the land with the permission and knowledge of the owner were either clearly warned of any potential hazards or steps were taken to guard any such hazard. Most provinces have passed statutes modifying an owner’s “common law” responsibility to both trespassers and permitted guests their occupier’s liability acts. 9.

Under what circumstances might one neighbour sue another for nuisance?

Answer: A nuisance takes place where one neighbour uses his properly in such a way as to interfere with his neighbour's use of his. This might be allowing bees, fumes, noise or smoke to escape making it impossible for the neighbours to enjoy their patio. 10.

What is meant by defamation? What is an innuendo?

Answer: Defamation is a false and derogatory statement about another to their detriment. An innuendo is an implied or hidden meaning which when combined with known facts makes an otherwise innocent statement defamatory

Chapter 2 – Torts and Professional Liability

11.

Distinguish between libel and slander. Why is the distinction important?

Answer: Generally, libel is written and slander is spoken. Broadcasted defamation is usually made libelous by statute. It is easier to prove libel since you must not only prove that slander took place but that it resulted in some actual, measurable monetary loss. 12. Explain the difference between privilege and qualified privileged, and when these defences will be used. What about fair comment? Answer: Absolute privilege means that the words cannot constitute defamation no matter how false and derogatory or what the motive. Absolute privilege applies only to words spoken in courts and parliament. Qualified privilege is also protected but only if the words were spoken believing they were true with no ulterior motive and with a duty such as an employment obligation to speak the words. Fair comment allows critics or others to make disparaging or critical comments about matters of public interest and so long as they are opinions that can be held and drawn from the known facts and there is no ulterior motive they are protected. 13.

Explain the role of fault with respect to the tort of negligence.

Answer: The fault here is inadvertent not intentional. The fault is failure to live up to a standard of conduct deemed acceptable by the law (determined by applying the reasonable person standards). 14.

What must be established in order to successfully sue for negligence?

Answer: Four elements are required: that there was a duty to be careful; that the defendant failed to meet the required standard of care; that the complained of conduct caused damage or loss to the defendant; and that the loss was not too remote. Note that contributory negligence or voluntary assumption of risk on the part of the plaintiff might affect the outcome. 15. Explain the role of the Donoghue v Stevenson and Ann’s cases in determining duty of care. Answer: In the case of Donoghue v Stevenson (the snail in the ginger beer case) the court held that the test for determining whether a duty was owed was to determine whether a loss or injury to the plaintiff was reasonably foreseeable by the defendant. This has been modified to a limited extend by the Ann’s case test which adds a second part to the question and asks whether there is any good policy reason to reduce or modify that duty 16. Explain what is meant by strict liability and when it might be imposed on an occupier of property and how has the standard of care imposed on occupiers been modified by statute?

Chapter 2 – Torts and Professional Liability

Answer: Strict liability means that the defendant will be liable no matter how careful he was. The rule in Rylands v. Fletcher imposes strict liability on an occupier of property who stores something dangerous on that property and it escapes causing injury or loss to a neighbour (see footnote 20). The primary effect of occupier liability statutes is to change the obligation owed to people using the land with permission (licensees). An occupier owes a duty to take reasonable steps to protect those using their property whether they are there for a business purpose (invitees) or there simply with the occupiers permission (licensees). The duty owed to a trespasser is often increased as well, although it remains minimal in most cases. 17. How have the principles of contributory negligence and voluntary assumption of risk been modified in recent times? Answer: The presence of contributory negligence on the part of the plaintiff used to be a complete bar to recovery, but now by statute the court must apportion the loss between the parties on the basis of what portion each contributed to the loss. Voluntary assumption of risk used to simply refer to the plaintiff putting themselves in harms way, but now it must be shown that they have voluntarily assumed not only the physical risk but the legal risk as well. 18. Explain how the problems with remoteness in a negligence action have been substantially resolved in recent times. Answer: The approach taken today is to apply the two step test used in the Ann’s case. That is to determine the degree of proximity - reasonably foreseeability test, and then determine whether there is any good reason – based on social policy considerations, to reduce or modify that duty. 19. If I were to carelessly injure the hand of a musician, on what basis would damages be determined, given the victim’s occupation? Answer: We must take our victim as we find them. The damage or loss of a concert pianist would be much greater than a normal person and we are responsible to compensate for that greater loss. 20. Why are manufacturers usually sued for negligence rather than for breach of contract? Why is an action in contract preferable for the victim? Answer: The victim of a manufacturer’s negligence is normally the consumer and normally there is no contract between them, the product having passed through a retailer. In those few cases where the manufacturer sells directly it is better to sue in contract since there is no need to demonstrate fault, only that the product caused the damage.

Chapter 2 – Torts and Professional Liability

21. Explain when a professional’s liability will be based on contract and when it will be based on negligence. How is the standard imposed with respect to negligence determined? Answer: If the person suing is the actual client of the professional, the relationship will be primarily contractual and the action can be brought in contract. Where the expectations are not specifically spelled out in the contract a claim alleging “professional malpractice” often requires the determination of whether the professional has acted within an acceptable standard, and the test to determine an acceptable standard will be the same as that used in a negligence action. If the person suing is not the client, as would be the case where investors sue because of an auditor’s mistake, then the action has to be based on negligence since there is no privity of contract between the parties. 22.

Explain what is meant by fiduciary duty and when such a duty arises.

Answer: A fiduciary duty means that one person owes an obligation to the other to act in the best interests of that person to the extent of putting their own personal interests second. Usually the duty of a fiduciary is imposed where one person is in the service of the other in such a way that there is a great deal of vulnerability if there is any wrongdoing. Agents owe fiduciary duties to their principals, and that applies in employment, corporations, partnerships and other situations where an agency relationship exists. 23. Explain the nature of the following torts: deceit, product defamation, inducing breach of contract, passing off, trespass to chattels, and conversion. Answer: Deceit involves knowingly making a false statement (see fraudulent misrepresentation). Product defamation involves someone, usually a manufacturer or seller, making false and damaging claims with respect to a product produced by another (usually a competitor). Inducing breach of contract often involves one employer persuading an employee to leave his employment and work for the new employer breaching his contract of employment in the process. Passing off involves a business producing a product or service in such a way as to lead the consumer to believe they are dealing with another well-known business. This is often done by using a similar logo or name. Trespass to chattels includes any kind of damage or interference intentionally done to tangible, movable goods belonging to someone else. Conversion is where one person takes goods belonging to another as their own. A conversion action is brought by the proper owner to recover those goods.

Chapter 2 – Torts and Professional Liability

Questions for Further Discussion 1. Individuals are sometimes convicted of a crime and then sued in tort for the same conduct. Is it fair or just for one person to face trial twice for the same thing? Comment: It is important to point out the difference between a crime and a civil tort action. It is through a tort action that the victim receives compensation from the wrongdoer. It is also important to point out that a different standard of proof applies. It is much more difficult to prove that a person has committed a crime. As for the question of whether it is fair or not, that depends on the point of view of the those discussing the question, but the answer should be viewed from the perspective of the objectives of the criminal law compared to what society views as the purposes of a civil action. Certainly the differences in the approach and difficulty of proof should be taken into consideration. 2. Is the reasonable person test appropriate for determining what standard of behaviour should be imposed in a negligence action? Would it be more appropriate to determine negligent conduct on the basis of the average person or some other test? Comment: The argument is that society is served by demanding a higher standard of behaviour from individuals than mere average when determining fault and who should be held responsible for injuries and losses suffered. In a negligence action it must first be established that some injury or loss was suffered. That means that someone will have to bear the loss. The question then is who should be responsible: the victim or the person who caused that injury? When looked at from the point of view of determining which person must bear the loss, the victim or the person who caused it, it is much easier to accept the higher standard of fault imposed with the reasonable person test. In fact the discussion will often go further and ask whether merely establishing that a person caused the loss of another should be enough no matter how careful they were. This is the argument for strict liability 3. In Canada when someone produces a defective product or performs an imperfect service, he or she must be shown to have been careless—to have fallen below a community-established standard of behaviour (the reasonable person test)—before he or she can be found liable for negligence. When a person is suing for breach of contract, it is unnecessary to establish fault; the breach is enough. Consider whether the requirement to establish fault where someone’s conduct causes another injury ought to be abandoned in a tort action. In other words should it be enough to show that one person caused the injury for him or her to be liable? Comment: This question is an extension of the one above but directed specifically towards product liability. Should the seller or producer of a defective product be responsible for any injuries or loss caused by the defect whether they can be shown to be careless or not? Should they be held strictly liable for loses or injuries caused by the product? This is a good opportunity to point out the difference between contract law and tort law. As well, this is a good opportunity to show how legislation is often

Chapter 2 – Torts and Professional Liability

introduced to change the standards imposed. This is common in product liability situations. It is also a good opportunity to point out how in some situations it can be very difficult to show that one of the parties was indeed careless. Although res ipsa loquitur is no longer good law in Canada, the Supreme Court did point out that they could draw the same conclusion on the basis of circumstantial evidence. 4. Freedom of expression has been guaranteed in our constitution. Yet when people criticize public officials and other public figures, they can be sued for defamation; even if they believe what they say is true. Do you think we should adopt an approach similar to that in the United States and take the position that it is more important to have a frank debate with respect to such public matters, a debate free of the chill imposed by the threat of legal action? Should the protections of privileged communications be applied to all such discussions of matters of public interest, whether the statements are accurate or not? Should the media enjoy special protection in such matters? Comment: This is a very controversial problem and can lead to a heated discussion. Media people feel strongly that they are performing a public service and that anything of public interest is fair game. Most strongly believe that they should be exempt from defamation actions. The threats of being sued for defamation, according to these people, creates a libel chill, in effect suppressing a fundamental aspect of our democracy, the freedom of the press. The US has taken the position that the press must be free to report on public matters including matters relating to public officials and even people who are simple public figures. Canada and Australia, for example, have rejected that approach and consider defamation laws a reasonable limitation on freedom of the press and freedom of expression. It is important to discuss the balance between the public’s right to know, the press’ so called duty to report, and an individual’s right to protect his reputation when wrongly attacked. Cases for Discussion 1. Lewvest v Scotia Towers Ltd. et al. (1981), 126 D.L.R. (3rd) 239 (Nfld. Supreme Court Trial Div.) Scotia Towers Ltd. was constructing a building in St. Johns, Newfoundland, and in the process a crane they were operating often swung over the adjoining property owned by Lewvest. Lewvest had not given permission for such an intrusion and sued. Explain the nature of Lewvest’s complaint, the arguments on both sides, and the appropriate remedy if the action is successful. Decision: Lewvest would frame their complaint as a trespass to land and seek an injunction. In the actual case the plaintiff would save about half a million dollars by so trespassing but the judge held that property rights are sacrosanct and issued the injunction. Lewvest owned not only the land but what was above it. This might be limited to some extent with air travel and the like but certainly they had a right to at least this much and the defendants were trespassing. Because property rights are so important the

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balance of interest did not enter into the matter. The defendant had to negotiate with the plaintiff otherwise they were enjoined from this trespass. 2. Resurfice Corp. v. Hanke 2007 SCC 7, [2007] 1 S.C.R. 333 (S.C.C.). Hanke was the operator of an ice-resurfacing machine and was filling it with water when an explosion injured him. The water tank and the gasoline tank were similar and located in close proximity and he made the mistake of filling the gasoline tank with water from a hose. When the water filled the tank, the gasoline escaped and an overhead heater ignited the resulting fumes. He sued the manufacturer and distributor of the machine for negligence. Explain the arguments available on both sides and the likely outcome including the calculation of damages, if appropriate. Would it make any difference to your answer to know that Hanke testified that the two tanks did not confuse him? Decision: This is a good case explaining how all elements of negligence must be proven in order to establish a successful claim. The Court recognized that the poor design of having the fill caps for two similar looking tanks in close proximity could lead a reasonably competent person to make the mistake Mr. Hanke did. However, in this particular case Mr. Hanke was fully aware of the difference between the two tanks despite the close proximity of both fill caps and it was solely his own carelessness that caused him to mistakenly fill the gas tank with water. As such, his claim was dismissed as the design “flaw” was not the cause of the accident. 3.

Kralik v. Mount Seymour Resorts Ltd. 2008 BCCA 97, 78 B.C.L.R. (4th) 313.

Mr. Kralik was skiing on Mount Seymour when he fell from a ski lift. He was about to get on the chair when he found ice on it and tried to remove it as the chair moved onto the boarding ramp. As it started to leave, he grabbed onto the chair, but realizing he couldn’t get on he let go and in the process fell about three meters, causing him serious injury. There was a lift attendant present whose job was to ensure that the skier mounted the chair properly. Kralik sued claiming that the lift attendant had failed in his duty and that the employer was also liable. Explain what arguments the defendants could raise, and indicate the likely outcome and how damages would be calculated if appropriate. Decision: This case provides a good contrast to the Resurfice case noted above. The Court rejected the resort’s suggestion that Mr. Kralik was entirely responsible for his mishap as he failed to pay attention to the moving chair and that was the sole cause of the mishap. Instead, the Court ruled that both Mr. Kralik and the lift attendant shared legal responsibility for the accident occurring: negligence by the lift attendant in not keeping reasonable watch on riders such as Mr. Kralik and contributory negligence by Mr. Kralik for not paying sufficient attention to the moving chair as he tried to remove the ice. As both parties appeared to be equally “at fault”, Mr. Kralik’s damages were reduced by 50%. As Mr. Kralik’s injuries caused him “pain and suffering” and a loss of income due to his absence from work while recovering, the amount awarded for these two losses were reduced accordingly.

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4. Bruce v. Coliseum Management Ltd. (1998) 56 B.C.L.R. (3d) 27, 165 D.L.R. (4th) 472 (B.C.C.A.) Bruce went to a bar. After a friendly tussle with his friend, the doorman asked him to leave, as he thought the two friends were fighting. The doorman escorted Bruce out and at the upstairs exit Bruce prevented the doorman from closing the door. Bruce was quite abusive and eventually the doorman gave him a push that was hard enough to throw him off balance. Bruce fell down the stairs and suffered a serious injury. In this action Bruce is seeking compensation for his injuries from both the doorman and his employer. Explain the nature of his complaint, the arguments on both sides, and his likelihood of success. What factors should be taken into consideration in calculating what damages, if any, should be paid? Decision: The Court found that the doorman was within his power to restrain the defendant but that he used excessive force causing the injury. In assessing the damages the court held that the plaintiff's actions had provoked the use of the excessive force and this must be taken into consideration to reduce the award of both special and general damages. The appeal court then used the same principles as with contributory negligence and because of the provocation held the plaintiff 30% responsible for his own loss. 5. Bahner v. Marwest Hotel Co. (1970) 12 D.L.R. (3d) 646 (B.C.C.A.) Mr. Bahner attended the defendant’s restaurant with some friends and ordered some wine shortly before midnight. Unknown to Bahner, the laws then in place in British Columbia required all drinks to be removed from the table by midnight. This meant Bahner and his friends only had about 15 minutes to drink the bottle of wine which had been opened by the waiter. When Bahner learned this, he refused to drink or pay for the wine, although he did pay for the rest of his meal. When he proceeded to leave, a security guard told Bahner to remain in the restaurant and to wait until the police arrived. The situation was explained to them and they arrested Mr. Bahner who spent the night in jail. He sued both the restaurant as well as the police for false imprisonment. Explain the likely outcome. Decision: The Court held that two separate false imprisonments had taken place. The first was by the hotel when they refused to let Mr. Bahner leave. Because he had been told he had to stay and wait for the police and had submitted to that demand that constituted an imprisonment. It was false since at best there was a civil dispute in the form of breach of contract with respect to price of the bottle of wine. No crime had been committed. The second imprisonment took place when the police came, heard what happened and instead of releasing Bahner arrested him and he was kept overnight in jail. They did not have reasonable grounds for arresting him since what had taken place was clearly explained to them and they should have known that since no crime had taken place he should not have been arrested.

Chapter 2 – Torts and Professional Liability

Sample Examination Questions Multiple Choice Questions 1. Jim was assigned to a different workroom at the factory. During the day he became increasingly upset with one of his new co-workers, Mr. Saur, who criticized everything he did. After several hours of this, Jim said, "I could do a little better in here if you kept your mouth shut." Saur answered, "you young @#$%%, you make me sick," and with that he intentionally knocked over a machine that would have hit Jim if he hadn't jumped out of the way. Jim picked up a paper cup of water and threw its contents at Saur saying, "cool down, old man." Some of the water hit Saur who then ran over and hit Jim hard with a piece of pipe. Charlie, another worker, grabbed Jim by the hair and pulled him out of the room, away from Saur. On these facts, which of the following is true? a. Jim could not sue Saur for assault because Jim was not hurt by the falling machinery. b. If Jim sues Saur for battery, Saur could defend successfully on the ground of self defense. c. If Jim sues Saur for battery, he will have to prove his case “beyond a reasonable doubt". d. If Saur sued Jim for battery, Jim could defend successfully on the ground of provocation. e. Charlie could be sued successfully for battery even though he was acting in Jim's best interest. Answer: E 2. A seven-year-old boy followed his dog into Mr. Howe's backyard. He fell into a large hole dug by Mr. Howe in preparation for a tree that had been ordered. The boy broke his arm in the fall. At the hospital the boy was treated by a doctor employed there for four years. The doctor did not set the boy's arm because he made a mistake in reading the xray. Because the arm was not treated correctly, it healed improperly. When the boy kept complaining, his mother took him to their family doctor who discovered the error. The boy had to have his arm rebroken so that it could be set properly. On these facts, which of the following is true? a. The owner of the land owed no duty of care to the boy or anyone else on his property without his permission. b. The case law that developed over hundreds of years on the duty of care owed by occupiers of land has priority over any subsequent legislation on the point. c. The doctor owed a duty of care to the boy but he only had to meet the standard of care expected of the average man. d. The hospital, not the doctor, would be solely liable for any harm suffered due to the negligence of a doctor on the job.

Chapter 2 – Torts and Professional Liability

e. In an action against the land owner, if the boy were found to be partially at fault for his injury, the court would apportion the award of damages as it apportioned the fault. Answer: E 3. A person could be liable for the tort of trespass: a. If, in the middle of the night, he was carried onto the neighbour’s property and thrown in their pool. b. If he lost control of his bike and accidentally went onto his neighbours property and into their pool. c. If he stood in the lane and threw a tire in the pool. d. For swimming in the pool with the owner’s permission. e. For delivering a package to the owner at pool side as instructed by the owner. Answer: C 4. Beth and Alan had just left Logan Drugs Ltd. when they were stopped by the store detective who told them he was going to detain them until a policeman came to charge them with theft for stealing a radio. In fact, nothing at all had been stolen by anyone. Beth was upset, felt compelled to wait and did wait. Alan, however, just walked away and left on a bus. On these facts, which of the following is true? a. Because the detective did think a theft had taken place he could not be successfully sued. b. Because the detective wanted to hold them both, both Beth and Alan could sue him for nuisance. c. Because there was no crime committed, both Beth and Alan could sue the detective for false imprisonment. d. Beth could successfully sue both the store detective and Logan Drugs, Ltd. e. Alan could sue the detective for false imprisonment but not Logan Drugs, Ltd. Because only the detective committed a tort, not Logan Drugs, Ltd. Answer: D 5. After the McLeans filled their swimming pool, recently built in their backyard, swarms of bees came regularly for water. The bees stung everyone including the dog and made it impossible for the McLeans to enjoy the use of their pool. Unknown to the McLeans when they had the pool installed, their neighbour Springborn had bee hives on his property. On these facts, which of the following is true? a. b. c. d.

McLeans have an action against Springborn for nonfeasance. McLeans have an action against Springborn for nuisance McLeans have an action against Springborn under the occupier’s liability act Both b and c are true

Chapter 2 – Torts and Professional Liability

e. Springborne would successfully use the defence of absolute privilege. Answer: B 6. Paul invited several friends over to celebrate Ann's birthday. About an hour before the guests arrived Paul bought some sparkling wine and put it in his refrigerator. When all the guests were assembled, Paul lifted the chilled bottle of wine from its gift box. Before it was completely out of the box, the bottle exploded sending glass in all directions. The glass cut Paul's hand and also the eye of one of his guests, Joan. No one else was hurt at all. Assuming all these facts could be proved, which of the following is true? a. Because Joan did not buy the wine, she has no cause of action against anyone. b. Joan could sue Paul successfully for the tort of negligence for buying and serving sparkling wine. c. All the guests, including Joan, could successfully sue the manufacturer for negligence; they need only prove that the explosion was the fault of the manufacturing process. d. If Joan sued the manufacturer for negligence, the court could rely on circumstantial evidence to determine negligence on the part of the manufacturer. e. A manufacturer owes a duty of care only to its customers, the ones paying for the product. Answer: D 7. A truck was driven right into the family room of a home causing $14,000.00 worth of damage. The driver was impaired so the owners called the police. The driver was arrested and charged with an offence under the Criminal Code, convicted and sentenced. Which of the following is false? a. In the criminal proceeding, the prosecutor had to prove the case beyond a reasonable doubt. b. In the criminal action, the Crown, not an individual, is taking the action against the accused. c. The owners cannot sue the driver in a civil action because he has been convicted in the criminal action and the same behaviour cannot be subject matter of both types of actions. d. In a civil action, the plaintiff must prove his case on the balance of probabilities. e. A civil action is a private action in which the plaintiff's primary purpose, generally, is to seek compensation. Answer: C

Chapter 2 – Torts and Professional Liability

Short Answer Questions 1.

Joe was drunk driving his car when he saw Sam on the side of the road hitch-hiking. Joe stopped, opened the door and offered Sam a lift. Sam got in despite the fact the he could smell liquor on Joe's breathe. Subsequently, Joe was in an accident and Sam was injured. Sam has sued him for negligence. Indicate what likely defence Joe would use in these circumstances and whether it would be successful?

Answer: Voluntary Assumption of Risk and it would not be successful, because in these circumstances Sam assumed the physical risk but not the legal risk. There is no indication by Sam in these circumstances that when he got into that car he was absolving Joe of responsibility for any injury that might result. 2.

Mary was driving down the road when Sam came out from a side road, went through a stop sign without stopping and struck the side of her car. Upon later examination of Mary's car, it was determined that the brakes were worn down beyond the point of safety. Sam sued her for negligence. Explain the likely result?

Answer: If Mary didn't notice Sam and didn't touch the brakes than her poor brakes had absolutely nothing to do with the accident and did not cause it. It was Sam's negligence that caused the accident by going through the stop sign. If, however, she did see Sam coming through the stop sign and was unable to stop because of her defective brakes she at least contributed to the accident by her negligence. 3.

Joe was driving his automobile when Sam came from a side street, went through a stop sign without stopping almost causing an accident. Joe swerved to avoid and was successful in doing so. He wrote down Sam's license number, and sued Sam for his negligent driving. Indicate the expected result?

Answer: He will fail because there was no material loss as there was no collision. 4.

Explain how the standard of care imposed varies when particular expertise is involved (e.g. a doctor)?

Answer: The reasonable person test is really the reasonable person in the circumstances. Therefore, the standard imposed with medical malpractice is what a reasonable doctor would have done in those circumstances. With other professions the question becomes what would a reasonable accountant or reasonable plumber or electrician have done in the circumstances.

Chapter 2 – Torts and Professional Liability

Explain how the courts determine whether a duty of care exists in a negligence action?

Answer: The test of reasonable foreseeability applies: that is, could a reasonable person have anticipated that his conduct could cause harm to another. If the answer is yes, the duty exists. Note however that today because of the Ann's case there may be some factors to reduce or alter the nature of that duty. 6.

Following a broadcast on the TV station the night before about a councilman having been pulled over for drunk and driving, Joe, a political cartoonist, drew a political cartoon of a local city councilman, obviously drunk and with his clothes in disarray having difficulty walking down a straight line on the road with a sober police officer looking on. This was published the next day in the paper for which Joe works. The city councilman involved had disagreements with Joe in the past and intensely disliked him. It turned out that the story published by the TV was an error, but the city councilman chose not to sue the TV reporter and the station, rather he sued Joe for defamation. What would Joe's best defence be and indicate the likely outcome?

Answer: Joe's best defence would be fair comment. Unfortunately for Joe, the fact upon which the comment or opinion is made must be correct and here it was not. As such, he would be liable for defamation. It doesn't matter that the city councilman chose to sue Joe instead of the TV station, he has that right. It would be no defence for Joe that the city councilman was motivated by malice against him because the city councilman was defamed. 7.

Will anything short of complete restraint amount to imprisonment?

Answer: Yes, when one person surrenders to the control or authority of another voluntarily thinking that they have no choice, an imprisonment has taken place even though there is no physical restraint. 8.

Joe wandered onto Sam's land not realizing that he crossed the property line. In the process he trampled Sam's prize rose bush. Sam found him there and sued him for trespassing. Explain the likely outcome?

Answer: It is no excuse to say that you didn't know that you were on the other person's land. So as long as you intended to be where you were, it is trespass if you were on another's land without authority. Joe is a trespasser and liable for the damage. 9.

When a doctor treats or operates on a patient, explain why that patient cannot sue for battery?

Answer: The patient has consented to the procedures; therefore, it is not actionable.

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10.

Explain what is meant by vicarious liability and when it is available?

Answer: An employer can be held responsible for the acts of an employee committed during the course of the employment. This is referred to vicarious liability. An employer is only responsible for those acts of an employee committed during the course of the employment. Essay Topics 1.

Explain what must be established in order to succeed in a negligence action.

Discuss how legislation has impacted the field of negligence.

Indicate why the Donoghue v. Stevenson case (the snail in the ginger beer bottle) was so important in the development of negligence law.

Discuss the position of a doctor when faced with a patient refusing life saving medical treatment.

Discuss the position of a political cartoonist in terms of defamation law. Consider the conflict between public interests in this kind of dispute.

Discuss the various different kinds of remedies that are available in tort actions, and in your answer, discuss any limitations on the availability of those remedies.

Instructor’s Manual Chapter 3 Formation of Contracts Teaching Suggestions I usually devote about 2 to 3 hours to the formation of contracts and start out by asking the class how many of them have entered into a contract in the last few days. I look at those who don't raise their hands and ask one with a soft drink bottle or cup of coffee where they got it. It is a good way to get across how extensively contract law is involved in both our business and personal lives and forms the basis of our consumer society. I first define what a contract is indicating that it is an exchange of promises or commitments enforceable in court. I emphasize the “enforceable in court” part. I then list the ingredients necessary to form a contract: consensus (offer and acceptance); consideration; capacity; legality and intention (taking a few moments to explain each one). I mention writing here to emphasize that it is not a requirement for a contract to exist. I also explain the terms void, voidable, unenforceable and illegal with respect to contract law and then go through each ingredient in some detail. I look at consensus by pointing out that an offer is a tentative commitment that must contain all of the essential terms necessary to form a contract. Some of these terms or the whole contract can be implied but if it is clear that some have been left to be agreed upon later there is no contract. There is no such thing as a contract to enter into a contract. The basic things that must be agreed upon are usually “parties, price and property” and anything else that the parties have indicated is important. At this stage I also distinguish between an invitation to treat and an offer. I go over the Pharmaceutical case pointing out how I think the judge's reasoning was wrong, but that it has been accepted as good law making goods displayed on a shelf in a self-serve situation an invitation rather than an offer. I point out that advertisements, catalogues and displays in stores etc. are invitations not offers. I point out that an offer must be communicated by explaining that you can't accept an offer you don't know anything about. In fact all terms must be communicated and you are not bound by terms you don't know about or that haven't been properly brought to your attention. I then discuss exemption clauses and the ticket cases. I also point out that it is no excuse to not have read the document. The test is not whether you have read it but whether you have been given a reasonable opportunity to review the terms. If you don't bother to read such a document and sign it usually that is your problem. I discuss contracts where the terms cannot be changed: i.e. “standard form contracts”. Contract law is based on a bargaining model and the assumption that both parties are in an equal bargaining position and these types of contracts are inconsistent with that model. Hence the courts interpret any ambiguity in favour of the party disadvantaged by the term. I then go over what causes an offer to lapse before acceptance. The offer may end with the expiration of a specified time limitation or where there has been no acceptance within

Chapter 3 – Formation of Contracts

a reasonable time. It will also end with a revocation, a rejection, or a counter offer. I point out that an offer will not lapse simply due to the sale of the subject of the offer. It will only lapse upon sale if the offeree has notice of that sale before acceptance. I also use the Dickinson v. Dodds case here to illustrate this point. It is an old case but lends itself nicely to teach when an offer lapses and can also be used to introduce the concept of consideration and even what an option is. The case also shows how a revocation can take place by conduct (the sale of the item) providing the offeree has notice. The examination of acceptance is much simpler. The offeree must simply give an indication of a willingness to be bound by the offer and communicate that to the offeror. Note that where a different method of acceptance is specified, such communication may not be required. The general rule is that an acceptance is effective and the contract formed when and where the acceptance is communicated to the offeror. I point out that the post box rule is an important exception. The rule states that where it is reasonable to respond by mail the acceptance is effective when and where sent. I emphasize that the reason for the rule was delay and uncertainty resulting from communication over long distances. Today that is no longer a problem and so there is no need to extend the rule to modern forms of communications, although there are cases extending the rule to situations where couriers are used. Certainly on the basis of the Entores case it will not apply to fax (which is very similar to a telex) and likely not to internet communications either. I also emphasize that the rule does not apply to all acceptances sent by post, only where that method of response is reasonable. I refer to the Henthorne v. Fraser case here that establishes that principle. I also use that case to show that the rule only applies to an acceptance not to a revocation sent by the offeror. Using the same reasoning I argue that it is also likely that the rule will not apply to a rejection or counter offer. The post box rule is an exception only to the requirement that an acceptance be communicated. Under the topic of consensus I take the time to explain, if I haven't already done so, the difference between bilateral and unilateral contracts. Next I look at consideration. Usually the rule is stated as the requirement that both parties get some benefit out of the deal. But I find it better to approach it from the point of view that both parties must pay a price. What benefit is received is often not clear but it is usually quite clear what price (or what commitment) is being made. In dealing with the concept of consideration, I point out that a one-sided promise or gratuitous promise is not normally enforceable. At this stage I talk about promissory estoppel. It is a very difficult concept to get across, and may not be worth the effort, but if the students can grasp it they understand consideration. Firstly, I point out that promissory estoppel never comes up where there is consideration on both sides. There must be a one-sided promise that the promisor is reneging on. Secondly, promissory estoppel can only be used as a defense and not as a basis to sue the other party for failing to live up to that promise, and it will be a rare circumstance where the problem will arise. There must be a pre-existing right, usually contractual, that the promisor is canceling or modifying by that promise, and then for some reason decides to renege on that promise and tries to enforce the pre-existing rights that were canceled by the promise. There has

Chapter 3 – Formation of Contracts

to be a pre-existing agreement between the parties with one party promising not to enforce his rights under it who then changes his mind. The key to understanding promissory estoppel is that it cannot be used as a cause of action but only as a defense (as a shield but not as a sword) I also look at situations where a person demands more to do something he is already obligated to do. For example, a contractor has an agreement to build a house by a certain date and then falls behind and asks for more to finish it on time. There is no consideration (or further value) given for the extra payment, since he has only promised to do what he is already legally obligated to do. It is also important to deal with the situation where someone takes a lesser payment in full satisfaction of a debt. This normally would not constitute consideration for the same reason, but by statute, if the money is actually taken such a transaction is binding on the parties. Also it is important to point out that the consideration promised must be specific. “Some money” or “a few dollars” will not constitute consideration. I then point out that the stated consideration must be legal and possible. Students sometimes have difficulty with past consideration. Past consideration is no consideration because the consideration has already been received before the agreement and so there is no bargain and no exchange of consideration. I also deal with the use of a seal. The document must be sealed by the person making the promise, and when such a seal is present there is no need to show consideration on both sides. An exception to the requirement of specific consideration being agreed to is where services are requested. In the absence of a prearranged payment amount the recipient of those services must pay a reasonable amount for them. The principle is called quantum meruit. If someone does gratuitous work for you causing you loss, they will not be liable under contract law but may still be liable for their shoddy work under the tort law of negligence. The next topic is capacity. I live in B.C. and the law of infancy is to some extent different from the rest of Canada. All contracts with infants here are unenforceable even those for necessities and beneficial contracts of service. The exceptions are those made binding by statute such as student loans. In other provinces these contracts are voidable except for necessities and beneficial contracts of service, which are binding on infants. I also explain how an infant can seek a court order for capacity to enter into a contract and that when they ratify contracts after becoming an adult they are bound as if made as adults. When an adult co-signs or guarantees an infant’s contract the adult is bound. An infant may not be bound by contract but is responsible for his or her torts. Note that the adult can’t get around the protections afforded to the infant by suing in tort instead. To escape a contract on the basis of insanity the person must show not only that they were insane to the extent that they didn't know what they were doing, but also that the other person was in a position where they knew or ought to have known of that insanity. Also, a person must repudiate within a reasonable time of regaining their sanity. The same principles apply to intoxication. I usually don’t have time to deal with the other areas that may come up here such as diplomats, statutory organizations and aboriginal people except to mention that they also may have capacity problems with respect to contracts they are involved in.

Chapter 3 – Formation of Contracts

When I look at the topic of legality it is generally obvious that an agreement that involves criminal or other illegal activity is generally not a contract at all. I also point out that this may also apply to things that while not strictly illegal are considered against public policy (such as prostitution). It is necessary to look at the statute, if one is involved, and determine what it says about the legality of the contract and remedies. When the object is not to control such activity but to simply gain income, the contract is usually binding despite the statutory prohibition. I look at the kinds of things covered such as crimes and torts, immoral acts, the obstruction of justice, contracts to promote litigation, and contracts to injure the state or public service. When looking at bets and wagers I point out the difference, the social changes in the law with respect to gambling and take a look at insurance. This is not gambling because when the insured against event takes place there is a loss and the insurance simply compensates. There is in no windfall. I take a longer look at agreements in restraint of trade. These are okay providing they are designed to protect some legitimate business interest and go no further than reasonable in doing so. I also usually introduce the Competition Act at this point. Finally, I look at the topic of intention. I deal first with the presumption that there is no intention to be bound with a domestic agreement and the opposite presumption with a commercial agreement. I also point out that these presumptions can be rebutted with appropriate evidence. In other situations the court will often apply the reasonable person test to determine whether there is an intention that legal consequences will flow from an agreement If I have time I look at the Statute of Frauds in some detail, pointing out how it has been modified over the years and varies considerably from province to province. I emphasize how it is always a good idea to put any agreement in writing and then look at what must be evidenced in writing in my jurisdiction, what happens when it is not and that part performance will also satisfy the requirements of the Statute of Frauds. Chapter Summary Contract: an exchange of promises enforceable in court Consensus may be implied from conduct of the parties but offer and acceptance are usually required Offer Offer and acceptance leads to agreement Invitations do not create legal obligations An offer is a tentative commitment containing essential terms Offer/contract need not be in writing An agreement leaving terms to be negotiated later is not a contract Exemption clauses must be brought to the other party’s attention Offer will end: - At end of a specified time - At end of reasonable time - Upon death or insanity of offeror

Chapter 3 – Formation of Contracts

- Upon rejection - Upon counteroffer. Selling item does not end offer Option keeps offer open One-sided contracts controlled by statute Acceptance Acceptance is a commitment by the offeree to terms of offer Acceptance must be complete and unconditional. General rule: acceptance is effective when and where communicated Acceptance may be by specified conduct Acceptance may be by performance (unilateral contract) No acceptance by silence Exception: Where use of mail is reasonable, acceptance is effective when and where posted Post box rule will not apply where a fax is used Post box rule only applies to an acceptance Consideration Exchange of promises / benefits required Consideration need not be reasonable but must be legal, possible, and have some value Both parties must pay a price Past consideration is no consideration Taking less in satisfaction of a debt made binding by statute Where service requested but no specific consideration is specified a reasonable amount must be paid (quantum meruit) Relied upon one-sided promise may be used as a defence Where there is a seal, no consideration is required Capacity Infants not bound by contracts but adults are Infants are bound by beneficial contracts of service and for necessities (but not in B.C.) Infant can ratify when adult Infants liable for their own torts. Parents may be made liable by statute Where one party is insane or intoxicated, there is no contract if the other person knew or should have known of the incapacity Statutory bodies may have limited capacity Diplomats protected. Aboriginal people protected Legality Contracts to commit a crime or other illegal acts are void Insurance agreements require an insurable interest Restrictive covenants must be necessary and reasonable

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Intention Parties must intend legal consequences to result from contract In domestic or social relationships presumption of no intention In commercial transactions there is a presumption of intention Presumptions may be rebutted Formal requirements Writing may be required by statute Statute of Frauds requires evidence in writing in specific situations Sale of Goods Act requires writing in some jurisdictions Where writing is required but absent, the contract is unenforceable. Part performance satisfies writing requirement Questions for Review 1. Explain consensus, its importance in contract law, and how such consensus is reached. Answer: Consensus is the heart of contract law. It refers to the agreement between the parties or the meeting of minds. It is accomplished through the process of offer and acceptance 2. Distinguish an offer from an invitation to treat. Answer: An invitation is part of the negotiation process leading up to the creation of a contract. It merely indicates a desire to start the negotiation process whereas an offer is the first stage in the creation of a contract actually bestowing rights and powers on the offeree. 3.

What must be contained in an offer for it to form a binding contract?

Answer: All of the essential terms. They can be expressed or implied. They include “party, price and property” plus any other terms the parties have chosen to include. 4.

What role does the requirement of writing play in the formation of a contract?

Answer: A verbal contract is as binding as a written one. But it is a good idea to have evidence of it in writing. Note the exception of the Statute of Frauds. 5.

What is an exemption clause and how is it treated by the courts?

Answer: An exemption clause is a contractual term favouring one of the parties, usually limiting their liability. The courts treat such clauses very narrowly, strictly interpreting them in favour of the party disadvantaged by that exemption clause. They give it effect only when it is clear and that both parties have agreed to it.

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Under what circumstances can an offer end before acceptance.

Answer: An offer will end before acceptance by revocation, a counter offer, the expiration of a reasonable or specified time, by a rejection, by the death or insanity of the offeror, but not by the sale of the item to someone else unless the offeree has notice of that sale. 7.

Explain the requirements for an option agreement to be binding.

Answer: An option agreement must be supported by additional consideration and other required contractual elements. It is a sub-contract requiring the offeror to hold the offer open for a specified period during which time he can't revoke it. 8. What is required for acceptance of an offer and how can such acceptance be accomplished? Answer: Acceptance is the response of the offeree to the offer, committing himself to the agreement and creating a binding contract between them. The general rule is that the acceptance is effective when and where communicated to the offeror. 9.

When and where is an acceptance effective?

Answer: An acceptance is effective when and where communicated to the offeror. Note post box rule exception. 10. What is the effect of the post-box rule and when does it apply? To what forms of communications does it apply? Answer: When the post box rule applies the acceptance is effective when and where the acceptance is sent. It applies when it is reasonable to respond by mail, by telegram and perhaps by courier. It does not apply to communication by fax or internet. 11.

When a unilateral contract is involved, how is acceptance accomplished?

Answer: Unilateral contract involves acceptance by performance of the act requested as consideration in the offer itself: e.g. The offer of a reward. 12.

When will an acceptance sent by email or fax be effective?

Answer: An acceptance by e-mail or fax is effective only when communicated to the offeror. 13.

Explain what is meant by consideration and the contract rule associated with it.

Chapter 3 – Formation of Contracts

Answer: Consideration is the price paid or the benefit received in exchange for the promise made by the other party to the agreement. Consideration must be present on both sides for there to be a contract between the parties. 14.

Explain what is meant by past consideration and why the designation is important.

Answer: Past consideration refers to some benefit received before the agreement is made. Because it has already been received, there is no bargain and no contractual obligation. 15. What is the effect in most jurisdictions of a creditor taking less in full satisfaction of a debt? Why? Answer: Taking less in full satisfaction of a debt ends the obligation in most jurisdictions because of the passage of legislation to that effect. 16.

Explain what is meant by promissory estoppel and why it is important.

Answer: Promissory estoppel refers to a one sided promise unsupported by consideration. This would normally not be binding but can be used as a defense when the promising party is insisting on rights that he has given up with that promise. Promissory estoppel can be used as a defense, but not as a cause of action. 17. What is the relationship between a sealed contract and the requirement of consideration? Answer: If a contract is sealed by the parties there is no requirement of consideration. The seal takes the place of consideration 18. Explain the effect of a contract entered into between an infant and an adult on the parties to it. When will infants be bound by their contracts? Answer: The answer to this question depends on the jurisdiction. In B.C. such a contract is unenforceable. In other provinces the contract is voidable. In provinces other than B.C. infants will be bound by their contacts for necessities and beneficial contracts of service as well as for those made binding on them by statute. 19. What must be proved in order to escape liability of contracts on the basis of insanity or intoxication? List other situations where capacity may be a problem. Answer: The person claiming insanity or intoxication must be incapable of understanding the nature of what he agreed to and the other person must have known or been in a position where he should have known of the insanity. Other situations where capacity might be a problem involve statutory bodies such as government agencies, foreign diplomats and to some extent the First Nations people of Canada under the Indian Act.

Chapter 3 – Formation of Contracts

20.

What is required in order for a restrictive covenant to be enforceable?

Answer: For a restrictive covenant to be enforceable it must be brought to the attention of the other party and be reasonable (in effect go no further than necessary to protect a legitimate interest such as the good will of a business). Usually this means that there is be a reasonable time and geographical limitation on the restriction. It must also not harm the public interest. 21.

Explain what constitutes intention on the part of parties to contract.

Answer: In domestic agreements there is a presumption that there is no intention to be bound, whereas in commercial contracts the presumption is that there is an intention to be bound. Both presumptions can be rebutted with appropriate evidence. 22. Explain the provisions of the Statute of Frauds and when a contract must be in writing. Answer: The Statute of Frauds in place in some provinces requires that some types of contracts be evidenced in writing to be enforceable. The provisions vary from province to province but usually require at least that contracts where one person is answerable for the debt of another such as a guarantee and contracts dealing with interests in land (except for a lease for less than three years), be evidenced in writing to be enforceable. Other types of contracts covered in some jurisdictions are contracts not to be performed within one year, contracts where an executor promises to pay the debts of and estate out of his own pocket, agreements in consideration of marriage and the sale of goods over a specified amount. 23. What is the effect if the requirements of the Statute of Frauds are not met? Will anything else other than actual writing satisfy the requirements of the Statute of Frauds? Answer: If the writing requirement is not met the contract is unenforceable meaning that an action cannot be brought to enforce it but that the courts will not assist a party who has performed to get out of it after performance. In most jurisdictions part performance will also satisfy the requirements of the Statute of Frauds. Questions for Further Discussion 1. Consider the creation and use of the post box rule in terms of its original purpose, whether it met that objective, and whether its continued use can be justified today. In your answer consider whether the rule ought to be applied to communications between the parties other than acceptance and to different forms of communications such as email and the internet generally. Comment: The post box rule was originally created to answer a specific problem: the uncertainty created by time delays inherent in communication at distances. Students often think that the post box rule applies whenever the mails are used whether

Chapter 3 – Formation of Contracts

reasonable or not and also for any form of pre-contract communication including rejections, revocation, counteroffers and so on. Lord Denning made it clear in the Entores case that there was no reason to expand the rule to instantaneous means of communications such as telephone or telex (fax and internet) since the uncertainty no longer is present. It is hard to justify the post box rule with anything other than the practical argument of economic necessity created by that uncertainty. When the uncertainty is removed by the availability of instantaneous communication, it is hard to justify extension of the rule to these modern forms of communication other than to say that people are used to it. Similarly, it is hard to justify the extension of the rule to counteroffers, revocations and rejections other than to meet the demand for consistency. This discussion can be used to force the students to appreciate the limitation on the application of the post box rule to only an acceptance, and that only when sent by mail or by telegram and when that form of communication is reasonable. 2. It is arguable that the requirement of consideration in a contract serves no other purpose than to indicate that the parties intend their agreement to be binding. Do you think that the continued requirement of consideration in contract law serves any valid purpose today? What about the separate requirement of intention? Comment: It is arguable that the requirement of consideration in contract law is redundant given the requirement of intention. What is the value of consideration other than to indicate that the parties were being serious? Consider the use of the seal. When that is present there is no requirement of consideration. Why? Because the seal also indicates that the promise was serious. Would it be better to treat both of these things as merely aspects of determining whether the requirement of intention to be bond has been satisfied? The other side of the argument, of course, is that the true nature of contract law is based on the bargaining or marketplace model. This requires the exchange of benefits for a bargain to be struck. Both sides must get something out of the process or there is no bargain. Another important question that can be examined here is whether there ought to be a requirement that the consideration be fair. Students often assume that there is such a requirement when in fact the court historically only cared whether there was some consideration on both sides. Of course this is changing with growth of the principles of unconscionability, undue influence and the requirement of good faith. Perhaps there ought to only be a requirement of intention and requirements related to consideration-- whether its fair, whether there is a seal or any other evidence of intention-- should only be taken into consideration in determining whether the requirement of intention has been satisfied or not. 3. Consider the fact that in most jurisdictions only some forms of contracts have to be evidenced in writing to be enforceable. Many jurisdictions have made important changes to these requirements. What do you think? Should only written contracts be enforceable in court? Should writing ever be required? In your answer consider the costs and use of legal resources as well as whether the purposes of justice in a broad sense are served by your recommendations.

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Comment: Many students start out thinking that a contract must be in writing or it is not a contract and this is one of the first things we have to correct. We are left with the Statute of Frauds that requires some type of contracts be evidenced in writing to be enforceable. The debate is whether or not this requirement can be justified for any type of contract. It is clear that over the years the Statute of Frauds has led to more fraud than it has prevented. The problem is in how it is applied. The court must first determine whether there is a contract or not and then apply the statute. But once it has been established that there is a contract and then to not enforce it because it is not in writing perpetrates a legal fraud. If the court decides there is no contract they never get to the question of whether the Statute of Frauds applies. The kind of things that must be evidenced in writing is also debatable. Most provinces have modified the provision restricting what is covered or repealed the Statue of Frauds altogether. The discussion that should follow is whether there should ever be a requirement that any type of contract be in writing and also what should be the consequence if it is not. 4. People who are insane are given special treatment with respect to the contacts they enter into. If they are so insane they don’t know what they are doing the contract isn’t binding if the other party knew or ought to have known of the insanity. Should the only question be whether there was insanity? Would that be fair to merchants? Why don’t we treat contracts with infants the same way and allow the infant to escape the contract only if the adult with whom they were dealing knew they were contracting with an infant? Comment: This question gets into a comparison of how incapacity with respect to infants and the insane are treated. The question here is, if the person is insane how can there be a meeting of the minds. With an infant it doesn't matter whether the merchant knew they were dealing with an infant or not, if an infant is involved the contract is voidable or unenforceable depending on the jurisdiction. When dealing with insane people, however, if the merchant thinks they are dealing with a sane person and there is nothing to alert them otherwise, the contract is binding no matter how insane that person is. How can the two approaches be reconciled? If a person is sufficiently insane, surely the enforceability of the contract should be in doubt just as it is in infancy. Of course the other side of the argument is the position that it puts the merchant into when dealing with a person who is not obviously insane. Why should the merchant be the one to suffer the consequences? Then again why not be consistent and treat them both the same. In this discussion there is also an opportunity to consider the remedies available. Should the contract be unenforceable, voidable or void?

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Cases for Discussion 1.

Wong v. Lok’s Martial Arts Centre Inc. [2009] B.C.J. No. 1992

Victor Wong was 12 years old when he was injured while participating in a martial arts class. He sued the operators for their failure to protect him, to make sure all participants were properly trained, and to supervise matches and make sure proper safety gear was used. The defendant, Michael Lok, the operator of the facility, responded that there were signs prominently posted in various locations stating that there was some danger of injury and that the operators were not responsible. He also pointed to a waiver signed by Victor’s mother making it clear that if he was injured the operators could in no way be held responsible. It stated as follows: It is expressly agreed that all exercises and treatments, and use of all facilities shall be undertaken by the student’s sole risk. LOK’S HAPKIDO SCHOOL and its affiliated studio’s (Flying Eagle Hapkido, Flying Tiger Hapkido Studio and any other studio’s) shall not be liable for any injuries, past/future medical complications, any claims, demands, injuries, damages, actions or cause of actions whatsoever, including without limitation, those resulting from acts of active or passive negligence on the part of Lok’s Hapkido School. Should Victor succeed in this action? What are the arguments that can be raised by the parties? What do you think should be the outcome of the case? Would it make any difference to your answer to know that Mrs. Wong claimed that she did not read the release? Would it make a difference if Victor did not see the rules or notices around the club? Decision: The case was decided on the issue of whether a parent can validly waive or give up an infant’s right to compensation by executing a waiver on behalf of the child. The martial arts owner strongly argued that a parent could validly do so as a condition for accepting such students for recreational training and activities. As the matter turned out, the Court ultimately decided that in British Columbia the Infants Act prohibits a parent doing so by signing such a waiver. As a result, Victor’s claim was allowed to proceed to trial for determination. (Keep in mind that the fact that Victor’s mother had not fully read the release was of no legal consequence. A party cannot avoid the content of a document by failing to read it carefully.) 2.

Lilly v. Phillips 2006 CanLII 29280 (ON S.C.)

Sandra Phillips won $675,000 in the Cash for Life lottery and her friend Eunice Lilly is claiming half of it. They played together in a bowling league. For years on their weekly bowling night they had jointly shared in the purchase of 50/50 $2.00 lottery tickets and on the few occasions when they had won a small amount they had shared the proceeds. It was clear that the practice to share was only on nights when they were both present for the league play. At the bowling league’s Christmas party in 2003 the league executives decided to use the excess end of year funds (left over from regular registration fees that all members paid) to purchase Scratch to Win Cash for Life lottery tickets and give them out to attendees to encourage attendance. At the Christmas party there was also bowling

Chapter 3 – Formation of Contracts

but it was not league play and was just for fun. When they both attended they both received tickets and at the 2002 party they both won $4.00. Ms. Lilly testified that it was her understanding that if they were to win any large amounts it would be shared. But she couldn’t give any indication of what would happen if one was absent from the party. At the 2003 Christmas party only Ms. Phillips attended while Ms. Lilly went to another party. Phillips accepted a ticket for herself and one for the plaintiff even though she was not there. Ms. Phillips ticket won $676,000. Although there was no specific agreement with respect to the sharing of the lottery win, indicate what arguments could be advanced by both parties and the likely outcome. Decision: The action was dismissed. Even after the defendant had won the jackpot, the plaintiff continued to bowl with her for the remainder of the season without ever mentioning that she thought she was entitled to a share. Essentially there was simply no evidence to support that there was any agreement (expressed or implied) to share in the proceeds of a winning ticket that would apply in this situation. Also it could not be argued that there was any trust relationship created. To do so there would have to be shown an intention and reliance neither of which can be established. Also the plaintiff had made no contribution to the purchase of the ticket and so there was no obligation to share the proceeds. 3. Stone v. Polon 2006 CanLII 24712 (ON C.A.) Stone and Polon were partners in an accounting firm that was dissolved when they both joined a larger firm. Eventually Stone left that firm and this action is brought to settle the accounts between the parties. The matter was submitted to the court and the judge accepted Stone’s calculations as accurate with respect to the early years of the partnership. They could not agree on the calculations for the final years and agreed to submit the matter to arbitration. The arbitrator accepted Polon’s position that all of the accounts, even those dealt with by the courts, should be reviewed. Solon disagreed and withdrew from the arbitration. This action is brought to determine whether Stone was bound to proceed with the arbitration on those terms or not. What do you think? What are the arguments that both parties could raise and the likely outcome of the matter? Did they ever have an enforceable agreement to arbitrate the dispute? Decision: Stone’s legal representatives strongly submitted that it would be improper for the arbitrator to question an earlier legal determination between the parties. In this matter the Court ruled that the arbitrator’s jurisdiction included the power to “go back” and review the calculations for the “early years” despite the fact that those calculations had been viewed as correct in the earlier court proceeding in the Ontario Superior Court. In making this ruling, the Ontario Court of Appeal confirmed that the parties recognized that the earlier ruling by the Ontario Superior Court had left the matters between the parties still unresolved and they clearly wanted the arbitrator to make rulings that would resolve the matter in a complete fashion. As such, despite the earlier ruling on “part of the problem”, the Ontario Court of Appeal interpreted the arbitration agreement as providing the arbitrator with a wide scope of jurisdiction to review all financial aspects between the parties from the outset of the partnership to Stone’s leaving the firm. In doing so, the Ontario Court of Appeal also made it clear that the arbitration agreement was valid and binding despite the controversy between the parties as to its terms as to scope and

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jurisdiction. This is a good case illustrating that parties will be bound by the “objective meaning” of an agreement despite their respective honest but subjective views on meaning. 4. Gendis Inc. v. Richardson Oil & Gas Ltd. (2000) 148 Man. R. (2d) 19, 224 W.A.C. 19, (2000) 9 W.W.R. 1, 6 B.L.R. (3d) 193 (Man. C.A.). The chief executive officer of Gendis and the managing director of Richardson Oil & Gas met and negotiated a deal, whereby Gendis would purchase Richardson’s share of a privately owned oil company for $39 million, plus certain designated incentive payments (Gendis and Richardson each owned 50 percent of that company at the beginning of the negotiations). At the end of the negotiations both men agreed that they had a deal and agreed that Gendis would supply written documents to confirm the deal and add the necessary details. When the written documents were supplied, Richardson refused to sign them and refused to complete the transaction. When Gendis sued, Richardson claimed that what had been agreed at the negotiation session had not been finalized, and there was no intention to create a binding contract at this stage. What do you think? What is the likely outcome? Decision: The court found that a binding contract existed between the parties. They had concluded their negotiation and had agreed on terms. In this situation Richardson was trying to renegotiate and get a better deal, but it had already committed itself and was bound. It will always be a question of fact in these cases as to whether a deal had been struck which was then to be put into a formal written document or whether there was more left to be agreed upon and no contract existed. 5.

Lam v. Fashion Hair Culture Inc. 2007 CanLII 44827 (ON S.C.)

Fashion Hair Culture was a tenant in premises owned by Lam, the current landlord, when a dispute arose about how long they could stay. Lam said they could only stay until March 2007, but Fashion produced a letter between them and the former landlord stating that the tenancy agreement would be extended until 31 October 2010. This letter was not actually signed by the former landlord, just by a representative of the tenant. An application was brought by Lam after March 2007 to have the tenancy terminated and the tenants evicted. Explain what arguments the parties could raise in support of their positions and the likely outcome of the application. Decision: This case aptly illustrates how the Statute of Frauds applies to contracts involving land. The Court ruled that the present landlord (Lam) could not be bound to honor an agreement not actually signed by the previous owner or himself. As well, neither the previous owner nor Lam acted consistently with an agreement extending the tenancy. For example, Lam twice sent back post-dated cheques provided by Fashion Culture attempting to pay the rent past October 2007. As such, the Court ordered the tenants (Fashion Hair Culture) to give up possession of the premises as no proper written agreement extending the tenancy existed.

Chapter 3 – Formation of Contracts

Sample Examination Questions Multiple Choice Questions 1. Martin offered to buy property for $200,000: “Offer to remain open until 5:00 pm Thursday, January 21, 1993”. Which one of the following situations will not cause the offer to end? a. Insanity of the offeree before the offer is accepted b. Martin sells the property to another party before the expiration of the period stipulated and before hearing from the offeree c. A counter offer from the offeree d. Death of offeror e. The offeree has not accepted and the stipulated time has expired. Answer: B 2. Indicate the incorrect statement about consideration. a. In a bilateral contract, the exchange of promises can provide consideration for both parties. b. The common law holds that consideration must be adequate to insure that contracts are fair bargains. c. Consideration is "the price for which the promise (or the act) of the other is bought." d. An altered course of action, e.g. forbearance, may be good consideration. e. In a unilateral contract, the performance of the offeree provides consideration to the offeror. Answer: B 3. Which of the following is false with regard to the intention of the parties to an agreement to enter into a legal relationship? Where appropriate, assume that all the other elements necessary to form a contract are present. a. An intention to be legally bound is a necessary element of a contract; without it there is no contract. b. Since family matters are private matters, an agreement between a husband and wife to transfer property from the husband to the wife could not be a contract even if all the other elements of a contract were present. c. The court will presume there is no intent to be legally bound in social situations. d. Although the court makes presumptions about the intention of parties to be bound, the presumption may be rebutted by evidence to the contrary. e. Parties may expressly state their intention to be legally bound in which case the court need not rely on presumptions. Answer: B

Chapter 3 – Formation of Contracts

4. Requirements of a contract include capacity of the parties to contract, legality, and intention of the parties to be legally bound. Which of the following is false with regard to these elements? a. A restrictive covenant prohibiting one party to the contract from competing with the other is enforceable if it is reasonable between the parties and not contrary to public policy. b. The court can presume the intention of the parties to be legally bound, but a party to the contract can bring forward contrary evidence to rebut the presumption. c. If an adult cannot sue the other party to the contract because he is a minor, neither can the infant sue the adult. d. A seller that contracts with an infant cannot avoid the difficulties of enforcing the contract by suing him in tort instead of breach of contract e. A person with mental incapacity might still be held to a contract even if, at the time of the contract, he didn't understand the nature and quality of his act. Answer: C 5. Which of the following is false with regard to contract law? a. If Henry of Vancouver contracts with Carl of Calgary by mail, an important criterion for determining the place of the contract is the place where the offeror lives. b. An exchange of promises can be consideration adequate to form a contract. c. To form a contract there must be an offer which is accepted unconditionally. d. The terms of a contract must be brought to the attention of the offeree before or at the time of contract. e. If the offeror mails a revocation at the same time that the offeree mails his acceptance, and it is reasonable to accept by mail, the offeror would be bound in contract. Answer: A 6. Which of the following is false with regard to contract law? a. An exchange of promises can be consideration adequate to form a contract. b. To form a contract there must be an offer which is accepted unconditionally. c. A contract for a $50,000 boat does not have to be evidenced in writing to be a valid contract. d. A contract for the sale of land is required to be evidenced in writing e. The parties to a contract can always go to court and have the court declare a contract void if the consideration is not adequate, i.e. fair, even if there is no evidence of fraud, duress, undue influence or mental incapacity. Answer: E 7. If you pay $100 for a 90-day option on property offered at $200,000, which of the following is true? a. You have bought a 90-day period of time within which you may or may not accept the offer of the land.

Chapter 3 – Formation of Contracts

b. With the signing of the option agreement, you have entered into two contracts -- a contract for time and another for land c. You have agreed that you will accept the offer of land within the 90-day period. d. If you do not exercise the option you can get your $100 back. e. The seller of the land can revoke the offer of the land any time before acceptance. Answer: A Short Answer Questions 1. Explain any limitations on the availability of promissory estoppel. Answer: It can only be used as a defense, not as a cause of action. 2. One of the basic precepts in contract law is that any bargain struck must be fair to be enforceable. Explain the accuracy of that statement. Answer: It is only necessary that the consideration involved has some value. It is not necessary that it be fair or reasonable. 3. Explain the nature of the post box rule. Answer: When it is appropriate to respond by mail the acceptance is effective when and where dropped in the mail box. 4. Distinguish between an offer and an invitation to treat. Answer: An invitation to treat is an advertisement or other form of inducement to encourage someone to come and deal or negotiate and has no legal significance with respect to contract law. An offer is a clear indication by one of the parties that they are willing to be bound by certain terms if the other party accepts. The offer is the first stage of the creation of the contract whereas the invitation to treat merrily is the communication process that takes place to bring the parties to the point where one makes the offer. 5. Distinguish between a void and voidable contract? Answer: A void contract never was a contract and the agreement is simply of no effect whereas a voidable contract is a binding contractual agreement but one of the parties has the right to get out of it. Until that right is exercised, it is binding. 6. Just what has to be in writing to satisfy the requirements of the Statute of Frauds? Answer: Some evidence consistent with the existence of the contract, not necessarily the contract itself. Thus a memorandum, a note, or a confirmation etc., would be sufficient. 7. Explain haw an insurance contract avoids being void as a wager.

Chapter 3 – Formation of Contracts

Answer: The insured must have an insurable interest in the thing insured and not obtain a windfall when the insured against event takes place. 8. What must a person establish in order to escape contractual obligations on the basis on inanity? Answer: That he was insane at the time of the contract to the extant he didn't know what he was doing, that the other person knew or ought to have known of that insanity and that the contract was repudiated quickly on regaining that persons senses. 9. Indicate under what circumstances parents are responsible for the contracts entered into by their children. Answer: There is no such general responsibility, only where the child was acting as an agent for the parent will the parent be bound in contract, or where the parent has co-signed or guaranteed the transaction. 10. Indicate what types of contracts are binding on infants. Answer: Necessaries and beneficial contracts of service (except in B.C. where all contracts with infants are unenforceable, except those made enforceable by statute). Essay Topics 1. Explain the principle of promissory estoppel and how it relates to the requirement of consideration in contract law? In your answer explain any limitations on its availability. 2. Explain the Post Box Rule and discuss its relevancy in the modern business world. 3. Describe how infants are treated in contract law in Canada. 4. Discuss how some persons are incapacitated in contract law in various jurisdiction and the justification for such a treatment. 5. Discuss agreements that restrict competition or that are in a restraint of trade and how they are treated in contract law. 6. The purpose of contract law is to give effect to the reasonable expectations of the parties to a contract. Discuss this observation in terms of the five elements that are required for the creation of a legally binding contract. 7. Discuss the Statute of Frauds as it related to contract law. In your answer consider the justification of requiring some contracts to be evidenced in writing and also, how and why the Statute of Frauds has been modified or repealed in several jurisdictions.

Instructor’s Manual Chapter 4

Enforcing Contractual Obligations Teaching Suggestions I usually spend about two hours of lecture time on the subject matter of this chapter and begin with the topic of mistake. I explain first that the mistake involved has to go to some aspect of the contract, not just the effect. For example, you may make a mistake by choosing to purchase a particular home or product and then not like it but that will not affect the validity of the contract. I then point out that there are three types of mistake: shared mistake (common mistake); misunderstandings (mutual mistake) and one-sided mistakes (unilateral mistakes). I find the use of the arrows indicating whether there is a meeting of the minds or not (see text) is very helpful. If a shared mistake goes to the existence of the subject matter the contract is void. For a misunderstanding the court will usually apply the most reasonable interpretation of the relevant terms claimed to be a “mistake” and enforce the contract accordingly. As such, a contract will only be void where the mistake is serious enough and both interpretations are equally reasonable. For one-sided mistakes the doctrine of caveat emptor generally applies. However, if the onesided mistake is so serious as to destroy consensus, the contract will be void. Misrepresentation is a far more important topic. Misrepresentation involves three elements: the misrepresentation must be a false statement of fact; the false statement is made by one party to the other during negotiations; the other relies on that false statement in the sense that the statement induces them to enter into a contract. If the false statement becomes part of the contract terms, it is just another form of breach of contract. The misrepresentation may be innocent, fraudulent or negligent. If it is innocent, the only remedy is rescission; if the misrepresentation is fraudulent or negligent, damages for tort (deceit or negligence) can also be obtained. It is easier to prove innocent misrepresentation since you don’t need to prove fraud or negligence as well. The right to rescission can be lost if the goods have been resold, destroyed or some third party may be disadvantaged by allowing it. Silence can only be a misrepresentation where there is a duty to disclose as in a good faith contract such as insurance. Opinions are not considered a misrepresentation unless given by an expert. I then move onto the concepts of undue influence and duress. I point out that duress involves the use of threats to get someone to enter a contract whereas undue influence involves taking advantage of the control or influence one person has over another because of the relationship between them. I point out that when one of these relationships is present e.g. doctor/patient, accountant/client, undue influence is presumed, meaning that without further evidence to rebut the presumption, the contract may be set aside because of undue influence. The best way to rebut such a presumption is to show that the disadvantaged party received independent legal advice before entering the contract. It is important to point out that with both duress and undue influence the contract is voidable not void. I also mention unconscionable contracts and the growing trend to find a duty of good faith between the parties.

Chapter 4 – Enforcing Contractual Obligations

The next topic is privity of contract. Privity is the concept that explains that only the parties to a contract are able to enforce it. I go back to the Donoghue v. Stevenson case pointing out that the reason Mrs. Donoghue couldn’t sue the café for breach of contract was because her friend bought the contaminated ginger beer and so Mrs. Donoghue was not privy to the contract. After dealing with the basic concept I then go over all of the exceptions and apparent exceptions and look at the Kuehne & Nagel case which shows the trend today to move away from the privity rule. Assignment of contractual rights is an important topic growing out of the discussion of privity. Just as forms of tangible property can be sold so can intangible interests such as claims or rights under a contract. This is called assignment of those contractual benefits, but it is only the benefits or rights that can be assigned not the obligations. The assignment of accounts receivable is a common example of assignment. It is vital to understand that the assignee takes subject to the equities between the parties. This means that the assignee can be in no better position than the assignor. Any defenses that the original contracting party has against the assignor will be available against the assignee as well. As well, if the contract claim is not honoured by the original contracting party the assignee has to go back through the assignor to enforce the agreement. In some situations where the assignment is absolute, in writing and the original contracting party has been given notice of it, the assignment qualifies as a statutory assignment which allows the assignee to enforce it directly so that there is no longer a need to involve the assignor. In relation to this topic I take the opportunity to briefly discuss negotiable instruments here and explain what they are (cheques, bills of exchange or drafts and promissory notes) and also explain the position of an endorser. I emphasize that the difference between assignment and negotiable instruments is primarily when the negotiable instrument get into the hands of a third party. I contrast the position where the holder in due course of a negotiable instrument can enforce the instrument independent of problems with the original deal and point out how the holder in due course of such a negotiable instrument can be in a better position to enforce it than is the assignee of a contractual claim who takes subject to the equities. I also take time to go over the case of Trans Canada Credit. The Trans Canada Credit decision is an old case from a lower court but I find that it nicely illustrates the principle of assignment of contractual rights and contrasts the position of an assignee with that of a holder in due course of a negotiable instrument. It can also be used to illustrate other aspects of tort and contract law including fraudulent misrepresentation, vicarious liability and also can be used to introduce secured transactions. I try to spend the larger portion of the second hour dealing with discharge of contracts and remedies for breach. I first point out that often when we deal with discharge it does not end the obligations of both parties. For example, a breach of condition will discharge the victim but not the breaching party. With reference to discharge by performance it is obvious that when a contract is properly performed the obligations end. But I use this topic as an opportunity to discuss what constitutes proper performance including tender

Chapter 4 – Enforcing Contractual Obligations

of performance and legal tender. I also deal with the topics of substantial performance and breach of warranty and point out that although these situations fall short of complete performance, they don't discharge the victim from their obligations since the failure to perform in both cases is minor. I also go over the difference between breach of a condition and breach of warranty at this stage. Most students think of warranty in terms of product liability and I use this opportunity to show that it more correctly refers to a minor or less significant term of a contract. Substantial performance involves the breach of a major term of the contract (a condition) but in some minor or insignificant way. Discharge by agreement is simply the application of the principle that any contract can be discharged or modified by a subsequent contract. All the elements must be present including consensus and consideration. One of the parties cannot impose changes on the other without their agreement. Nor can a one-sided promise to change the terms of a contract where one party receives an advantage and the other receives nothing or is disadvantaged be enforced. This is a good opportunity to review promissory estoppel. All situations where promissory estoppel can be raised involve a pre-existing obligation that one party gratuitously promises not to enforce. Somebody has a pre-existing contractual right that they gratuitously agree to change or give up and then after the other party has relied on the promise, they change their mind and demand performance of those original contractual rights. If the other party has relied on that promise to forgive the obligation, he can use promissory estoppel as a defense. Note that the promise is being used “as a shield, not as a sword”. Most students don't have much trouble with the concept of frustrating event. However, it is important to show that for a contract to be discharged by frustration some outside unforeseen event out of the control of either party must have made performance impossible or made performance so inherently different so as to change the whole nature of the agreement. This latter part is difficult to get across. It must be clear that just because performance is more difficult or more expensive that will not be enough. It must change the whole nature of the agreement. It is also necessary to emphasize what happens. No longer is the result “let the loss lie what it has fallen”. Rather, various provincial “Frustrated Contract Acts” require payment for any benefit received and where a deposit has been paid it can be apportioned between the parties on the basis of expenses incurred. I also point out that self-induced frustration, where because of one of the party’s actions it is no longer possible to perform, simply amounts to another form of breach of contract. When I’m discussing breach of contract I start with a discussion of anticipatory breach. I point out that a contract can be breached by refusing to perform, by failing to perform or by performing improperly. Again I point out the difference between a condition and a warranty and point out that it is only where a condition, an important term of the agreement, is breached that the obligations of the other party will be discharged. Where a contract is breached the victim is entitled to the remedies discussed below. I point out that a “wrongful” refusal to perform a contractual duty is often referred to as “repudiation”. I

Chapter 4 – Enforcing Contractual Obligations

point out that repudiation can be implied as where one party sells the subject matter of the agreement to another before performance is due. I then point out that more usually repudiation occurs when the breaching party simply notifies the other party that they will not perform. When repudiation takes place before performance is due it is called anticipatory breach and the victim has the choice of continuing to demand performance or accepting the breach (by making other arrangements and taking action against the breaching party immediately). Finally, I explain that the victim is bound by their choice and I usually use the example of some intervening frustrating event that discharges the contract to show the dangers involved with making such a choice, I finish my lecture(s) on this chapter by dealing with remedies for breach of contract. When discussing damages I point out that this is a monetary award designed to compensate the victim of the breach. Punitive damages are normally not available unless there has been some tort such as fraud involved. I also point out the limitation on damages. I explain that damages are confined to what damage or financial loss the parties could reasonably foresee would result from a breach at the time they entered into the contract. This normally excludes unusually high business profit losses that may become known about after the contract was entered into. I also point out that there is a requirement on the victim to mitigate their loss and they will only receive damages so as to compensate them for the loss they would have suffered had they taken reasonable steps to limit those damages. When talking about equitable remedies I use the opportunity to review the creation of the law of equity by the Courts of Chancery and the objective of providing relief from the limitations of the common law. Equitable remedies are treated differently in that the victim must also come with clean hands and without unreasonable delay in bringing the application to the court. Also, the remedy sought must not cause undue hardship to some innocent third party. Specific performance involves an order by the court for the breaching party to do whatever he was required to under the contract, e.g. convey the house or product to the purchaser as the agreement requires. An injunction is an order not to do something inconsistent with the contract such as selling that house or product to someone else. I also look at the process involved in an accounting and review the concept of quantum meruit. Chapter Summary Mistake Parties making the same mistake may destroy consensus Court may correct mistake in recording term through rectification When parties disagree, court will apply reasonable interpretation One-sided mistakes usually have no effect on contract But non est factum can cause void contract if one-sided mistake goes to root of contract

Chapter 4 – Enforcing Contractual Obligations

Exemption clauses Exemption clauses limit liability Exemption clauses are strictly interpreted Misrepresentation Misrepresentation involves false and misleading statements If a false statement is a term of contract, the remedy is to sue for breach False statements that induce a contract are also actionable To be actionable, a false statement must be a statement of fact, not an opinion Silence is not misrepresentation except where duty of good faith or relationship Where misrepresentation is innocent, the only remedy is rescission Damages are not available where misrepresentation is innocent Fraudulent misrepresentation occurs when a person knowingly misleads. Remedy for fraud can be damages and/or rescission Innocent misrepresentation is easier to prove than fraud. Damages also available where misrepresentation was negligent Fraudulent misrepresentation may constitute a crime Duress and undue influence Threats, a form of duress, make the contract voidable Undue influence involves abuse of a trusting relationship making a contract voidable Undue influence presumed in some situations Unconscionable contract when vulnerable people taken advantage of Privity Privity means only the parties to contract are bound by it Privity exceptions: - Interests in land - Trusts - Life insurance Agency and novation do not violate the privity principle Privity rules are changing Assignment Contract benefits can be transferred or assigned to a non-party Statutory assignments can be enforced directly Only benefits can be assigned, not obligations Negotiable instruments Holder in due course must be innocent Holder in due course gets better rights than parties Negotiable instruments take the form of: -Promissory notes -Cheques -Bills of exchange or drafts

Chapter 4 – Enforcing Contractual Obligations

Normally the endorser adds credit to a negotiable instrument Contract ends by performance Contractual obligations can be ended by performance Breach of warranty still considered performance Substantial performance still considered performance Note limited definition of legal tender Except with money, proper tender is considered performance Contract ends by breach Repudiation involves refusal to perform If anticipatory breach occurs, victim can treat contract as ended by breach or demand performance but is bound by choice Contract ends by frustration Frustration ends contractual obligations Frustration involves impossibility of performance or fundamental change Self-induced frustration is breach of contract Frustrated contracts acts require payment for benefits received and the return or apportionment of any deposit Contract ends by agreement Contract can be modified by new contract For modification all ingredients including consideration must be present Note condition precedents and conditions subsequent in contract Remedies Remedy of damages involves money payment Liquidated damages are pre-agreed payments for breach of contract Mitigation requires victim to take reasonable steps to limit or eliminate damages Damages only payable where reasonably foreseeable at time contract entered into Equitable remedies require good behaviour of victim Specific performance requires carrying out original contractual obligation Injunction requires stopping conduct that is breaching a contract Accounting requires disclosure of profits and their surrender to victim Quantum meruit requires reasonable payment for services given Questions for Review 1. Distinguish between a shared mistake, a misunderstanding and a one-sided mistake and explain how a court would deal with each of these problems. Answer: A shared mistake takes place when both parties are making the same mistake. If it is serious enough the contract is void. A misunderstanding is when one person thinks they are agreeing to one thing and the other person thinks the term means something else. The courts apply the most reasonable interpretation of the agreement. If both positions

Chapter 4 – Enforcing Contractual Obligations

are equally reasonable and the mistake is serious enough the contract will be void. A one- sided mistake is where only one of the parties is mistaken about some aspect of the contract. In such a situation the doctrine of caveat emptor usually applies and the person making the mistake is out of luck. 2. Distinguish between innocent, fraudulent, and negligent misrepresentation, and indicate the remedies available for each. Answer: A fraudulent misrepresentation occurs when the person making the false statement knows what he is saying is incorrect. A negligent misrepresentation occurs when the person thinks what he is saying is true but should have known better using the reasonable person test. An innocent misrepresentation occurs when the person thought what he was saying was true and was perfectly reasonable in that belief. There is no fault with innocent misrepresentation. With fraudulent and negligent misrepresentation damages and/or rescission can be obtained as a remedy. With innocent misrepresentation only rescission is available as a remedy 3. Explain why it is easier to succeed with an action for innocent misrepresentation than for fraudulent or negligent misrepresentation. Answer: With innocent misrepresentation you need only prove that the false statement was made, but with negligence and fraud you must also show fault (either intention or failure to live up to the reasonable person standard) which is harder to do. 4. Distinguish between a void and voidable contract. Why is this important to the discussion of duress and undue influence? Answer: A void contract is no contract at all, usually because one of the essential elements such as consideration is missing. A voidable contract is a contract but one of the parties has the right to get out of it. The distinction is important where goods have gotten into the hands of third parties or where the subject matter of the contract has been resold. In a void contract the original owner still owns the goods and the third party must return them. With a voidable contact the original contract of sale was valid and the purchaser had the power to pass on good title the third party if he resold those goods. Thus they cannot be recovered from the third party where the contract is voidable. Contracts involving duress and undue influence are voidable not void. 5. Explain what is meant by a presumption with respect to undue influence, the effect of such a presumption, and under what circumstances those presumptions will occur. Answer: In certain kinds of relationships the courts will presume that undue influence is present such as lawyer/client and doctor/patient. This means that without further evidence the contract is voidable because of the undue influence. It is open to the professional, however, to rebut that presumption by producing evidence that there was no undue

Chapter 4 – Enforcing Contractual Obligations

influence. This evidence usually takes the form of showing that the other party obtained independent legal advice. 6. When will the courts find a contract to be unconscionable? What effect will that have on the position of the parties? Answer: The courts will find a contract unconscionable where: it is particularly unfair to one of the parties; that party has been taken advantage of because of weakened intellect, unusual circumstances, lack of ability to speak the language, desperation, or some other factor; and the other party was aware of the other’s vulnerability and took advantage of it. The courts under those circumstances can change the terms or discharge the contract altogether. 7.

What is meant by privity of contract and indicate any exceptions.

Answer: The principle of privity of contract means that only the parties to the contract are bound by its terms and outsiders cannot enforce those terms under normal circumstances. Exceptions include trust arrangements and rights running with the land in real estate transactions. A novation, which involves one party being substituted for another in a contractual relationship, is not a violation of privity, since all of the parties to the old agreement and the new must agree to the change. Thus a new contract is actually substituted for the old. Agency, likewise, is not an exception because the relationship was always between the principal and third party, the agent merely acting as go between. There is a trend for the courts to move away from strict application of the rule of privity where it seems unjust to impose it. 8. Explain what is meant by assignment in contract law, and indicate any limitations on what can be assigned. Answer: Benefits or claims accruing to one party under a contract can be sold to a third party. This is called assignment. But only benefits or claims can be so assigned, not obligations. 9. What is necessary for an assignment to qualify as a statutory assignment? What is the importance of such a designation? Answer: A statutory assignment must be absolute (unconditional), in writing and with notice to the other party to the contract. The advantage is that the assignee of a statutory assignment can sue to enforce those rights directly and does not have to go through the assignor. 10.

What does it mean to say the assignee is “subject to the equities”?

Answer: Subject to the equities means that the assignee can be in no better position than was the assignor. He gets only what the assignor has and if the original contracting party

Chapter 4 – Enforcing Contractual Obligations

has a good defense against the assignor he can raise that defense against the assignee as well. 11. Define a negotiable instrument and distinguish between a cheque, a bill of exchange and a promissory note. Answer: A negotiable instrument is an instrument covered by the Bills of Exchange Act given by one party to another and often negotiated to others after that. It conveys the right to collect funds. A promissory note involves a maker who promises to pay a payee a certain sum at a specified future date or on demand. A bill of exchange involves three parties. The drawer orders the drawee (usually, but not necessarily, a financial institution) to pay a payee certain funds at a specified future date or on demand. A cheque is like a bill of exchange in that a drawee orders a bank to pay a payee a specified sum on demand. 12.

Explain the position of an endorser of a negotiable instrument.

Answer: There are several different forms of endorsement but with the most common, the endorser adds his credit to the instrument. If he endorses the instrument and passes it on and when eventually presented for payment it is dishonoured that endorser can be required to pay. 13. What is necessary for a person to qualify as a holder in due course? Why is that designation significant? Answer: A holder in due course is a stranger to the instrument who takes that negotiable instrument innocently without notice of any defect. Also there has to have been consideration given for the instrument. Such an innocent H.I.D.C. can enforce the note independent of any problem surrounding the initial issue of the note. Compared to assignment whether the assignee takes subject to the equities the H.I.D.C. is in a much better position to collect. 14. Distinguish between conditions and warranties, and explain how this can affect the discharge of contractual obligations. Answer: A condition is an important term of a contract whereas a warranty is a minor or less significant term. If a warranty is breached, the victim is still required to perform her obligations under the contract, but if a condition is breached the victim can be discharged from their contractual obligations. 15. Explain what is meant by substantial performance and how that can affect the discharge of contractual obligations. Answer: Substantial performance involves the breach of a condition but in a minor or insignificant way. If the breach is only minor so that the shortfall is insignificant, the

Chapter 4 – Enforcing Contractual Obligations

contract is said to be substantially performed and the other party is still required to perform their side of the contract. 16. Explain what is meant by repudiation and, in particular, the effect of anticipatory breach on the position of the parties to a contract. Answer: A contract is repudiated when a party to it refuses to perform their contractual obligations. This can be done expressly where he tells the other person he will not be performing or by conduct as when they sell the subject matter of the agreement to someone else. If the repudiation takes place after performance is due, it is simply a breach of contract. If it takes place before performance is due, it is called an anticipatory breach. In such a situation the victim can accept the breach and treat the contract as discharged and sue for breach without waiting or continue to demand performance. Alternatively, the victim can insist on performance and wait until the date for the same. The victim is bound by the choice/election he makes. 17. What will cause a contract to be discharged though frustration and what are the consequences? How has the effect of a frustrated contract been modified by statute? Answer: A contract is frustrated when some outside, unforeseen event, out of the control of either party, occurs and performance of the contract is no longer possible or the nature of contract has changed to such a fundamental degree that to require performance would lead to a completely different result. The common law position was that when a contract was frustrated the loss would lie where it fell, with the exception that if a deposit was involved and there was no benefit at all to the party paying the deposit, it would be returned after the frustrating event. The Frustrated Contract Acts in place in most provinces change this so that such a deposit can be apportioned between the parties to compensate for expenses incurred, and also the parties must pay for any benefits they have received under the contract. 18.

How has the effect of a frustrated contract been modified by statute?

Answer: Historically, the effect of a frustrated contract was simply “let the loss lie where it falls.” Both parties were discharged of any further obligations, keeping any benefits and bearing any losses that had been incurred to that point. But that was seen to be unfair, and today all jurisdictions have enacted frustrated contracts acts that overcome much of this unfairness. Essentially, if either party has benefited by a partially performed contract, he or she will have to pay for that benefit. If a deposit has been paid and no benefit has been received, the deposit must be returned. Note that a portion of that deposit can be retained to compensate for costs incurred in preparing to perform the contract. The British Columbia Frustrated Contracts Act goes further by requiring the parties to share equally any costs incurred, even where no deposit has been paid 19.

What is necessary for a contract to be discharged or modified by agreement?

Chapter 4 – Enforcing Contractual Obligations

Answer: When a contract is discharged or modified by agreement this is a contract to change a contract and all of the elements of a contract must be present. This usually means that there has to be consensus and consideration supporting the change. This can be implied from the conduct of the parties 20.

Explain the role promissory estoppel sometimes plays in discharge by agreement.

Answer: Where such a change is one-sided and there is no consideration to support it the promise would normally not be binding. But where one party has made such a one-sided promise to forgive certain contractual obligations of the other party and then changes his mind and tries to enforce them, that other party can raise that one-sided promise as a defense, even though they would not have been able to sue to enforce it. 21.

Distinguish between a condition precedent and a condition subsequent.

Answer: A condition precedent refers to some event that must happen before the contractual obligations come into effect. This is usually expressed as, “… the agreement is conditional upon …” A condition subsequent involves an event that brings ongoing contractual obligation to an end. This is often expressed as “… this obligation will continue until…” 22. Explain the nature of an exemption clause in a contract and how the courts deal with such a provision. Answer: Parties to contracts will often include terms limiting their liability when breaches do occur. Because parties are free to include in their bargains whatever they want (“freedom of contract”), such exemption clauses are an important part of doing business. In the absence of other forms of misconduct or interfering legislation, how successful they are at limiting liability will depend on how carefully those clauses are worded. Recently the Supreme Court of Canada has made it clear that a properly drafted exemption clause will relieve a party from any significant obligation arising from breach if the clause clearly describes that type of breaching conduct and stipulates that only nominal or no compensation is payable. 23.

Explain the remedy of damages as it applies to breach of contract.

Answer: Damages are a monetary award that a court orders the breaching party to pay the victim of the breach. 24. Explain how damages for breach of contract are calculated and any limitations on their availability. Answer: Such damages are usually designed to compensate the victim of the breach for the all loss suffered due to the breach. However, the amount that can be claimed is limited by two important factors: the victim will only receive what they would have lost if they had taken all reasonable steps to mitigate (avoid or reduce) those damages after

Chapter 4 – Enforcing Contractual Obligations

becoming aware of the breach, and; only for losses that were reasonably foreseeable at the time the parties entered into the agreement. 25. How are equitable remedies treated differently from an award of damages for breach of contract? Answer: When an equitable remedy is sought, the party requesting the remedy must come with clean hands (can’t be guilty of any wrongdoing related to the agreement themselves). As well, there must have been no unreasonable delay in seeking the remedy and the order can't jeopardize the position of an innocent third party. 26. Distinguish between specific performance, an injunction, an accounting and quantum meruit. Answer: Specific performance involves the court ordering the breaching party to perform the contractual terms: for example, to convey the house as agreed in the sale of land agreement. An injunction involves an order to stop doing something inconsistent with the agreement: for example, an order not to sell the house to anyone else. An accounting involves a determination of the profits made by the breaching party as a result of that breach and an order to pay them over to the victim. Damages look at the losses suffered by the victim, whereas an accounting looks at the profits wrongfully earned by the breaching party and orders them to be paid over to the victim. Quantum meruit means a fair price. Where services have been requested and there has been no price agreed on, or where there has been a breach and a partial benefit must be paid for, the principal of quantum meruit will be employed to require the benefiting party to pay a reasonable amount for what has been gained. Questions for Further Discussion 1. The law of contract is to a large extent based on the barter model. The guiding principle of this model is that the parties are in an equal bargaining position negotiating balanced terms with which the courts shouldn’t interfere. But in recent years the courts are showing an increasing willingness to overturn terms such as exculpatory clauses, or they are stepping in to protect individuals on the basis of good faith or unconscionability. Consider whether in the process of attempting to ensure fairness in contract law the courts and legislatures have interfered to such an extent as to defeat the underlying principle of the parties’ freedom to contract as they wish. Should the guiding principle or the assumption that the parties are in an equal bargaining position be abandoned and the courts take on more of a protective role? Comment: A basic part of contract law is the element of bargaining. When it can be assumed that the parties are in equal bargaining positions, the courts normally won’t interfere with what they negotiate. There is good reason for this. If one person negotiates a price with an exemption clause in the contract removing some of the risk, and the courts later overrule that exemption clause they upset the fairness of the bargain. Wouldn’t the party protected by the exemption clause have negotiated a higher price to cover the extra

Chapter 4 – Enforcing Contractual Obligations

risk if he had known that the exemption clause would not be enforced? The same argument applies with unconscionable transactions and the creation of good faith obligations. The courts shouldn’t interfere with the negotiations taking place between the parties. They upset the bargaining process and interfere with the marketplace. Of course, the answering argument is that people are not always in equal bargaining positions and may need protection from unscrupulous merchants and others. These competing interests, freedom to contract vs. judicial interference, should be brought out in the discussion. 2. Discuss the principle of privity of contract and whether it has any place in modern law. In your answer consider the problems it presents when the person injured by products or services supplied under contract are not the party who originally contracted for that product or service. Also look at the growing number of exceptions, including assignment of contractual rights and negotiable instruments, and consider whether the retention of privity causes more harm than it overcomes. Comment: Privity has always been an important aspect of the law of contract, but it is also more and more being ignored by the courts. There is a growing movement to create more exceptions or to ignore the privity principle altogether. The Kuehn Nagel case and various consumer statutes that give contract protection to any user of a defective product can be used as examples. In this discussion it is a good idea to make sure that all understand exactly what privity is and also to go over the growing list of exceptions. The discussion should consider whether this movement away from privity interferes with the balance of interests in contract law expanding liability especially for business people when dealing with consumers. Will this change the risks and the economic realities in most business transactions? 3. Consider the discharge of a contract through frustration. There are several restrictions on the application of frustration such as the fact that the interfering event must be unexpected and out of the control of either party. Also legislation has been passed modifying the common law position of “let the loss lie where it falls”. Consider whether anyone should be allowed to escape his or her contractual obligations on the basis of frustration. Should the application of the principle be broader so that there aren’t so many limitations involved? Does the statutory interference reduce the problem or make it worse? Is there any place for the doctrine of frustration in modern contract law? Comment: One of the features of contract law in contrast to tort law is that in the event of a breach there is no need to establish fault. If a party to a contract fails to perform that is enough to sue. The principle of discharge by frustration seems to fly in the face of this basic reality. Should people be held responsible for their contractual obligations no matter what? On the other side many feel that they should be relieved of their obligations whenever situations change that make the deal less attractive. Students can consider the relative merits of both positions and then look at frustration. The question arises as to where the line ought to be drawn. Does that doctrine strike a reasonable compromise? Should a change in financial circumstances alone trigger the operation of frustration? Should only absolute impossibility of performance trigger frustration? You can also get into a discussion of master/servant law here, asking whether an employer should be able

Chapter 4 – Enforcing Contractual Obligations

to discharge an employee without notice (just cause) when he simply has no work for him to do, or where other business circumstances change? What should happen as a result of the frustrating event? At common law it was to let the loss lie where it fell, but this was changed by various frustrated contracts acts where the parties must now pay for any benefits they have received and also any deposits can be split according to expenses incurred. Is this a good result or would some other approach work better? 4. It makes little difference to the nature of the injuries suffered by the victim of false statements if they were misled intentionally or inadvertently. However, it makes a significant difference to the remedies available to the victims if they were misled intentionally or innocently. The victims of intentional misrepresentations can sue for damages, whereas the victim of an innocent misrepresentation can only ask for rescission. Should a distinction be drawn between fraudulent and innocent misrepresentation in determining the availability of damages as a remedy? Comment: You have to look at this question from the point of view of the two parties. The victim doesn’t care whether he was misled intentionally or innocently the result is the same. A good discussion can be generated with the question of whether any statements that are made as part of the negotiation process ought to be actionable. What about caveat emptor and should we take the onus off the parties themselves to approach these transactions with care and suspicion. Should the only thing to be examined by a court be the bare wording of the contract itself? Another related question deals with whether a misrepresentation made because of negligence ought to be considered innocent as it was in the past or actionable as a tort like fraud which is the present law. Central to this discussion will be an examination of the different remedies available. Rescission is a contractual remedy available whenever misrepresentation takes place, but where the misrepresentation is negligent or fraudulent the victim can also seek damages. This also leads to a discussion of legislative interference in the market place with various forms of consumer protection legislation which is a nice way of leading into the topics in covered chapter 5 Cases for Discussion 1. Kettunen v. Sicamous Firemen’s Club, B.C.S.C. as reported in the Lawyers Weekly Consolidated Digests, Volume 19. Mrs. Kettunen attended a campground where a “mud bog race” was being held. Even though she was in the campground some distance from the race course, one of the drivers lost control and the vehicle struck Mrs. Kettunen, causing her injury. She sued Sicamous Firemen’s Club, the operators of the campground and the race. When Kettunen signed in as a camper, one of the documents contained a waiver of liability and indemnity. This is a particular kind of limitation clause exempting one party from liability for failure to perform what would otherwise be an obligation under the contract. Should the victim be precluded from seeking compensation on the basis of this waiver of liability? How would your answer be affected by knowing that the clause was long, in small print, was difficult to read, and was not drawn to her attention?

Chapter 4 – Enforcing Contractual Obligations

Decision: This is a good case to illustrate how a court now deals with exclusion or limitation clauses. The court held that it was not binding on Mrs. Kettunen because: it was in fine print; it was long and complicated; nothing was done to bring it to her attention or to explain the effect of the document; and there was nothing to make a person think that it would preclude actions against anyone associated with the car races. Also the court looked at the wording and found that it was too narrow to apply. It referred to people entering the restricted area, not those in the camping area where the plaintiff was when the accident took place. 2.

Green Lane Environmental Group Ltd. v. Leach 2005 CanLII 7877 (ON C.A.)

Green Lane agreed, in a simple one-page contract, to remove approximately 2,000 cubic metres of soil from Leach’s property. When the job was done Leach received an invoice for $236,582.89 instead of the $80,000.00 expected. The reason for the difference was in the way the volume was calculated. Green invoiced based on the 122 trucks being loaded to capacity, which they were not. Leach calculated based on the actual amount removed. Discuss the problem and how the court would likely approach it. State the arguments for both sides. Would it make any difference to your answer to know that the industry practice supported Green’s calculations but the actual wording in the contract supported Leach? Decision: This case provides a good example of how the “hierarchy” of rules as to interpretation will be applied to terms or phrases in a contract. Green contended that the contract was not sufficiently specific on how volume would be determined and reliance on an industry practice for measuring was necessary. Leach contended that the contract was specific that payment would be based on actual volume removed. The Court ruled that the plain language of the contract was capable of a reasonable interpretation and understanding and as a result reliance on “industry practice” was not necessary. Accordingly, the Court ruled that the actual volume could and would be determined by a simple conversion from weight to volume based on the conversion ratio Green used in paying the landfill facility when dumping the soil at that landfill nearby. 3.

968703 Ontario Ltd. v. Vernon 2002 CanLII 35158 (Ont. C.A.)

Vernon agreed to have the assets of his business sold at auction with the proceeds to be deposited in a bank account held jointly by Vernon and the auction company. Vernon was to get the first $450,000.00, the auctioneer was to get the next $150,000.00, and anything else was to be split 70/30. But after two days the auctioneer made no bank deposit, keeping the entire $100,000.00 proceeds for himself. Vernon refused to let him back on his property to complete the auction. The auctioneer sued and Vernon countersued. Explain the arguments for both parties, who breached the contract, and their resulting responsibilities. How would it affect your answer to know that the auctioneer had sold some of the assets belonging to Vernon at a lower price than agreed, to a company with which the auctioneer was associated? Decision: In this case the auctioneer contended that the failure to deposit funds into the jointly held account was a minor breach of the agreement and as the other terms as to .

Chapter 4 – Enforcing Contractual Obligations

conduct of the auction itself were complied with this minor breach did not allow Vernon to rescind the contract and refuse the auction company further access to the property and goods to complete the auction sale. Ultimately the Court agreed with Vernon’s contention that the failure to deposit the funds in the jointly held bank account was a serious breach and did entitle Vernon to rescind the agreement. The Court was bolstered in this opinion by the fact that the auction company refused to rectify the non-deposit of funds until shortly before the trial of the matter got underway. The Court further pointed out that the seriousness of such conduct was exacerbated by the fact that in doing so the auction company also failed in its obligation of good faith and fair dealing towards Vernon is acting in such a fashion (amounting to a breach of fiduciary duty). 4. Cassidy v. Canada Publishing Corp. B.C.S.C., as reported February 3, 1989, in Lawyers Weekly Consolidated Digest, Vol. 8 Ms. Cassidy had a contract to work as part of an authoring team to produce a social studies text to be used in the public schools. Her contribution, among other things, was to provide a chapter on criminal law. Unfortunately, the Ministry changed the curriculum requirements and her contribution could no longer be used. She was dropped from the writing team with no compensation for the work she had done. She sued. Explain the Arguments raised by both sides and the likely outcome. Note that this is a province where the Frustrated Contracts Act requires compensation to be paid for work done benefiting one of the parties. Decision: This case provides a good example of how a frustrating event may relieve parties to a contract from their respective obligations. This case also illustrates that in the case of British Columbia, the Frustrated Contracts Act may still require one of the parties to be paid compensation for the work they completed before the frustrating event occurred. The publishing company contended, successfully, that the change in the curriculum made Ms. Cassidy’s intended contribution unnecessary and the contract as to her authorship and material was frustrated. However, she was awarded approximately $18,000.00 to compensate her for the work she had done over approximately two years before the curriculum change made it clear her material would not be required or used. 5. Canlin Ltd. v. Thiokol Fibres Canada, Ltd. (1983) 142 D.L.R. (3rd) 450 (Ont. C.A.) Canlin manufactured swimming pool covers and purchased their material from Thiokol Fibres. Unfortunately, one batch of material was defective, but this was not discovered until dissatisfied customers complained and demanded compensation. Canlin not only had to meet these expenses, but also lost a considerable amount of future business because of the harm to their reputation. In this action they are asking for compensation from Thiokol for these losses. Explain the arguments that Thiokol might raise in its defence. Explain the likely outcome. Decision: Thiokol argued that the lost business profits because of the harmed reputation were too remote and could not have been reasonably foreseen at the time of the creation of the contract. The court disagreed and found that these losses were exactly what could .

Chapter 4 – Enforcing Contractual Obligations

be expected in the event of this kind of breach. Note that the defendant had expressly made known to the supplier the nature of the business, the guaranty to customers, and specifically how and under what conditions the product would be used. 6.

Byle v. Byle (1990) 65 D.L.R. (4th) 641 (B.C.C.A.)

Various members of the Byle family were involved in a real estate business that went sour when one son physically threatened one of his siblings. Fearing for their other children, the parents conveyed certain land to the verbally abusive son and gave him other advantages. Two years later this action is being brought by the parents and other family members to overturn those transactions. What arguments can be raised by the various parties to this action? Explain the likely outcome. Decision: Note that there was a time delay of two years between the threats and the application to set the transactions aside. This is an example of duress and the trial court found that as a result of such duress the transactions were void and set them aside. On appeal the court found that the transactions were voidable not void. This opened the possibility that the two years period of delay established that the parents had affirmed the contracts with the result that they would now be binding. However, the Appeal Court found that they were not aware that they had any alternatives over that time and so the voidable transactions were set aside by the court. This is a good case to illustrate the difference between void and voidable. 7. ISkin Inc. v. SA, Ont. S.C. (2005) 139 A.C.W.S. (3d) 758, 2005 A.C.W.S.J. LEXIS 3725, 25 T.L.W.D. 2512-015, [2005] O.J. No. 2251 ISkin sold cases for the iPod. They contracted with SA to design, create the moulds for, and manufacture a silicon case for that device to be supplied to ISkin for marketing. The contract contained a non-competition clause but no confidentiality agreement. After the parties terminated their business relationship SA very quickly developed and sold a very similar version to the case developed for ISkin. ISkin brought this application for an interlocutory injunction to prevent SA from manufacturing and selling the product. Explain what they would have to establish to be successful as well as the likely outcome. Decision: This case illustrates the elements that need to be proven in order to obtain an interlocutory (pre-trial) injunction. Firstly, the claimant ISkin must show that there is a clear “prima facie” case that the contract had been breached and that SA was continuing to carry on its business in breach of the contract. In this case SA was pursuing its active business of design and manufacture of a competing product in clear breach of its obligation not to use confidential information obtained from ISkin in doing so. However, the Court denied an interlocutory injunction even though it was satisfied that “irreparable harm” was being suffered by ISkin due to SA’s continued conduct. The Court denied the injunction because it determined that the harm could be quantified and appropriate monetary damages could be awarded after trial if ISkin proved and won its claim. As such, the Court was not prepared to prohibit SA’s ongoing business until the case was decided on its merits after a full trial.

Chapter 4 – Enforcing Contractual Obligations

Sample Examination Questions Multiple Choice Questions 1. In which of the following instances would the court most likely hold the contract to be void on the basis of a mistake? a.

b. c. d. e.

Barry and Mary contracted for the sale and purchase of a boat for the price of $1,200. When the contract was written up the price was incorrectly stated as $1,700. Two parties contracted for a shipload of fish, but unknown to both parties, at the time of the contract, the ship had sunk and the fish had been lost. Carson and Leno had a serious misunderstanding about a term in the contract; the court found that the more reasonable interpretation was that of Leno. Sarah bought three rolls of wallpaper, but found she had made a mistake; two would have been sufficient. Although the seller said nothing to the buyer about the characteristics of the answering machine, the buyer bought it, thinking that it would tell him the date and time of the call. Later, he learned that it did not perform that function.

Answer: B 2. With regard to the law concerning misrepresentation, which of the following is false? a. b. c. d. e.

The case law does not give any remedy for a wildly exaggerated claim, such as “this is the best car ever built”. A statement of opinion can be a misrepresentation. A misrepresentation can be a false assertion of fact which induces (persuades) the party to contract, and need not be an assertion about a term of the contract. For fraudulent misrepresentation, the buyer could ask for both the equitable remedy of rescission and damages for deceit. A buyer could not be awarded the equitable remedy of rescission if the seller honestly believed that the misrepresentation was true.

Answer: E 3. When the courts find that undue influence is present the resulting contract is: a. b. c. d. e.

Voidable Void Unenforceable Binding Illegal

Answer: A

Chapter 4 – Enforcing Contractual Obligations

4. With regard to the law governing privity of contract and assignment, which of the following is false? a. b. c. d. e.

The privity of contract rule states that only the parties to the contract have rights and obligations under the contract. Assignments are modifications of the privity of contract rule since they do allow a stranger to the contract to receive benefits from the contract. A statutory assignment is easier to enforce than an equitable assignment. A party to a contract for services can assign both his contractual obligations and his contractual rights. Novation refers to the ending of the original contract and entering into a new contract with changes in terms, such as substituting one party for another.

Answer: D 5. In all but one of the following situations, the contract is frustrated. Identify the exception. a. b. c. d.

Jack contracts with Bill to build a barn on his one acre lot but before the permit is obtained, a new law prohibits barns on less than three acres. Rudolph is due to appear in a local variety theatre which has just been destroyed in a fire of unknown origin. Frank has contracted to ride Emperor, a prize horse in the Canada Day races on July 1, but on June 28 the horse breaks a leg and has to be destroyed. Jerry, a doctor, is due to perform a heart transplant operation on Mary and the night before the surgery his arthritis becomes so painful that he cannot hold a scalpel Gregory, a trucker with whom you contracted last month to haul potatoes tomorrow, phones to tell you that his truck has broken down.

Answer: E 6. We have the legal rule that “it takes a contract to end a contract”. Which of the following would not meet this requirement? a. b. c. d. e.

Watson had contracted with Holmes to do some research. Watson asked to call it off and Holmes agreed before either had performed under the contract. Mutual waiver A condition subsequent is met A written statement by one party stating "the contract is cancelled". Ms. Marple had already paid to have the windows washed when the other party to the contract said he didn't want to do them. She agreed if he would return the money. He promised he would and did.

Answer: D

Chapter 4 – Enforcing Contractual Obligations

7. In which one of the following instances would the seller most likely succeed in an attempt to escape liability by the use of an exemption clause? a.

b. c. d.

Where the store had posted at the entrance to the dressing rooms a large sign reading "not responsible for stolen articles", and the customer lost articles in a fire that swept through the dressing rooms. Where the purchaser of goods after the sale is sent an invoice on which the exemption clause is printed in boldface type at the top of the first page. Where the clause says there will be no liability for breach of condition and the breach that occurs is of a minor term. Where there has been a breach of the fundamental obligation of the contract, and the court holds that on its true construction the parties did not mean the exemption clause to cover a serious breach. Where the exemption clause that covers the situation was posted in view at the place and time of contract.

Answer: E 8. Which of the following is false with regard to remedies for breach of contract? a. b. c. d.

The quantum (amount) of damages to be given to the victim of the breach may be limited to the amount specified in a liquidated damages clause of her contract. The victim of a breach cannot recover damages which he could have avoided if he had tried to mitigate his loss. A person who breaches a contract is liable for all the loss that directly and naturally flows from the breach no matter how unforeseeable. An injunction is the proper remedy to stop a person from doing something which he had promised in the contract not to do, e.g. not to compete, not to disclose secrets, etc. Specific performance is an equitable remedy forcing a person to comply with the terms of the contract.

Answer: C Short Answer Questions 1. Distinguish between innocent and fraudulent misrepresentation, indicating why the distinction is important. Answer: Innocent misrepresentation occurs when the person who made the misleading statement honestly believed it to be true. Fraudulent misrepresentation occurs where the person making the statement knew it was false or didn’t believe it was true. The distinction is important since with innocent misrepresentation the only remedy is rescission, whereas with fraudulent misrepresentation, the victim may obtain rescission and, or, damages.

Chapter 4 – Enforcing Contractual Obligations

2. What's the effect of a court determining that undue influence has been present in a contractual relationship? Answer: That the contract is voidable. 3. Explain the impact of the principle of privity of contract. Answer: When two people enter into a contract, they only bestow rights and benefits on each other. The third parties, who are not party to the contract, cannot enforce the contract. 4. What is the significance of an assignment being “statutory” rather than merely an “equitable” assignment? Answer: A statutory assignment allows the assignee to sue directly, whereas if the assignment is equitable the assignor must be joined in the action. 5. Will anything short of the complete performance of the contractual terms amount to performance of the contract and discharge the agreement? Answer: Yes. Substantial performance where an important term is substantially performed, and where breach of warranty or a minor term has taken place, the contract is considered discharged by performance, subject to an action by the other party for compensation for the inadequacies in performance. 6. For a contract to be frustrated, performance of the contractual obligation must be impossible. Discuss the accuracy of that statement. Answer: It is inaccurate. It still may be possible to perform a contractual obligation but the contract may still be frustrated where the event that forms the basis of the contract fails to take place. 7. If a victim of an anticipatory breach continues to insist on performance, what danger does he face? Answer: That some subsequent outside, unforeseen event will make it impossible to perform the contract, and the contract will be frustrated, or else, for some reason, circumstances will change and he won’t want go through with his side of the deal and he will then be the one in breach of the contract. 8. What is the importance of the distinction between a breach of warranty and a breach of condition? Answer: When one of parties breaches a condition of the contract, the other one is entitled to treat the contract as discharged and not perform his side of the agreement and is also entitled to sue for damages or another remedy. When a breach of warranty takes

Chapter 4 – Enforcing Contractual Obligations

place, the contract is considered to be performed and there is an obligation on the victim of the breach of warranty to go through with his side of the agreement, although he can still bring an action for compensation for the imperfect performance. 9. The purpose of damages is to award monetary compensation for a breach of contract to compensate the injured party for the losses suffered. Indicate two limitations on this principle. Answer: The first is remoteness, where the contracting party is responsible only for those damages that could be reasonably foreseeable at the time they entered into the contract. The second is mitigation where the victim of the breach has an obligation to keep his damages as low as reasonably possible. 10. Indicate three different types of equitable remedies and distinguish between them. Answer: Specific performance, the court orders the person to perform his contractual obligation. Injunction, the court orders the breaching party to stop acting in a way that is inconsistent with the terms of the contract. An accounting, the courts order the breaching party to account for any profits that have been made through that breach and pay them over to the victim. Essay Topics 1. Discuss the principle of caveat emptor and how it relates to mistake and misrepresentation in contract law. 2. Discuss the various remedies that are available where one of the parties to the contract is a victim of misrepresentation. 3. Discuss how privity of contract effects the position of people who are not parties to a contract. In your discussion, include an examination of the Supreme Court decision in London Drugs Ltd. vs. Kuehne & Nagel International Ltd. 4. Discuss exculpatory (exemption) clauses and how they are treated by the courts. 5. Discuss frustration in contract law and indicate when it's available and how and why it's been modified by statute. 6. Discuss how and why promissory estoppel might come into play when a contract is being discharged or changed by agreement. 7. Discuss the equitable remedies that were developed in contract law and why they were necessary. 8. Explain the difference between the assignment of a contractual rights and the negotiation of a negotiable instrument and why the distinction is important.

Instructor’s Manual Chapter 5

Legislation in the Marketplace Teaching Suggestions I usually take about two to three lecture hours on this subject and spend most of that time on the Sale of Goods and Personal Property Security acts. For the Sale of Goods Act I first explain what is required for the Act to apply. That is, the Act applies to tangible moveable goods that are sold for money where title will actually transfer at the time of the contract or an agreement of sale where title will pass sometime in the future. Then I explain the purpose of the Act: to imply missing terms into each sale of goods contract. It is vital at this stage to point out that the parties can contract out of most Sale of Goods Act terms by clearly stating the terms they do want in the contract. I also point out at this stage that the Sale of Goods Act applies to all sales of tangible movable goods whether it is a pencil or a locomotive. As well, I point out that the Act applies to all such sales whether at the retail or wholesale level and whether individuals or corporations are involved. I concentrate on only a few areas of the Act. The first focus area is title and risk. This is one area where the parties often contract out of the provisions of the Sale of Goods Act. I go over FOB, CIF and COD contract illustrations. Where the Act is left to apply, the general principle is that risk follows title. There are five rules used to determine when title transfers. The first four are reasonably straight forward, but students often find rule number five difficult to understand. They often mistake the requirement of assent as another way of saying that notice is required. However, I point out the difference by giving an example of a car being left with a dealer to install tires. The brand and tire model will be specified but the selection of the actual tires will be left to the installer. By leaving the car, the purchaser has assented to that selection by implication and no notice is required. The other problem students have is identifying unascertained goods. These are goods not yet made or where a model has been chosen from a sample or advertisement but the specific item has yet to be separated out and designated to that purchase. I also explain what constitutes acceptance under rule four. The second major area of focus is the obligations of the seller with respect to title, goods bought by description, by sample and requirements of fitness and quality. It is important to point out that some of these requirements are conditions and some are warranties. For example, it is a condition that the seller delivers good title but a warranty that the goods be free from any charge or encumbrance. Goods purchased by description must match the description, and be of merchantable quality and goods bought by sample must match the sample. When the skill of the seller is relied on the goods must be fit for the use recommended and in general the goods sold by description must be of merchantable quality. That means they must be fit for their normal purpose and free from any defect

Chapter 5 – Legislation in the Marketplace

that would render them unmerchantable. In B.C. the goods must be durable as well. The courts have established that whenever we are dealing with a good that has been mass produced so that it is in a box with a description or a specification sheet, we are buying the product by description and the merchantable quality requirement applies. I also point out that if no price has been agreed to the purchaser must pay a reasonable price. This statutory provision overrides the basic contractual requirement of specific consideration. If no date for delivery or time for payment has been stated, the goods must be delivered within a reasonable time, and payment made upon delivery. I also mention the unpaid seller’s lien while the goods are still in his possession, the right to intercept goods in transit (stoppage in transitu) and under the Bankruptcy and Insolvency Act, the limited right in the event of a bankruptcy to the return of goods even after delivery. The discussion of consumer protection legislation will vary to a large extent between jurisdictions because of the different statutes, but there are usually provisions dealing with unconscionable transactions, and specific rules dealing with often-abused practices or businesses. I look at deceptive and misleading trade practices, which are controlled in all jurisdictions. I also introduce the Federal Competition Act, explaining how it controls misleading advertising and the various ways that businesses try to restrict or control competition. I spend the majority of the time on secured transactions. Security, as it is used here, is some method employed to give the creditor additional assurance they will be paid even if the debtor becomes insolvent. This usually involves giving the creditor first claim against some asset owned by the debtor. I usually distinguish between conditional sales and chattel mortgages at this stage because they are still used as methods of creating security, although they are no longer covered by separate statutes. It is important to emphasize that under the old legislation title to the goods was actually held by the creditor in these situations, but now it remains with the debtor, even though the rights created in the creditor are essentially the same. The current legislation covering situations where personal property is used as security is the Personal Property Security Act (“PPSA”). There are some differences between provinces, but the basic principles are the same. The first advantage of the PPSA is that it creates one statute with one body of rules that covers all situations where personal property is used as security. Secondly, the Act expanded the kinds of things that could be used as security. I take care to explain the difference between attachment and perfection under the Act. I find it best to approach such transactions in three stages. First is the creation of the contract naming what is to be used as security, but before any benefits have flowed to either party. Second, attachment takes place where the creditor bestows some benefit on the debtor. This gives the creditor the right to sue or repossess the security in the event of a default, but gives no protection against third parties. For this there must be perfection and this is accomplished by registration of the security transaction at the appropriate registry office. Alternatively, perfection can also be accomplished by the creditor taking possession of the item used as security. This happens when dealing with items that don't require the

Chapter 5 – Legislation in the Marketplace

debtor to retain possession such as share certificates and negotiable instruments. Perfection gives the creditor priority against third parties. I also go over the process of realizing on the security. The right of repossession and resale is the next topic for consideration. Students are often surprised that this can be accomplished as a matter of right simply by employing an agent or bailiff. No court order is needed but it must be done properly as set out in the Act. The debtor need not be given notice before repossession, but must be given notice and an opportunity to redeem the goods before resale. As well, the sale must take place in a commercially reasonable manner. That usually means at public auction. If these requirements are not carefully adhered to the creditor can lose the right to sue for any shortfall after the proceeds of the sale and expenses and may even be required to compensate the debtor for the lost value on the item improperly sold. In most provinces the creditor retains the right to sue for any shortfall if the amounts raised by the sale of the goods don't cover the amounts owing, including the costs incurred in repossession and resale. I also briefly discuss builder’s liens explaining the holdback provision and how it benefits both the homeowner and the subtrade suppliers and workers. I also go over guarantees explaining how this is a contingent liability instead of a primary one. If the guarantor is required to pay in the event of a default, he steps into the shoes of the creditor taking over all rights that the creditor has against the debtor. I also point out that the guarantor has all the same defenses against the creditor that the debtor has (except infancy). Finally, I point out that the creditor has an obligation not to weaken the position of the guarantor and so any further transactions between the creditor and debtor that have that effect and is done without the consent of the guarantor relieves the guarantor of that obligation. The final topic covered is bankruptcy, although there is often not enough time to deal with it adequately. I distinguish between insolvency and bankruptcy pointing out that with bankruptcy the property of the debtor is actually transferred to a trustee in bankruptcy. This can take place voluntarily (an assignment) or involuntarily where the creditor obtains a receiving order from the court. The creditor must show that an act of bankruptcy has taken place, which is usually simply showing that the debtor was not able to meet his obligations with his creditors. Such acts may also be failure to honour a Division One or Division Two proposal or the commission of some bankruptcy offense, such as giving one creditor a preference or transferring assets to a spouse or friend, to keep them out of the hands of the creditors. The commission of such a bankruptcy offense can result in criminal penalties. The trustee's job is to realize as much as possible from the assets for the creditors. I point out the difference between secured, preferred and unsecured creditors, and their relative rights when a bankruptcy takes place. After a period of time an individual who has gone bankrupt can apply to be discharged. The application is now automatic in most cases. If no conditions are placed in the discharge the bankrupt is totally discharged from his debts. This means he is forgiven of those debts and even if he were to win a lottery the next day he would not have to pay them. Note

Chapter 5 – Legislation in the Marketplace

that there are some exceptions to such a discharge including maintenance and support obligations to a spouse or children and student loans for the first 10 years. Note that a corporation will not be discharged after the bankruptcy process. I also mention the alternative to bankruptcy, a Division One proposal applies to a corporation or someone who owes more than $75,000 and a Division Two proposal covers an individual owing less than that amount. The Division One proposal is more formal and complex but both involve the debtor making a proposal to the creditors to pay the debt or a portion of it and if accepted and properly performed the debt is discharged and bankruptcy avoided. If the proposal is not approved or not properly performed this is an act of bankruptcy and will support the application by the creditor for a receiving order. I also mention the federal Company Creditors Arrangement Act that provides large corporations protection from creditors while they rearrange their affairs. Chapter Summary Statutes modify business law Sale of goods Sale of Goods Act supplies missing terms For the Act to apply, goods must be transferred /sold Under the act risk follows title, except in the case of CIF, FOB, COD, and Bill of Lading Five rules determine when title transfers Breach of condition ends contractual obligations. Breach of warranty does not end contractual obligations Obligations of seller under the Act: - To deliver good title - To deliver quiet possession - To deliver goods free of liens Goods must match description or sample Goods must be of merchantable quality Goods must be fit for the purpose purchased where recommendation of seller relied on Limited warranties try to override these obligations Exemption clauses must be clear and brought to purchaser’s attention If the purchaser defaults, the seller can stop goods in transit If bankruptcy, seller has limited right to recover goods Consumer protection Both federal and provincial consumer protection legislation Consumer goods must be of minimum quality Abusive and deceptive trade practices are controlled Unconscionable transactions are controlled Salespersons’ statements form part of the contract Abusive merchants subject to fine, injunction, and loss of licence Cooling off period for door-to-door sales

Chapter 5 – Legislation in the Marketplace

Pyramid schemes and referral selling are prohibited True cost of borrowing must be disclosed Powerful government agencies enforce rules Non-government agencies also help consumers The federal Competition Act controls anti-competitive merchandising and advertising practices Conspiracies including bid rigging and price fixing that unduly lessen competition are prohibited Pyramid selling schemes are prohibited and are criminal offenses Deceptive marketing schemes including misleading advertising and false bargain prices are prohibited, as are practices such as bait and switch and double ticketing Other questionable business practices such as predatory pricing and mergers lessening competition are controlled. Secured transactions Security arrangements assure creditor of repayment Real property and personal property used as security PPSA accommodates all forms of personal property as security In a conditional sale the seller is a creditor Chattel mortgage involves title going to creditor as security Now all forms of personal property used as security are covered by PPSA Now title remains with the borrower Attachment gives the creditor rights against the debtor Perfection by registration Perfection gives the creditor rights to security good against all subsequent claimants Perfection by possession Creditor has the right to repossess and resell upon default Court order not needed to repossess But force cannot be used Creditor must give the debtor notice and the opportunity to redeem the goods before resale If resale is properly handled, in most provinces the creditor has the right to sue for deficit Builders’ liens protect contractors, subtrades, workers, and suppliers Guarantee: One person agrees to pay if debtor does not Guarantor has the same defenses as debtor (except infancy) Guarantor steps into the shoes of the creditor upon payment Guarantor not liable if agreement terms are changed without his permission. Bankruptcy and Insolvency Bankruptcy involves transfer of debtor’s assets to a trustee Assignment is voluntary, but bankruptcy may also be forced by a receiving order. Must be act of bankruptcy to obtain receiving order Trustee distributes assets: - First to secured creditors - Then to preferred creditors - Finally to unsecured creditors

Chapter 5 – Legislation in the Marketplace

Some possessions are exempt Bankruptcy offences prohibited and penalized Discharge ends obligations Note exceptions Corporations do not survive bankruptcy Division Two proposal is an alternative for individuals Division One proposal is an alternative to bankruptcy for a company CCAA also provides alternative to bankruptcy for company Receivership is not bankruptcy Questions for Review 1. Explain the role played by the Sale of Goods Act and the qualifications that must be met for the Act to apply to a particular transaction. Answer: The Sale of Goods Act supplies terms that the parties may not think to include when they entered into their contract. Most can be modified or excluded by clear written agreement between the parties. Goods must be involved, and they must be actually transferred for monetary consideration. 2. How is the person who bears the risk determined under the Sale of Goods Act? Explain how this can be modified by the parties. Answer: Either the parties specify (FOB, COD, CIF) or risk follows title 3. Act.

Explain the five rules that determine when title will pass under the Sale of Goods

Answer: Situation

Rule

Result

The sale of specific goods in a deliverable state

Title transfers immediately upon creation of the contract of sale.

The sale of specific goods needing Repairs, etc.

Title transfers when work is done and the purchaser is notified.

The sale of specific goods needing to be weighed or measured

Title transfers when this is done and the purchaser is notified.

The sale of goods on approval

Title transfers to the purchaser with - Notification to seller of approval - Passage of a reasonable time - Treatment of goods as the purchaser’s own

The sale of goods that are not yet selected (from many) or not yet made at the time of contract

Title transfers when goods are unconditionally committed to contract with assent (expressed or implied)

Chapter 5 – Legislation in the Marketplace

4. Explain the obligations imposed on a seller with respect to title, sale by sample and description, fitness and quality, and merchantable quality. Answer: Seller’s obligations with respect to title

Seller must deliver property/good title. Seller must deliver quiet possession . Goods must be free of charge or encumbrance.

Condition Warranty Warranty

When goods bought by description

Goods must correspond to description.

Condition

Purchaser relies on advice of seller

Goods must be reasonably fit for purpose required.

Condition

When goods bought by description

Goods must be of merchantable quality.

Condition

When goods bought by sample

Goods must correspond to sample and be free of hidden defects.

Condition

5. Discuss the nature of limitation or exemption clauses and their effect on the provisions of the Sale of Goods Act. Answer: They are effective if clearly expressed in writing in the sale agreement (often called a limited warranty). In some jurisdictions when consumer transactions are involved, such exemption clauses that try to overturn the Sale of Goods Act provisions with respect to fitness and quality are void. 6. When a default takes place, what are the rights of the seller with respect to goods that are in transit and with respect to goods that are in the hands of a bankrupt? Answer: Goods in transit can be recovered (“stoppage in transitu”). Goods in the hands of the bankrupt can also be recovered providing they are still identifiable. 7. Describe the abusive business practices that are controlled by trade practices or business practices acts. Describe how the statutes’ provisions are enforced. Answer: These usually deal with misleading and deceptive practices such as false statements about the products or support for them. Unconscionable practices where people are taken advantage because of a particular vulnerability can also be overturned or set aside. The inappropriate conduct can be treated as an offense and prosecuted as a provincial offense and in some cases civil actions can be brought by the victims. 8. Explain what is meant by a cooling-off period and explain how pyramid and referral selling schemes are controlled under consumer protection legislation. Answer: Referral selling involves giving a discount when the purchaser provides a list of names for the seller to contact. Pyramid sales involve multi-level organizations where

Chapter 5 – Legislation in the Marketplace

people buy into the organization and the money is distributed up the chain, much like a chain letter. These are generally prohibited. A cooling-off period gives purchaser of a service or product a specified period of time to cancel the contract. If the purchase price has already been paid and/or goods received, they must be returned. 9. Explain the purpose of the federal Competition Act, and list five competition offenses Answer: The Competition Act controls anti-competitive merchandising and advertising practices such as predatory pricing (low prices are used to drive competitors out of business); anti-competitive mergers; agreement between competitors to control prices; bid rigging; and misleading advertising. 10.

Explain what is meant by bid rigging, double ticketing, and predatory pricing.

Answer: Bid rigging involves competitors conspiring to control the bids for a particular project. Double ticketing involves two prices being put on an item and the seller charging the higher price. Predatory pricing involves one supplier selling a product below cost to drive another supplier out of business. 11. List and explain five deceptive marketing practices, and explain how they are treated differently from offences against competition. Answer: Deceptive marketing practices involve directly misleading the consumer whereas offenses against competition usually involve suppliers working with or against competitors to unduly restrict competition in the marketplace. The following are examples of deceptive marketing practices:  False and misleading representations  Warranty or performance claims not supported by tests; unsupported tests and testimonials 

Bargain prices not supported by goods sold at regular prices



Selling at a higher price than advertised

 Bait and switch selling  Failure to disclose chances and value of prizes in a contest  Failure to base contestants on skill or at random

Chapter 5 – Legislation in the Marketplace

12. What kinds of matters are reviewable by the Competition Tribunal? What is the purpose of such a review? Answer: The object of the review is to stop the practice and may include the imposition of penalties. Examples include:

13.



False and misleading representations



Warranty or performance claims not supported by tests



Unsupported tests and testimonials



Bargain prices not supported by goods sold at regular prices



Bait and switch tactics Indicate other federal statutes that have a consumer protection aspect to them.

Answer: Food and Drug Act, the Hazardous Products Act, 14. Explain what is meant by a secured transaction, indicating the special position of the creditor. Answer: A secured transaction involves the debtor giving the creditor some extra assurance that they will be paid. This is usually done by giving the creditor some priority claim to property in the event of default. 15. Traditionally, when personal property was used as security this was accomplished by the title being transferred to the creditor. Indicate the effect of the Personal Property Security Act on such transactions. Answer: The two principal transactions are still known as a conditional sale or chattel mortgage. Under a conditional sale the seller provides possession of the goods to the buyer with title to the goods being transferred only when the last payment is made. Chattel mortgage involves the debtor putting up some property as security by transferring title of the property to the creditor that is held until the last payment is made. These are both handled now under the provisions of the PPSA which simply gives the creditor priority against the personal property named as security without the transfer of title. 16. Distinguish between attachment and perfection, and describe how perfection can be accomplished. Answer: Attachment takes place when the creditor gives some value under the contract. Perfection gives the creditor priority against third parties and requires registration or taking possession of the property designated as security.

Chapter 5 – Legislation in the Marketplace

17. Describe the rights of the creditor when there is a default under the Personal Property Security Act. What must the creditor do to protect his or her right to sue for a deficit? Answer: The creditor has the right to repossess and resell the goods used as security in the event of default. The debtor must be given notice and a chance to redeem the goods, and they must be sold in a commercially reasonable manner to get a fair price. 18. Explain the significance of a holdback under the builders’ liens or construction lien statutes. Answer: This is a portion of the amount owed to the builder, supplier or contractor, (for example 10%) that is withheld to satisfy any claims presented later by unpaid workers or suppliers. If this is withheld and made available for such obligations, the property owner will have no further obligations to the claimants even where the amount claimed exceeds the amount held back. 19.

Distinguish between an indemnity and a guarantee.

Answer: The term indemnity isn’t used in the text but refers to the difference between someone who cosigns a contract and a guarantor. With an indemnity the parties are codebtors and each equally obligated on the debt. In contrast, a guarantee is a contingent obligation where the obligation of the guarantor is secondary and arises only when there is a default. 20. Explain the position of a guarantor with respect to the debtor’s obligations and how those obligations are affected by subsequent dealings between the parties. Answer: This is a contingent obligation where the obligation of the guarantor is secondary and arises only when there is a default. If the creditor agrees to new terms without agreement and additional consideration to the guarantor, the guarantor is freed from his obligations. 21. Distinguish between insolvency and bankruptcy; between an assignment and a receiving order; and explain the role of a trustee in bankruptcy. Answer: Insolvency is being unable to pay your outstanding debts in a timely manner (or in accordance with the payment schedules stipulated for such debts). Bankruptcy is the process whereby your assets are transferred to a trustee in bankruptcy for the benefit of your creditors. An assignment in bankruptcy is a voluntary transfer of your property to a trustee whereas a receiving order is a forced transfer of those assets imposed on you by your creditors through the courts. The trustee in bankruptcy takes over those assets of the debtor and sells them or otherwise deals with them so as to get as much as possible for them and then distribute the proceeds to the creditors

Chapter 5 – Legislation in the Marketplace

22.

Distinguish between an act of bankruptcy and a bankruptcy offence.

Answer: An act of bankruptcy is necessary in order to force a person into bankruptcy. This could simply be failure to pay obligations as they become due. A bankruptcy offence involves wrongdoing such as fraud, hiding property or lying to the trustee with respect to asset and the like. Such bankruptcy offenses can also be acts of bankruptcy triggering the right to obtain a receiving order. 23. Explain the positions of secured, preferred, and unsecured creditors in the event of a bankruptcy. Answer: Secured creditors have a claim against some asset and can take that asset or be paid its value before any other claims under bankruptcy. Preferred creditors are paid next: e.g. funeral expenses, claims for rent or employee claims for wages up to a limited amount. If there is anything left after secured and preferred creditors have been paid, that remainder is distributed on a percentage basis to the unsecured or general creditors. 24.

Explain the effect of a discharge on the bankrupt.

Answer: When a bankrupt is discharged they no longer are obligated to pay their debts. They are free to start over. Note that a few obligations such as student loans, fines and family support obligations will survive a bankruptcy. 25. Explain the difference between the provisions of the Division One and Division Two proposals. Answer: Division Two proposals are made by individuals owing less than $75,000. If accepted by the creditors and honoured bankruptcy can be avoided. Division One proposals are made with respect to corporations or individuals owing more than $75,000. This is a more complex process but if accepted by the creditors and honoured, bankruptcy can be avoided. Questions for Further Discussion 1. The purpose of the Sale of Goods Act is to imply terms into any contract of sale where the parties haven’t specifically agreed otherwise. In some provinces a few of these terms are imposed and any attempt to override them is void. Some other provinces accomplish the same thing through separate consumer protection legislation. Consider whether the parties should be able to contract out of any of the terms of the Sale of Goods Act. Should such restrictions apply to both consumer and business transactions? Should there be any provision of the Sale of Goods Act that the parties can’t override in their own agreement? In your answer consider both consumer and business transactions. Consider also consumer legislation generally. Should such legislation ever interfere with the parties’ rights to have whatever terms they deem appropriate in a contract, whether it relates to a consumer transaction or not? Do such restrictions unduly interfere with the commercial process?

Chapter 5 – Legislation in the Marketplace

Comment: This question relates to how much freedom to contract people ought to have. Should terms be imposed upon them or should they be free to agree to whatever terms they choose adjusting the consideration paid in terms of the risks assumed or not assumed? If the terms of the Sale of Goods Act are made mandatory so that they cannot contract out of them, it would certainly change the nature of doing business and that’s a fundamental consideration when looking at this question. Most people don’t have too much of a problem with freedom to change the implied terms of the Act when large corporations are involved and purchasing raw materials or equipment at a wholesale level. But when there is an imbalance, as is the cases between consumers and retailers, many people feel that the protections set out in the Sale of Goods Act specifically related to fitness and quality ought to be mandatory. Certainly some provinces have done this within the Sale of Goods Act itself or in other consumer protection legislation. The results are the same; the merchant is liable to the consumer no matter what kind of exemption clause is included in their limited warranty. The debate then is whether this is a good thing or does it interfere too much with the marketplace and the rights of the parties to negotiate their own terms. 2. Does the process of taking collateral security unfairly assist secured creditors over unsecured creditors? Does the requirement of registration sufficiently answer any criticism? In your answer consider the process of bankruptcy and how secured creditors are given preferred treatment, often leaving an unsecured creditor with nothing. Comment: There are great advantages to creating secured transactions from the point of view of the secured creditor, but these advantages are obtained at the expense of other creditors. While there are protections in place that are supposed to protect these other creditors, such as notification through the registration requirement, not all of these disadvantaged creditors are effectively protected. For example, a judgment creditor or supplier will normally not be able to take advantage of such notification and in a bankruptcy after the secured creditors have been paid there is often nothing left for the other creditors. The question here is why should a secured creditor be able to put itself into a position to collect first leaving little or nothing for the other claimants? Think of a secured creditor having a registered security against a debtor’s car, the owner of which then negligently hits a pedestrian. If the debtor has no assets other than the car, why shouldn't that go to the injured pedestrian rather than the secured creditor. 3. Competition lies at the heart of the capitalist enterprise. Is government regulation necessary and does it achieve intended aims? What are some of the negative impacts of regulating competition? What other methods of controlling competition might be more effective? Comment: This question deals with the general question of whether business people are better off unregulated and free to do whatever they want letting the marketplace control abuses. Many argue that these statutory controls simply hamper efficient commercial activity. The other side of course is to look at recent abuses. Like most of these discussion questions the problem is to determine just where the appropriate balance is.

Chapter 5 – Legislation in the Marketplace

4. Consider the bankruptcy process. It seems to be inconsistent with every principle of fundamental contract law and commercial relations. Is it fair to the creditors and debtor? What about discharge? Should debtors be allowed to escape their obligations in this way? Can you come up with a better alternative? Why prohibit student loans from being discharged through bankruptcy? Should there be other exceptions? Comment: The stated objective with the bankruptcy process is to preserve as much of the debtors assets for the creditors and then to give the debtor a chance to start over free from the burden of impossible debt. There is little argument with respect to the first objective but many balk at the second, especially when they realize that even if the debtor wins a lottery shortly after discharge he will not be required to make good on those former debts. Is there any place for such a process in our legal system? Are we just going soft on dead beats? Why shouldn't debtors be held to their obligations? This is really just a discussion examining the opposing social arguments to forgiving the debt of such debtors. In the past we used debtor's prisons. Today we have gone so far as to forgive the debt. Is there a middle ground? Students can get quite animated in this discussion especially when the topic of student loans is introduced were student loans are treated differently. Cases for Discussion 1.

Mustapha v. Culligan of Canada Ltd., 2008 SCC 27, (2008) 238 O.A.C. 130

Mr. Mustapha suffered considerable trauma when replacing a used jug of water with a new one he discovered dead flies in his sealed jug of water. He had a particular sensitivity to this and suffered an unusual reaction. When he complained to the water producer they offered him a few free water bottles and the cleaning of his dispenser as settlement. He was offended and sued. Explain the basis of his complaint and the likely outcome. What do you think should be the remedy Mr. Mustapha should receive, if anything? How would it affect your answer to discover that Mr. Mustapha suffered an unusual reaction becoming argumentative and edgy, losing his sense of humour and could no longer drink bottled water? Decision: While the court of appeal found that the injuries and psychological impact suffered by Mr. Mustapha was real and significant they found that such a result was not reasonably foreseeable. They concluded that it was not reasonably foreseeable that a person of reasonable robustness and fortitude would likely suffer such a psychiatric injury from this experience. The Supreme Court of Canada agreed with this decision finding that although there was a breach of a duty to supply uncontaminated water to the plaintiff and injury resulted in fact that injury was not the result of the act in law. The injury was imaginable but was not reasonably foreseeable and was therefore too remote and the action failed. With respect to his claim for breach of contract the resulting damage could not have been in the contemplation of the parties when they entered into the contract and so were also too remote within the context of contract law.

Chapter 5 – Legislation in the Marketplace

2. New Brunswick Power Corp. v. Westinghouse Canada Inc. N.B.C.A., [2008] N.B.J. No. 364; 300 D.L.R. (4th) 523; 337 N.B.R. (2d) 138; 51 B.L.R. (4th) 167 New Brunswick Power Corp. purchased eight electrical transformers from Westinghouse Canada Inc. for $44 million. Because of a design defect, those transformers overheated, causing New Brunswick Power Corp. to expend over $12 million in repairs over the lifetime of the transformers. They bring this action against Westinghouse, claiming reimbursement for that loss. The claim is based both on the contract and in negligence. What is the likelihood of their success? In your answer, consider the one-year limited warranty that excluded all other claims and liability. Would it make any difference to your answer to know that the transformers were in service for between 15 and 25 years before showing any signs of the defect? What if the normal life expectancy of this product in the industry is up to 40 years? Decision: This case is a good example of the fact that sophisticated parties now draft their contracts to include clauses that will seriously limit or even eliminate legal liability for faulty goods and products. In this case the Court ruled that the design failure did amount to a breach of contract and negligence on the part of Westinghouse. However, the Court also ruled that given the fact the transformers had been used for a considerable period of time before problems relating to the defect arose, the breach did not amount to a “fundamental breach”. As such, the Court did not see a need to reconcile various recent Supreme Court of Canada cases dealing with the applicability of exclusion clauses in face of a fundamental breach. Rather, Power Corp.’s claim was dismissed as the Court found that the warranty and limitation clauses clearly excluded any such claim. 3. Kubota Canada Ltd. v. Case Credit Ltd. Alta. C.A., 253 D.L.R. (4th) 171, (2005) 43 Alta.L.R. (4th) 9, (2005) 363 A.R. 353 Kubota sold goods to a debtor on credit and registered that purchase-money security agreement (PMSI) pursuant to the Alberta Personal Property Security Act. This is a specialized contract referred to as a PMSI, which creates a secured claim for the seller/creditor against the goods sold for the amount owing on the purchase. However, they allowed that registration to lapse, and in the meantime that debtor arranged further financing with Case Credit Ltd., securing it with a pledge of all of its present and afteracquired property. The debtor became insolvent, and this action was brought to determine which creditor had priority. Explain the arguments for both parties. Would it affect your answer if there were a subordination clause in the original PMSI with Kubota, requiring the debtor to preserve the security so that Kubota would retain priority over any subsequent financing arrangement? Decision: This case illustrates the importance of properly registering and maintaining registration of a security interest to ensure a creditor doesn’t “lose” its security and priority to a subsequent creditor. In this case it was clear that Kubota was at risk of losing its “purchase money” security in the equipment it had sold to the debtor when its registration lapsed and the debtor used the equipment as collateral for a subsequent loan from Case Credit. In Alberta, as in other provinces, purchase money security is

Chapter 5 – Legislation in the Marketplace

considered important enough as between contesting creditors to give even unregistered agreements priority if the subsequent lender specifically acknowledges that priority. However, in this case the Court ruled that Case Credit’s agreement did not contain such a “subordination clause”. As a result, Kubota lost its preferred priority and Case Credit was entitled to the equipment when the debtor defaulted on all its debts and became insolvent. 4. Manufacturers and Traders Trust Co. v. Amlinger Ont. S.C.J., [2006] O.J. No. 3465; 21 B.L.R. (4th) 249; 150 A.C.W.S. (3d) 881 The plaintiff U.S. bank loaned funds to Daytech on the strength of a corporate guarantee. In 2003, the bank requested further personal guarantees from the defendants, who were shareholders of Daytech Manufacturing Ltd., Daytech US’s parent corporation. These were given. In 2004, the bank permitted the U.S. corporation to restructure the loan, but the loan was eventually defaulted on, and the bank sued the defendants on the personal guarantees. What arguments could you raise in defence of the guarantors? Would it make any difference to your answer if the guarantee documents specifically allowed such a restructuring? Decision: The defendants claimed that the loan restructuring released them from their guarantees as it was done without their permission and they received no further consideration for their continuing guarantee of that changed obligation. The defendants were unsuccessful in this defence as this case illustrates what is usually now found in the terms of a guarantee in place between sophisticated lenders and business people. That is, the guarantee included specific provisions that it would continue to remain in effect even after loan restructuring. Such a term is now commonly included as most ongoing businesses and lenders realize that changing business environments and markets require flexible financing options and changes to be undertaken and it is inefficient to execute new guarantees every time such a change needs to be made. 5. R. v. Clarke Transport Canada Inc. (1995) 130 D.L.R. (4th) 500 (Ont. Gen. Div.) A group of five companies provided freight forwarding services through container shipments in the Toronto area. They would take orders from customers, charge on the basis of weight, fill a container with those orders, and transport the goods by rail. All five agreed to control prices. They exchanged information and promised not to undercut each other’s prices. Explain how their conduct would be viewed under the Competition Act. What arguments might they raise in their defence? Decision: The court found that in this case there was clear evidence of price maintenance or price control, but they also found that there was lots of competition remaining. There was in fact a considerable amount of competition from other forms of rail shipment, highway transport and other methods of transporting goods and so competition was not lessened unduly and no offence had been committed under the act. Note that the judge noted that this was based on poor evidence and had he been presented with better evidence he may well have come to a different conclusion. The Judge specifically stated: “I wish to make it perfectly clear that my decision is dependent solely upon the evidence adduced. I am not at all certain that I would have

Chapter 5 – Legislation in the Marketplace

come to the same conclusion had the Crown been able to establish that the pool car operators did indeed have a captive audience, which in turn provided them with a significant share of business in the relevant market. Instead, I was presented with no evidence of market share and with the inconclusive and less than reliable evidence of a handful of shippers, whose testimony the Crown sought to bolster by way of expert evidence which proved equally unreliable and inconclusive.” 6. Bank of Montreal v. 1480863 Ontario Inc. (c.o.b. Schon Masonry) Ont. S.C.J., [2007] O.J. No. 1494; 156 A.C.W.S. (3d) 1140 Michelle Schon and her husband signed personal guarantees to support the indebtedness of their corporation (Schon Masonry). The husband was the sole director and shareholder of the corporation. The bank loaned $50 000 to the corporation in the form of a demand loan. At that time the husband and wife attended at the bank and signed several documents, including personal guarantees. They did not receive any independent advice. When the corporation failed, the bank demanded payment on these guarantees. Mrs. Schon claimed not to have read the documents and not to have realized that she was guaranteeing payment for the company. What arguments can the parties raise in this situation? Explain the likely outcome. Decision: Mrs. Schon relied on the doctrine of non est factum and the fact she did not receive any independent legal advice before signing the guarantee. As to the doctrine of non est factum, the Court accepted Mrs. Schon’s claim that she did not read and understand the nature of the document she had signed. However, the Court ruled that she could not rely on the defence as no one misled her as to the nature of the document and it was through her own carelessness that she failed to read and understand the document. As to the lack of independent legal advice, the Court noted that lenders often insist on that being done before accepting a spouse’s guarantee of business debts to avoid a later claim that the spouse was subject to undue influence in doing so. However, in this case the Court noted Mrs. Schon’s evidence that she was adamantly opposed to her husband’s business venture and was in no way influenced by him to provide a guarantee. Rather, for reasons not explained by her, she attended the bank and signed various documents, including the guarantee, without adequately reviewing or questioning them. 7. Jen-Zam Enterprises Inc. v. Mehrabian 2006 CanLII 17753 (ON S.C.) 148 A.C.W.S. (3d) 712 Mehrabian traded in a Toyota 4Runner on a new Subaru Legacy, receiving a $14 000 credit. It turned out later that the 4Runner was stolen. This action is brought by the automobile dealer (Jen-Zam) to recover the $14 000 from Mehrabian. Mehrabian takes the position that he is completely innocent, knowing nothing of the vehicle being stolen. Assuming that he is innocent and sold the vehicle not knowing it was stolen; explain the arguments available to the parties as to their respective legal positions and the likely outcome of the action. Decision: This case provides a good illustration of the common law doctrine known by the phrase nemo dat quod non habet: no one can transfer a better title to goods than he himself possesses. As such, between two innocent parties, Jen-Zam and Mr. Mehrabian,

Chapter 5 – Legislation in the Marketplace

Mr. Mehrabian bears the loss as he cannot provide trade-in value by providing a stolen car belonging to someone else. As a result, the Court ruled that Mr. Mehrabian must pay Jen-Zam an additional $14,000.00 as the stolen car has been seized by the police and returned to the lawful owner. Sample Examination Questions Multiple Choice Questions 1. In which of the following will the title to the goods pass to the buyer at the time of contract? a. Mrs. Jones calls the Bay and asks them to send out the blanket advertised on p. 3 of its flyer. The Bay agrees and takes her credit card number. b. Mary picks out a leather briefcase and leaves it with the seller so that initials can be engraved on it. She paid by cheque. c. ABC Co. buys all the chemicals contained in a drum marked "A" but the price has to be ascertained by measuring the number of litres in the drum. d. Williams, at Antiques Unlimited, contracts for the desk he selected and arranges to have it delivered to his office tomorrow and to be paid for in one month. e. While at the Bay, Preston decides to buy the style of sofa he sees on display. He pays by cash and the store arranges to have one sent from its warehouse directly to Preston's home. Answer: D 2. The Sale of Goods Act adds a number of implied terms to a sale-of-goods transaction. Which one of the following statements is not an implied term under the Sale of Goods Act? a. The seller promises the buyer good title b. The buyer is promised satisfaction or the right to get his money back c. Where the buyer tells the dealer in those goods what he wants them for and relies on the seller to provide them, the goods must be reasonably fit for that purpose d. Goods sold by description must be of merchantable quality e. Where goods are sold by sample, the bulk must match the sample. Answer: B 3. Colson went to Logon Drugs and bought some light bulbs for the hallways of his new apartment building. A tenant asked for one and Colson gave him one but told him he was responsible for getting his own from now on. The bulb, manufactured by Burnaby Brite, Ltd. and sold to Logon Drugs by Dandy Distributors Ltd., was defective, improperly made. It exploded and caught some curtains on fire. The tenant's apartment suffered $6,000 damage; he had to move out. He couldn't live there while repairs were being undertaken and had no choice but to find another place. It would take three weeks to get the apartment liveable again. On these facts which of the following is false?

Chapter 5 – Legislation in the Marketplace

a. b. c. d. e.

The tenant could sue Logon Drugs for breach of contract or negligence because his loss was caused by the defective light bulb. Logon Drugs had not really caused the damage, but it could still be sued by Colson for breach of contract. Logon Drugs cannot sue the manufacturer for breach of contract even though the manufacturer was at fault. Logon Drugs could sue Dandy Distributors for breach of contract although it was not at fault for the damage. The manufacture could be sued in contract by Dandy Distributors, but could be sued by others only for the tort of negligence.

Answer: A 4. (Modify for your province) Which of the following statements does not accurately state the law with respect to the provisions of the Trade Practices Act or the Consumer Protection Act? a. The court will consider all the surrounding circumstances in determining whether or not an act or practice is unconscionable. b. Where a consumer has been subject to a deceptive or unconscionable act or practice, he may recover damages and be granted an order for rescission. c. In consumer transactions generally there is a cooling-off period of seven days in which the consumer can call off the deal. d. Where a supplier engages in a deceptive or unconscionable act, he may be subject to both fines and jail. e. A deceptive or unconscionable supplier may also lose his right to carry on business in the province. Answer: C 5. With regard to bankruptcy and debt collection, which of the following is false? a. The Bankruptcy and Insolvency Act provides for a procedure for an insolvent debtor to make a proposal to his creditors which may or may not result in bankruptcy for the debtor. b. Both fraudulent conveyance and fraudulent preferences acts (change for jurisdiction) attempt to prohibit the debtor from delaying, hindering or defrauding the creditor. c. Corporations which go into receivership may not be involved in bankruptcy; the receivership may be based on contract. d. The commission of a bankruptcy offence could prevent a bankrupt debtor from being discharged. e. Any assets obtained by a discharged bankrupt can still be claimed by former creditors who placed the former bankrupt into bankruptcy. Answer: E

Chapter 5 – Legislation in the Marketplace

6. Your brother wants to borrow $8,000 from the Bank of Britannia and has asked if you would guarantee the loan. You have been told the following with regard to guarantees. Which of the following statements is false? a. As guarantor you can use any defense against the bank that your brother could use. b. A guarantor becomes the primary debtor as soon as the guaranty is signed. c. You, as guarantor, may be relieved of your obligation if the bank does anything to weaken your position through subsequent dealings with the debtor, e.g. by agreeing with your brother to increase the amount without your consent. d. If he defaulted on his payments and you had to pay the debt to the bank, you would be subrogated to the rights of the bank, i.e. you would get the bank's right to sue your brother. e. A legally enforceable guarantee must satisfy all the elements required to create a binding contract. Answer: B 7. Identify the one factor not required with respect to the attachment and perfection of a secured creditor's security interest. a. The creditor must either have registered the interest or have taken possession of the collateral. b. The creditor must have agreed to be governed by the applicable legislation. c. The creditor must have given some value to the debtor. d. The item of collateral must be identified either by the creditor's possession of it or by a statement signed by the debtor. e. The debtor must have legal rights in the collateral. Answer: B 8. Which one of the following statements about the Personal Property Security Act is false? a. This legislation applies to all present and future transactions (whatever form they might take) where personal property is given as security interest to enforce an obligation. b. Unless a creditor in a secured transaction covered by this Act takes steps to "attach and perfect" his security interest, he could lose that interest to someone outside the contract. c. In a situation where a debtor fraudulently attempts to transfer property that he has given as security, the Act is designed to protect both the secured creditor and the innocent third party. d. If a secured creditor fails to register his security interest in the Personal Property Registry, he loses his rights against the debtor. e. If someone suspects that an item of personal property has been given as security by a particular person, he can search the Registry to see if that is true. Answer: D

Chapter 5 – Legislation in the Marketplace

Short Answer Questions 1. What types of transactions does the Sale of Goods Act apply to? Answer: The contract must anticipate the transfer of goods, either now or sometime in the future, for a monetary consideration. 2. Joe left his car at Harry’s tire store and asked Harry to put on a particular model of tire from his stock onto the vehicle while he went into his office in town. During the day, the tires were installed on the car and he returned that evening to pick them up. At what point did title on those tires transfer? Answer: This is Rule #5. Title transfers when the goods have been unconditionally appropriated and there is the assent of the other party of such appropriation. In this case, by leaving the car knowing that Harry would choose the tires and put them on, he had assented to the selection; therefore, title transferred when Harry put the tires on Joe's rims and on the vehicle. 3. Explain what obligation the Sale of Goods Act puts on the seller with respect to fitness and quality? Answer: The Act implies a condition into the contract that the goods will be of merchantable quality when sold by description and where bought for a particular purpose, the goods must be fit for that purpose. 4. Explain what kind of protection is provided by the Trade Practices Act (Unfair Practices Act, Business Practices Act depending on the jurisdiction). Answer: This legislation prohibits and provides remedies for misleading the deceptive statements in that they become part of the contract of sale and the purchaser can sue for breach of contract. Note that this answer will vary with jurisdictions. 5. Explain three significant contributions of the Federal Competition Act. Answer: 1. To control mergers and other agreements between businesses which have the tendency to restrict or limit competition. 2. To restrict or control certain anti-competitive abusive trade practices such as predatory pricing. 3. To control or prevent and provide remedies for misleading advertising, double ticketing, etc.

Chapter 5 – Legislation in the Marketplace

Explain the primary purpose of the Personal Property Security Act.

Answer: It is to bring all of the various different methods of using personal property to secure debt under one process and one Act. 7. Distinguish between attachment and perfection under the Personal Property Security Act. Answer: The creditor's rights under the Personal Property Security Act are said to attach against the chattel, or anything used as security when the contract is executed or partially executed, for example, when the money is advanced. Perfection, however, gives rights to the creditor against third parties and that takes place when the secured transaction is registered or where the creditor obtains possession of the thing he used as security. 8. Owen borrowed money from a credit union, guaranteed by his father, to buy a car. The credit union also registered a security interest under the Personal Property Security Act against the vehicle. Owen defaulted and, instead of repossessing the vehicle, the credit union demanded payment from the father. Explain the legal position of the father under these circumstances. Answer: The credit union has every right to demand payment from the father instead of repossessing the car. Once the father pays, however, he “steps into the shoes” of the credit union and has the right to repossess the car and have it sold, just as the credit union did. 9.

Explain two methods for a debtor becoming bankrupt.

Answer: Voluntary assignment where the debtor chooses to go to a trustee in bankruptcy and voluntarily assign his assets to that trustee, and a receiving order where the creditors go to court and obtain a receiving order whereby the assets of the debtor are forcibly transferred to a trustee in bankruptcy and the proceeds from their sale is then distributed to the creditors. 10.

Explain the role of the trustee in bankruptcy proceedings.

Answer: The function of the trustee is to receive the assets of the debtor, to deal with them in such a way so that as much as possible is realized from them, and then those funds are distributed to the creditors.

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Essay Topics 1.

Discuss the significance of the Sale of Goods Act in our market-based economy.

Explain the significance of a “manufacturer's warranty” for products such as a camera and a computer and why it’s necessary with respect to the Sale of Goods Act.

Discuss the consumer protection legislation in place in your province in terms of its effectiveness and purpose.

Explain the advantages and disadvantages of the registration requirement in a secured transaction situation. In your answer, deal with the changes imposed by the Personal Property Security Act.

Explain how in a creditor/debtor transaction the exposure of a guarantor is limited and his rights protected.

Discuss the objectives of the Bankruptcy and Insolvency Act and how well those objectives are obtained.

Discuss the bankruptcy and insolvency process from the point of view of the creditor, indicating how that creditor's interests are or are not protected.

Discuss the impact of federal competition act on the business climate of Canada.

Consider the offences, and other prohibited and reviewable practices under the Competition Act as well as the tools used to enforce those provisions and discuss the effectiveness of the act in meeting its objectives.

Instructor’s Manual Chapter 6

Agency and Employment Teaching Suggestions An unfortunate limitation of one-term courses is the lack of sufficient time to cover all the material in a comprehensive way in only 12 or 13 weeks. Although they are important, agency and employment law are two areas that suffer in my courses. I can usually spend only an hour on each of these areas. With this limitation in mind, I usually look at agency first and start by distinguishing between an independent contractor, an employee and an agent. The independent contractor has entered into a contract to do a specific job and in effect works for himself. The employee is in an ongoing service relationship and follows the instructions of the employer. An agent can be either an independent contractor such as a lawyer or accountant, or an employee. Agency is more of a function, where the agent is a go-between representing the principal/employer in dealings with a third party. When I look at agency I cover three different relationships: the agent/ principal relationship; the the principal/ third party relationship and finally; the agent/ third party relationship. The agency relationship can and usually is created by contract. This is often an employment contract but can be a specific agency agreement. This contract need not be in writing and may be verbal or even by conduct. But an agent can also act gratuitously. The key is the principal granting authority to the agent to act. With the exception of a gratuitous agent (a “volunteer” agreeing to so act) the agent /principal relationship is governed by contract. At the very least, the contract will determine payment of expenses, commissions, salary, and duties. The most unique aspect of this relationship is the fiduciary duty owed by the agent to the principal. The agent is obligated to act in the best interests of the principal even if this means the agent’s own interests suffer. I find the Ocean City Realty case very useful to get this point across (case number 2 in cases for discussion at the end of the chapter). That is, even though the real estate agent didn’t personally profit, she violated her fiduciary duty by not disclosing certain information about the sale that the principal had a right to know. She lost any claim to a commission as a result. In the principal/third party relationship the key is to understand under what circumstances a principal will be liable for the conduct of an agent towards a third party. In tort law this is based on vicarious liability. If the agent is also an employee the employer/principal will be vicariously liable whenever the employee was doing the wrongful act within the scope of his employment. If the agent is an independent contractor that liability is much more restricted. Only where the wrongful conduct takes place while the agent is actually exercising his authority, either actual or apparent will the principal be held vicarious liable. This usually is limited to situations where the agent is involved in fraudulent of negligent misrepresentation. In contract law we concentrate on whether the agent had authority to act or not. This authority can be actual (either express or implied), or apparent. Note that I distinguish between

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implied and apparent authority. You can't imply authority where the principal has specifically withheld it, but there still may be apparent authority based on the principle of estoppel. I draw two concentric circles, the inner one representing actual authority and the outer apparent authority. So long as the conduct falls within one of these circles the principal is bound. Even where the action takes place outside of both circles (the agent acting without any authority) the principal can still ratify the contract. Finally, I talk about the relationship between the agent and the third party. The primary question is under what circumstances a third party can sue the agent, and the answer is very seldom. Only where the agent has acted outside of any authority, actual or apparent, will the third party be able to sue the agent for not having the authority claimed (breach of warranty of authority). In situations where the agent acted with authority, actual or apparent, the third party can sue the principal. The second situation where the third party can sue the agent is where the agent signed the document involved in his own name and otherwise failed to indicate he was acting for someone else. This is an undisclosed principal situation and when the third party finds out about the principal, he has the choice to continue his action against the agent or to sue the principal instead. But once the choice is made, he is bound by it and can’t later change his mind. When discussing employment law I begin by distinguishing between an independent contractor, an employee and an agent if I haven’t already done so. I discuss the control test and the organization test in determining if there is an employment relationship. I also review vicarious liability to demonstrate again how an employer is vicariously liable for wrongful acts of employees committed in the course of that employment. I also point out here that in many jurisdictions the motor vehicle acts make the owners of motor vehicles vicariously liable like employers for any accidents that are the fault of people to whom they lend their cars. Thus employers can be liable even where an employee commits the wrongful act on a “frolic of his own” if a company vehicle is involved. I look at three different areas when examining employment law. First the common law master/servant relationship, then employee welfare legislation and finally collective bargaining. With master servant law I concentrate on termination. Most students are surprised to find out that an employer generally has the right to terminate for whatever reason they want. This, of course, has been modified somewhat by human rights legislation that prohibits discrimination in employment relationships and point out that this is usually modified in collective agreements. However, I emphasize that in general if an employer wishes to terminate the employment that is their option. The only requirement is that they give reasonable notice. That’s the catch. Students are usually surprised to discover that for long-term employees such reasonable notice can be up to two years notice or pay in lieu. The courts will look at such things as length of service, nature of job, age of employee, and the likelihood of finding another job in determining just how much notice is required. Note that this can be and often is modified by agreement. Employment contracts often specify notice periods of only a few weeks even in long term contracts or that the contract will end at a specific time and these specific provisions will prevail providing it is not inconsistent with the Employment Standards Act in force in the applicable province.

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I explain that if there is “just cause” an employee can be dismissed immediately without notice or payment of severance. Just cause may consist of wrongful conduct such as the commission of crime (theft or violence to the employer or other employee) disobedience of a lawful order, immoral activity, or incompetence. It is important to point out at this time the principle of constructive dismissal. That is, if the employer breaches the employment contract by unilaterally demoting transferring or requiring some other conduct that is contrary to what the employee has agreed to do, that employee is entitled to treat the employment as over and sue for wrongful dismissal. In any wrongful dismissal action the issues are usually a dispute over the length of the notice provided, or a dispute as to whether there was just cause or not. Damages are calculated on the basis of what notice should have been given when compared to what was given. In the Keyes case (Case Summary 6.7) the Supreme Court of Canada significantly reduced any notion that “bad faith” on the part of the employer in termination provided a basis for further lengthening the notice period (so called “Wallace” damages). However, employer conduct that amounts to defamation, harassment or other damage to the employee in these difficult situations can provide a basis for additional damages to be awarded on the basis of that improper conduct. Note however that the employee has an independent and ongoing obligation to mitigate in these circumstances. If he does find another job within the notice period, his damages will be reduced accordingly. This fact, as well as the costs involved and the uncertainty of success will usually persuade an employee tempted to dispute the notice given to accept a considerably lower settlement. Note that the employee is also required to give reasonable notice upon termination but this is usually a much shorter period of time although a key employee leaving early can be held liable for the damages this causes the employer. Note that there is no general fiduciary duty on all employees. However, there is a duty of confidentially if it is made clear what is required to be kept confidential. When I look at employee welfare legislation I briefly explain the Workers Compensation Act, the Employment Insurance Act, and the requirements of human rights legislation the workplace but I concentrate on an examination of the Employment Standards Act. This varies from province to province but covers common features like minimum work age, minimum wage, hours of work, overtime, leaves, holidays and vacation pay. I also deal with specified periods of termination notice required in these act. They are always shorter than the common law period, and many employers think that they are only required to give the statutory notice. But in most jurisdictions these acts make it clear that the standards set in the act are minimum and that any other standard in law that is higher will prevail hence the courts look to the longer common law definitions of reasonable notice and apply them. I usually have very little time to deal with collective bargaining but I do raise the subject and cover the basic factors. I point out that the legislation was born out of conflict with the main objective to stop the violence, not to be fair. The result is that employees have the right to join unions and be represented by them and the employers have little say in the matter. I point out that the process for certification involves the union applying to a government board and if they have a certain percentage of

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workers who have joined they can apply for certification. A vote is held and if a majority of those voting choose certification, the union will be certified. The employer must then bargain in good faith with the union instead of the individual workers. Once a contract is agreed to it constitutes a collective agreement. It must contain certain things like provision for the arbitration of disputes arising under it. If they cannot reach an agreement a mediator can be appointed to help them reach an agreement. Where no contract can be agreed to, and negotiations fail, the parties then have the right to go on strike or lock out. A strike involves the employees withdrawing their services whereas a lockout involves the employer halting work. Before there can be a strike or lockout the old contract must have expired, the parties must have attempted to bargain in good faith and appropriate notice must have been given to the other side. If a mediator was involved that mediator must “book out” of the dispute before job action can commence. When there is a lawful strike or lockout the employees generally picket the job site. This picketing is legal if it only conveys information. They picketers cannot legally force customers, the public or other employee not to cross the picket line. Any crime or tort committed on the line is actionable. Picketing is effective because customers and the public normally prefer to avoid such unpleasantness and there is a profound ethic in the union movement not to cross another union’s picket line. Thus other employees, even when they work for another employer, will normally not cross such a picket line if they can legally avoid it. In some jurisdictions only the jobsite that is on strike can be picketed. Other jurisdictions allow secondary picketing where employees can picket anywhere the employer does business. I also point out that the union also has obligations to their members. They must obey human rights legislation, conduct their business democratically and properly represent the employees in disputes with the employer. I point out that there are four different types of disputes in collective bargaining. Organization disputes are now dealt with through the certification process. Jurisdictional disputes (between unions as to who should represent workers or what group should do what kind of work) are also solved at this stage. Interest disputes are disputes over what should be included in a new collective agreement and are the only type of dispute where a legal strike or lockout can take place. A rights dispute is a problem over the content of a collective agreement that is in force. These must be solved by arbitration and where a strike takes place over a rights dispute it is an illegal strike and the courts will issue and injunction to force the parties back to work. Chapter Summary Agency An independent contractor works for him- or herself An employee works for the employer in an ongoing relationship An agent represents a principal in dealings with a third party An agent may be an employee or an independent contractor Agents usually enter into contracts on behalf of their principals

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Creation and authority Agency depends on granting of authority Agency is usually created by contract Principal also bound where agent acts within apparent authority Agent has apparent authority when principal leads another to that belief Agent can be given authority by ratification either intentionally or by implication Ratification works retroactively Restrictions on ratification Agent’s authority should be carefully specified Vicarious liability Vicarious liability will be imposed where an agent is also an employee and … Where employee/agent commits tort in course of or associated with employment Liability of principal for agent’s torts is limited when the agent is an independent contractor Principals will be responsible for their own torts committed through the agent Vicarious liability imposed on car owners by statute Liability of agent to third party Normally, the agent can neither sue nor be sued under the contract Exception: Agent may be sued for breach of warranty of authority Exception: Agent may be sued where acting for undisclosed principal Third party can sue agent or undisclosed principal, but bound by choice Third party not bound by contract where identity of undisclosed principal is important Agent’s duties to principal Agent has fiduciary duty to principal Agent must exercise utmost good faith to principal Agent must make full disclosure to principal. Agent must put principal’s interest ahead of his or her own Agent must also exercise reasonable competence and appropriate skill. Agent can’t normally delegate Agency ends with termination of authority Death, bankruptcy, or insanity terminates authority. But apparent authority may continue Employment Contract law applies to employment Specialized statutes have own definitions of employment Vicarious liability based primarily on employment Employment exists when employee can be told what to do and how to do it (control test) Employment also exists when employee is an essential element of employer’s organization (organization test) Vicarious liability and fiduciary duty Employer liable for torts of employee within scope of or closely associated with employment Employer liable for contracts made by employee/agent acting within authority

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Only managers or key employees have fiduciary duty Termination Employment contract may be for specific period But statutory requirements must be met. Notice requirement may be set out in contract Employer must provide reasonable notice of termination. Or provide pay in lieu of notice Reasonable notice requirement can be extensive No notice required where just cause Incompetence often difficult to establish Reasonable accommodation required for disabled workers Lack of work is not just cause Wrongful dismissal Wrongful dismissal damages based on what notice should have been given Terminated employee must mitigate loss Wrongful dismissal may take form of constructive dismissal Employee’s obligations Employee can quit where just cause (Or pursuant to contract provision) Otherwise employee must also provide reasonable notice (but usually less) Employees liable for misuse of confidential information or other wrong Collective bargaining History and certification Workers band together to combat poor working conditions Violence associated with early years of trade union movement Certification process reduces confrontation Canada follows American approach Employees have right to bargain collectively Recognition disputes reduced through certification process. Jurisdictional disputes also resolved through certification or by application to board Certification requires signing up members and making an application Followed by government supervised vote Certification granted with majority vote Intimidation and coercion prohibited But employer free to express honest opinions Bargaining Parties must bargain in good faith Mediation/conciliation available to assist bargaining Contract must provide for arbitration of rights dispute Agreement must be at least for one year First contract can be imposed Contract can require employees to join a union, with the employer collecting dues

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Strike and lockout Interest dispute may lead to strike or lockout Employees must give notice of strike. Employers must give notice of lockout Union members can picket during lawful strike but only to persuade Strong tradition of honouring picket line Trade unions must be democratic, not discriminate, and properly represent members Employee welfare statutes Workers’ compensation statutes compensate injured workers Occupational health and safety statutes ensure worker safety Employment Insurance Act helps workers between jobs Human rights statutes protect workers discriminated against in employment Employment standards statutes provide for holiday pay, leaves, overtime, termination, etc. Supervising employees Unfounded accusations of employee wrongdoing should be avoided Proper training of all employees including security people important Care must be taken in investigations to respect rights of employees Fair hearing must be given employee before disciplinary action imposed Progressive discipline often effective Often best to inform employees of surveillance Note no general right to search employees or their lockers Careful supervision, security, and surveillance can avoid problems Where theft or fraud is involved it is often better to involve the police Employers must take care not to infringe the rights of employees Expert help should be obtained when crime is suspected Improper process can have serious repercussions to the business. Questions for Review 1. Explain why the topics of agency and employment are important with respect to the study of business law. Answer: Virtually all businesses conduct their business through agent and employees. 2. Distinguish between independent contractors, employees, and agents. Explain why that distinction is important. Answer: An independent contractor does specific contracted work, in effect working for himself. An employee does work as directed by the employer. An agent may be either an independent contractor or an employee and acts on behalf of a principal in dealings with a third party. The obligations and liability of the principal/employer is determined to a large extent on the basis of that relationship 3.

Distinguish between actual, apparent and implied authority.

Answer: Actual authority is given directly to the agent by the principal either expressly or by implication. Apparent authority usually arises from the circumstances

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that the principal creates around the agent or by statements made by the principal that causes a third party to believe the agent has authority. Implied authority is actual authority given to the agent implied from expressed terms for the position provided by the principal to the agent in the agency contract. But you can’t imply authority where it has been specifically denied. Apparent authority is also taken from those circumstances where the principal has done something to lead the third to believe the agent has authority and it exists whether specifically denied by the principal or not. 4. Explain what is meant by ratification, how ratification may arise, and its effect on the contracting parties. Answer: Ratification takes place when the agent has acted for the principal without authority and after the fact the principal confirms that the action is binding on him thus granting authority to act retroactively. It makes the contract binding as if the agent had authority at the time he acted. It can arise by express ratification, by conduct of the principal or by the principal knowingly taking a benefit under the agreement. 5. Explain under what circumstances a principal will be responsible for the wrongful acts committed by an agent who is an employee, and an agent who is an independent contractor. Answer: The employer will be responsible for wrongful acts in tort law whenever the agent /employee was acting within the course of the employment when the tort was committed. For an independent contractor/agent the liability is much narrower and the wrongful act must be committed while acting within the actual authority given. This usually involves the negotiation of or the actual creating of the contract authorized by the principal. This is almost always fraudulent or negligent misrepresentation with respect to the transaction. 6. Explain what is meant by an undisclosed agency. What options are available to a third party when an agent acts for an undisclosed principal? Answer: In some rare situations an agent will act for a principal in dealings with a third party without disclosing that he is acting as an agent or withholding the identity of the principal. The third party usually thinks they are dealing with the principal party. If the deal goes sour the third party can sue the agent and upon learning of the identity of the principal can choose then to sue the principal instead, but once made he is bound by that choice. 7. Explain the nature of an agent’s obligations to the principal, and what is meant by fiduciary duty. Answer: The agent must act in a competent manner and without negligence when carrying out his responsibilities. He also has a duty of good faith and confidentiality to the principal. This is a fiduciary duty and requires the agent to put the principal’s interests ahead of his own. He must get the best price for the goods, not take kick backs, not use information gained for his own benefit or intercept opportunities belonging to the principal, etc.

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8. Define employment and distinguish between the control test and the organization test. Answer: In an employment relationship the employee is working for the employer meaning he takes direction from the employer and is in an ongoing service relationship. The control test looks at the degree of control that the employer exercises over how the employee carries out her work whereas the organization test asks whether the employee is an integral part of the employer’s organization or business. 9. Explain under what circumstances an employer will be vicariously liable for the torts committed by an employee, and for contracts entered into by an employee. Answer: The employer is responsible for all contracts entered into by the employee where that employee was acting as an agent and acting within the actual or apparent authority given by the employer. The employer is vicariously liable for any tort that was committed by an employee who was acting within the course of his employment at the time it was committed. 10. Explain how the employment relationship may be terminated. In the absence of contractual provisions, how much notice is required? Include a discussion of constructive dismissal and what effect that will have on the requirement of notice. Answer: The employment may be terminated by mutual agreement between employer and employee, by termination without notice where there is just cause or by giving reasonable notice by either party. This usually requires a longer period of notice on the part of the employer. Note that all statutory requirements must be adhered to and that where a collective agreement is in place the terms of that agreement will govern such termination. 11. Define just cause. Give examples, and explain what effect it has on the requirement of notice. Answer: Just cause covers those situations where the employee has done something wrong that will justify his being fired without notice. If the employee has stolen from or otherwise been dishonest with the employer, has acted immorally, or has been convicted of some crime that will interfere with his or her ability to perform the job, has disobeyed a lawful instruction from the employer, or has committed some actionable wrong while on the job, these can amount to just cause supporting immediate dismissal without notice or other compensation. Where an employee lies on a résumé and the employer finds out, that destroys trust and amounts to just cause. Sustained incompetence can be just cause for dismissal so long as the employer has exercised adequate “progressive discipline” leading up to termination. 12. What are an employer’s obligations with respect to disabled workers? Answer: The employer must make reasonable efforts to accommodate a disabled worker but not to the point of causing undue hardship to the business.

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13. How are damages assessed in a wrongful dismissal action, and how is that award affected by bad faith on the part of the employer or an employee’s failure to mitigate? Answer: The courts will look at such factors as length of service, the importance of the job, the age of the employee, and the likelihood of finding other employment. This notice period can extend to two years in long term relationships. The more recent Supreme Court of Canada decision in Keyes has severely restricted situations in which the notice period will be extended even if the dismissal involved false claims, harassment, lying and other conduct that may cause that employee mental distress. Damages awarded will be reduced by the employee’s failure to mitigate. 14. Answer: Explain the employee’s obligations with respect to notice to quit, fiduciary duty and confidential information. Answer: The employee also has to give reasonable notice but this is usually much shorter than what would be reasonable by the employer. Employees are all obliged to keep an employer’s information confidential. The problem usually is to make sure the employee knows what is to be kept confidential and what is not. Not all employees owe a fiduciary duty to the company, just those in senior or sensitive position and those acting as agents. 15.

Describe the certification process in your jurisdiction.

Answer: This varies from province to province but usually a certain percentage of the work force must be signed up, say 45%, and then a secret vote is taken. If over 50% of those voting choose certification the union is certified as the bargaining agent of the employees. In some jurisdictions if a high enough percentage of employees are signed up the certification vote is dispensed with. 16. Distinguish between recognition, jurisdiction, interest and rights disputes. Indicate how each of these types of deputes must be resolved. Answer: Recognition disputes deal with the union being recognized as the bargaining agent for the employees. This is now dealt with though the certification process. Jurisdiction disputes are where different unions either claim that work is to be done by their members or that they ought to be the union representing a particular group. These are handled either by the certification process or by application to the labour relations board or its equivalent for a resolution. Interest disputes involve disagreements over what terms should be included in a new contract. If an agreement between the parties can’t be reached, this can lead to a strike or a lockout. Rights disputes refer to disagreement with respect to the terms of an in force contract. This must be handled through some form of arbitration, not by job action. 17. Explain what is meant by unfair labour practices and how they are dealt with in Canadian law.

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Answer: Trying to intimidate or threaten employees, creating employer-dominated bargaining units, or even changing pay or conditions of work to undermine the certification drive are usually considered unfair labour practices and prohibited. Firing employees for their union activities is not only a violation of the Labour Code, but under section 425 of the Criminal Code it is a criminal offence for an employer to fire or refuse to hire someone because of his or her trade union activity or to threaten or otherwise intimidate employees from joining a trade union. It is also a criminal offence for employers to conspire together to do those things. In the face of such unfair practices in some jurisdictions the union can be certified without a vote. 18. Explain what is meant by the obligation for the parties to bargain in good faith and the role mediation plays in the collective bargaining process. Answer: Both parties have to meet and try to reach or negotiate a settlement of their dispute. This does not mean that either party has to back off their demands or make compromises. Mediation involves a third party being appointed to assist the parties to reach an agreement. 19. Distinguish between a strike and a lockout, and indicate how much notice must be given and any other restrictions or requirements on strike or lockout in your jurisdictions. Answer: A strike is a withdrawal of services by the employees whereas a lockout is a work stoppage instigated by the employer. There must be no current collective agreement in force, there must have been an attempt to bargain in good faith and notice must be given (72 hours in B.C.). If a mediator has been appointed they must book out of the dispute first. 20. What is meant by picketing? Why is it so effective and what limitations on the right to picket are there in your jurisdiction? Answer: Picketing involves union members stationing themselves at the entrance of the work site or walking around it supplying the public, customers and other workers with information so as to discourage those people from crossing the line and doing business with the struck employer. No violence can be used and no other law can be broken in the process. Such tactics are effective because other union members and their families are generally committed not to cross a legal picket line and members of the public and customers don’t like to subject themselves to such unpleasantness. 21. off.”

Explain what is meant by a union shop, a closed shop, and the right of “check

Answer: A union shop is the term used to describe a worksite where any new employee hired must join the union when hired. A closed shop is one where only workers who are already members of the union can be hired. A check off is the practice of an employer agreeing in the collective agreement to deduct union dues from the pay checks of their employees before they get into the hands of those employees. This makes it much easier for the union to collect union dues.

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22. Explain the purpose and effect of workers’ compensation legislation, occupational health and safety statutes, employment insurance statutes, and human rights statutes with respect to employment. Answer: These are all statutes designed to protect the health, safety and other rights of employees. Workers compensation provides and insurance scheme to cover workers injured on the job, Occupational health and safety rules impose controls on the worksite to reduce potential dangers, human rights legislation prohibits discrimination in employment and employment insurance provides a regular payment to an employee who has been laid off from his work to assist him until he finds another job. 23. List the standards imposed by employment standards statutes in your jurisdictions. Answer: This varies from jurisdiction to jurisdiction but will set age of work, hours of work, overtime rates, holiday pay, termination notice, various leave entitlements, and other standards in the work place. 24. Describe effective strategies to avoid or deal with unlawful and inappropriate behaviours by employees Answer: Security precautions balanced by procedures to promote employee loyalty. It is important to keep employees aware of surveillance and security measure to avoid resentment. Proper training is vital. 25. What dangers does a business face with respect to the investigation and enforcement aspects of employee crime? Answer: There is the danger of violating an employee’s human rights and privacy rights as well as running the risk of defamation or a wrongful dismissal claim. There is also the danger of committing the offence of obstruction of justice: e.g. making arrangements with the employee not to prosecute if the stolen property is returned. Questions for Further Discussion 1. A principal who enters into a contract that specifically limits the agent’s authority to act still faces the possibility of being bound by acts the agent performs outside that actual authority. This is because of the agent’s apparent authority. Why should the principal bear responsibility to the third party when it was the agent who violated the authority limitation? Would it not be more appropriate for the third party to turn to the agent for compensation for any losses suffered when the agent violates his or her authority? In your discussion consider the matter from the point of view of the principal, the agent, and the third party. Comment: The question asks how far we should extend the principal’s liability for what an agent does. If there is no actual authority given why should the principal be held liable at all? Remember that actual authority can be implied, and so with apparent authority we are only talking about those situations where the agent has clearly gone beyond what he was authorized to do. The other side of the argument is

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that the principal will only be liable for the agent’s conduct under apparent authority if it can be shown that the principal has done something to lead the third party to believe the agent does have authority. By choosing to act through and agent and placing her in such a position the principal is being held responsible for their own choice and conduct. Still the dilemma remains, should the principal ever be held responsible for the non-authorized acts of agents? This again imposes an obligation on the business person that adds more to the costs of doing business. But it does place the liability for the wrongful conduct on the business which was profiting from the actions involved. 2. Employers are held vicariously liable for torts committed by their employees in the course of their employment. Some have questioned the fairness of this process since it is the employee who is committing the wrongful act, not the employer. This is an example of holding the employer strictly liable for the employee’s wrongdoing even though they are completely innocent. We don’t even impose that kind of liability on parents for the wrongful acts committed by their children. Discuss the appropriateness of holding one person such as an employer responsible for the acts of another. Look at the question from the point of view of all parties involved and also consider the public interest. Consider as well that the Supreme Court of Canada has broadened the scope of activity for which an employer will be vicariously liable for the acts of employees. The test now is not whether he was doing his job but whether the act was closely enough connected to his employment to impose liability. Comment: The reasoning behind such an approach is that the employer has deep pockets, is more likely to have insurance and is the one profiting from the actions of the employee. Many students actually think that it is only the employer that is liable and not the employee. In fact both are liable and from the point of view of an employer, it is difficult to understand how they can be liable if they are in no way at fault for what has happened. From the public point of view it is important that someone who can pay assume the responsibility for the damages so that the public doesn’t get saddled with the costs. It can be a very interesting discussion to weigh these competing interests. The recent Supreme Court of Canada decision just expands the liability of the employer but the competing interests are the same. 3. In Canada we have developed the practice of requiring employers to give employees extensive notice or pay in lieu of notice when terminating without cause. Most provinces have enacted employment standards acts where the required statutory notice is much less than the common law requirement. But these statutes also provide that the longer term (in either the statute or the common law) should prevail. Is it appropriate or fair to employers to impose such lengthy notice periods? Should the declared statutory period simply override any prior common law approach, as would normally be the case with statutes? On the other hand, do you think that when a term is included in the employment contract that reduces this notice period, it should be allowed to stand? Think about the relative bargaining positions of the employer and employee at the time of hiring when these special terms are normally agreed to. Comment: Requiring extensive notice periods is a very controversial policy and is perceived as interfering with an employer’s right to make appropriate decisions to keep his business economically viable. Employers must be free to respond to changing market conditions. This is the accepted rationale for requiring much shorter

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notice periods in the U.S. The shorter periods set out in the statutes seem to adopt this U.S. approach to shorter periods and so the question must be asked whether the longer common law periods of reasonable notice ought to be abandoned. Certainly from the point of view of encouraging business, the freer the employer is to reorganize his workforce without incurring unbearable termination costs, the better. Into this mix must go the individual agreements to allow for a shorter notice period set out in an employment contract. If both parties agree why not allow it to override all other considerations. The problem with this is that it doesn’t take into account the relatively weak bargaining position that most new employees find themselves in and the difficulty of older more long term dismissed employees to find alternate work. 4. Do you feel that unions have too much power today? Look at the legislation in place in your jurisdiction and discuss whether it accomplishes a balanced approach between the needs of employees and their right to bargain collectively, and the freedom of action required by an employer to carry on its business. Comment: This is the classic debate between the imposition of collective bargaining on employers, taking away their ability to make business decisions at their will, weighed against the abuse of workers by those employers. Many feel that the arrangement we have today provides a good balance between these competing interests. In any case your discussion should include a reference to the violence, conflict and disruption that often accompanies these disputes. It can be argued that the public interest is served by the present balance by reducing such conflict whether the process is equally fair to each side or not. Cases for Discussion 1.

Doiron v. Devon Capital Corp. [2002] 10 W.W.R. 439, 2002 AB Q.B. 664 (Alta. Q.B.)

The plaintiffs wanted some short-term investments and turned to Mr. Demmers, who had looked after their pension fund and insurance matters as a representative of Manulife. He persuaded them to invest in Devon, calling the corporation “a no-risk investment.” This proved to be bad advice and the plaintiffs lost all of their funds. They unsuccessfully sought compensation from Demmers, who had become bankrupt. In this action the plaintiffs sought compensation from Manulife. It was clear that the plaintiffs thought Demmers was an employee of Manulife and that the Devon investment was one of their products, which it was not. Indicate the arguments that could be raised by both parties and the likely outcome. Would it make any difference to your answer to know that even though Demmers was required to work for Manulife exclusively, Manulife had taken pains to set out in their contract that Demmers was not an employee, but was an independent contractor? What if you were told that Demmers’ offices were located in the Manulife Building, that his calls were directed through the Manulife operator, and that when asked he was encouraged to present himself as a Manulife representative? Decision: This case is a good example of a situation in which a company will be legally liable for actions of its brokers even where that broker is not an actual agent of the company. In this case the Court accepted Manulife’s submission that Demmers was not an authorized agent of Manulife as stipulated in the brokering agreement

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between Manulife and Demers. Further, the Court accepted that even if Demmers was an agent for some purposes, he could not be for the sale of investments not related to Manulife as was the one sold to the Doirons. However, this case is a classic example of a party (in this case a broker) having the apparent authority to bind the principal in contract. In this case Manulife specifically allowed Demmers to carry on business in a way which would lead any reasonable client to believe he was acting on behalf of Manulife: his office was located in Manulife’s building; his calls were routed through Manulife’s switchboard; his business cards were embossed with the Manulife logo; his office door prominently displayed the Manulife logo; his office was provided with various investment brochures and advertising materials offering Manulife investment products. As a result, the Court ruled that the Doirons reasonably relied on the “apparent/ostensible” authority of Demmers in purchasing the investment and believing it was a Manulife product and Manulife was ordered to reimburse the Doirons for their lost investment of $60,000.00. 2.

Ocean City Realty Ltd. v. A & M Holdings Ltd. et al. (1987), 36 D.L.R. (4th) 94 (B.C.C.A.)

Mrs. Forbes was a salesperson working for Ocean City Realty when she arranged for Halbower to purchase commercial property in Victoria from A & M Holdings. But in order for the deal to proceed Halbower insisted that Mrs. Forbes surrender half of her commission to them. She agreed to do this but did not inform the seller. Even though A & M Holdings didn’t lose any money in the process when they found out about the agreement to pay over half the commission to the purchaser they refused to pay any commission to the agent. Explain the basis for their complaint and the likelihood of success. Decision: The court found that the agent had a fiduciary duty to the seller on whose behalf she was acting and as such had a fiduciary duty to act in the seller’s best interests. This included conveying any pertinent information she had with respect to the sale. This she failed to do. It was up to the principal to decide what information was important. Because of this failure she was not entitled to any commission on the deal. 3.

Adga Group Consultants Inc. v. Lane 2008 CanLII 39605 (ON S.C.D.C.)

Mr. Lane suffered from a bipolar condition, which caused mood swings from manic to depressive states. When stable he was a very capable worker, but could be very disruptive when in a manic phase. He was trained as an electrical engineer and had been employed successfully in sensitive industries in the past requiring a high security clearance. He worked for a time for Siemens but when they discovered his disorder they terminated his employment. Mr. Lane brought a complaint to the Ontario Human Rights Tribunal, which was eventually settled between the parties. He then worked for Linmor who were aware of his problem and were able to work around the disruptions. He was highly rated as a valued hardworking and productive employee. In September 2001 Lane applied for a job at Adga, but did not disclose that he suffered from the bipolar disorder. He was hired but 10 days later he had a manic episode and was terminated immediately. Note that the level of work involved working on NATO military contracts and was quite stressful. It was also time sensitive requiring prompt

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performance of software development contracts. Lane brought a complaint to the Ontario Human Rights Tribunal. How should the Tribunal respond to this complaint? Decision: The tribunal determined that the employer had failed to take any steps to assess and pursue the question of accommodation as it was required to do and that there was a “rush to judgement” by the employer. They failed to establish that they couldn’t accommodate Mr Lane to the point of undue hardship The Ontario Superior court of justice (Ottawa divisional court) determined that the tribunal had acted properly and applied the law to the situation appropriately. The application by the employer to overturn the tribunal’s decision was dismissed. The court also determined that the tribunal’s decision to award damages totalling over $79,000.00 was also appropriate and upheld. An important factor in that determination was that the employer had not taken the time to do any kind of assessment but simply terminated the contract. They should have determined the extent of Mr. Lane’s disability, how it affected his work performance and what else he was capable of doing. 4.

McKinley v. BC Tel et al (2001) 200 D.L.R. (4th) 385 (S.C.C.)

Martin McKinley was a chartered accountant who worked as a controller for several BC Tel companies. He developed high blood pressure, a condition which at first was controlled by medication. Eventually, under his doctor’s advice he had to take a leave of absence from his employment. He discussed with his superior his desire to return to work in a less responsible position, but no such position was offered even though such positions opened up in the organization. The company made him a severance offer that was rejected. His employment was terminated and this action for wrongful dismissal was brought against BC Tel. At the time of his termination McKinley had been employed by B.C. Tel for 17 years. When his employment was terminated, he lost his short term and long term disability benefits. As a result, Mr. McKinley brought this wrongful dismissal action. He claimed that the company had dismissed him in a “high handed and flagrant manner” amounting to “intentional infliction of mental suffering”. This was denied by the company. They claimed that the employment relationship had been frustrated and that they had offered a reasonable severance package. Did the company have just cause for termination? If not, what would be an appropriate remedy in these circumstances? If the company had been guilty of bad faith in the termination process, how would this affect the remedies to be awarded? How would it affect your answer to know that well into the trial the company was allowed to change their defence to just cause for dismissal? The new defence was based on a letter they discovered which indicated that the doctor had recommended a type of medication that would allow him to return to work and that McKinley’s withholding of this letter amounted to dishonesty justifying the termination. Decision: In this case the trial court held that that the employee had been wrongfully dismissed and upheld the lengthy notice period required The appeal court also upheld the lower courts decision to extend that notice period because of the unfair way that the dismissal had taken place. (This conclusion is of limited value following the more recent Keyes case noted above.) The employer has an obligation to treat their

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employees fairly and has a duty of good faith towards them. On further appeal, the Supreme Court of Canada held that this was not an appropriate case to award aggravated or punitive damages. One of the major problems with the case was the discovery that Mr. McKinley had lied about the advice he had received from his doctor about a medication that could be taken that would allow him to go back to work. The problem was whether such dishonesty was always just cause for dismissal. Here the Supreme Court of Canada found that such dishonesty had to be looked at in the context of the employment relationship? Did it undermine or was it incompatible with that relationship? In this case the jury held that it did not and awarded damages for wrongful dismissal and that was held to be appropriate by the Supreme Court of Canada. 5.

Fisher v. Lakeland Mills Ltd. 2005 BC S.C. 64 (CanLII)

Mrs. Fisher had worked for Lakeland for 15 years when she turned 65 in 2002. She asked and received assurance that she could work for the company for as long as she wanted. In 2003 she was required to do extra training and acquire computer skills. She had difficulty with the new demands and felt great pressure to retire and finally did so. She stated that she felt her immediate supervisor “wanted to get rid of her because she couldn’t do the job.” When she talked to the president of the company, he did nothing to change this impression. After retiring she considered what had happened and sued for wrongful dismissal. State the arguments supporting each position and the likely outcome. Decision: Mrs. Fisher claimed that the company unilaterally changed the terms of her employment by deleting some of her long time work duties and adding new duties for which she had no training or job experience. As such, Mrs. Fisher claimed that her work duties had changed in such a fashion that the new duties amounted to “constructive dismissal”. The company contended that the changes were necessary to adapt to changing business requirements and were made even more necessary as the company had lost staff that had previously dealt with such duties. As well, the company claimed that regardless of the changes to Mrs. Fisher’s work duties, she ultimately retired on a voluntary basis. The Court ruled that the changes to Mrs. Fisher’s work duties were significant and did amount to constructive dismissal: “…While it began in an innocent fashion, with an informal office discussion, there is no question that the proposal to add relief shipping duties to Ms. Fisher constituted a substantial change in her duties. This involved computer programming with which she was not comfortable and indeed her supervisor, Ms. Horning, expressed doubts before training that Ms. Fisher had the capacity to do the job. A week of training, or attempted training, reinforced that assessment…” As a result, Mrs. Fisher was entitled to resign her position in face of these unwanted changes and was awarded severance equal to ten (10) months’ salary and benefits.

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6. Pepsi-Cola Canada Beverages (West) Ltd. V. R.W.D.S.U., Local 558 (2002) 208 D.L.R. (4th) 385 (S.C.C.) The union in question obtained certification as the bargaining agent for the employees working at the Pepsi-Cola bottling plant in Saskatchewan. The employer and union bargained collectively but were unable to reach an agreement. As a result, a legal strike took place followed by a corresponding lockout. A bitter confrontation ensued, including employees taking over the company’s warehouse facilities. An injunction was issued and the company resumed business with replacement workers. The union members then extended their picketing to secondary locations, including retail outlets where Pepsi products were sold, as well as a hotel where several replacement workers were staying, and in front of the homes of several Pepsi managers. They carried placards, chanted slogans, screamed insults, and uttered threats of harm at these locations. This action was brought by the employer; they applied for an injunction to stop picketing at these secondary locations. Explain the grounds for their complaint and the likelihood of their success. Indicate any arguments that might be raised by the union in their defence. Would it affect your answer to know that there was no statute prohibiting secondary picketing in place in Saskatchewan as there is in some provinces? Decision: This was an application of freedom of speech and expression under the Charter. There was no prohibition against secondary picketing in the province and so the picketing of the other locations where the employer did business was allowed. In other provinces where there is no secondary picketing, it is likely that a successful application for an injunction could be brought that would limit picketing to the location where the striking workers were employed. This is a reasonable limitation of these Charter rights under section 1 of the Charter. But even in Saskatchewan such secondary picketing could not continue if it amounted to tortious or criminal conduct. The torts of trespass, intimidation, nuisance, misrepresentation and defamation would protect against picketing that involved coercion or prevented free access to private premises. The picketing of the homes of the Pepsi executives amounted to such prohibited conduct. 7.

Kelly v. Linamar Corporation 2005 CanLII 42487 (ON S.C.)

Kelly had worked for Linamar Corp. for 14 years. The company was the largest employer in the town and had a reputation as a good corporate citizen. He was working as a materials manager supervising 12 other employees when he was arrested after the discovery of child pornography on his personal computer (at home). He had a good employment record; nevertheless, upon learning of the arrest, the company immediately terminated his employment. He sued for wrongful dismissal. Do you think that the actions of the corporation were justified in these circumstances? How could they have handled the termination differently? How would it affect your answer to learn that the corporation had a good reputation in the community especially because of charity work done to support children? Decision: This case is a good example of how disgraceful or distasteful conduct by an employee not directly related to their day to day employment duties may still justify dismissal. The Court noted that Mr. Kelly had an unblemished work record with the company. However, the Court also noted that a large part of the company’s

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corporate goodwill and reputation was based on it charitable giving and support of children’s programs in the communities where the company carried on business. Mr. Kelly’s purchase and possession of child pornography was clearly contrary and detrimental to that corporate image and practice. Further, Mr. Kelly was required to meet with and work with other management colleagues and in doing so needed to be respected by those peers and his own subordinates. The fact that he was involved in such a distasteful and disgraceful activity, even on his “own time”, could only seriously impair and undermine those responsibilities. As a result, the Court upheld the termination and dismissed his claim. Sample Examination Questions Multiple Choice Questions 1. Although Jason had participated in the flower auction for the last nine years as an agent for Thomas Holt Ltd. (Holt) with the authority to buy whatever he felt the store needed, this day he was given express instructions to buy only cut flowers. When flats of young camellia bushes with a rare gold flower were being sold, Jason bought them on behalf of the company. Which of the following is false? a. Holt is not bound by the contract, because Jason’s authority was expressly restricted. b. Holt is bound even if it doesn’t ratify the contract. c. Holt is bound by the contract, but Jason is in breach of his agency agreement. d. Holt is estopped from denying Jason’s authority. e. Holt would not be bound if the auctioneer had been notified of Jason’s limited authority. Answer: A 2. Grant got a job with Ace Computers Co. (Ace) as a salesman. He was given a course in salesmanship by Ace, business cards, several of the company’s order forms and brochures, and was assigned to an area in which to sell computers door-to-door on behalf of Ace. Grant would be paid on a commission basis. At his first house, he was so excited by the interest shown that he forgot the explicit instructions he had received -- only cash sales permitted. As agent for Ace, he sold a computer on time to a 70-year-old woman. She was to pay $25 per month for eight years because that was all she could afford. When Brown, Ace’s sales manager, heard of the deal, he fired Grant and said he would not go through with the contract. However, the woman liked the computer very much and insisted that Ace provide her with one within the week as required by the contract. Which of the following accurately describes the legal position of the parties? a. Ace is not bound by the contract because no representations of authority were made by it to the customer. b. Ace would not be bound because Grant failed to follow the exact instructions he had received. c. Ace would be bound because the agent Grant acted within his apparent authority. d. Grant is directly liable to the woman because he didn’t have the authority he claimed to have. .

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Brown is personally liable to the woman because he is the employee of the company who decided not to honour the contract.

Answer: C 3. With respect to duties owed by an agent to his principal, which of the following statements is false with regard to agency law? a. Generally, an agent may not delegate his authority without the authorization of his principal. b. Failure of an agent to perform his duties personally may allow his principal to sue the agent for breach of contract. c. Failure of an agent to obey his principal and to act within the authority given him allows the principal to sue the agent for breach of contract. d. An agent must use reasonable care, skill and diligence in the performance of his duties as agent. e. When an agent enters a contract on behalf of his principal but does so in breach of his duties to the principal, the contract is void and cannot bind the principal. Answer: E 4. Chris was a systems analyst hired to ascertain the best system for a retail china shop. After a careful analysis of the shop’s needs and the available software, Chris presented a written report, which was approved by the owner of the business. Chris was paid his fee and was asked by the owner if he would act as his agent in purchasing the hardware and software recommended in his report. The purchase was not to exceed $40,000 and the commission was to be $1,000. Chris agreed. Read each of the following separately and indicate which is true. a. The agreement to act as agent fails to be a valid agency contract because it is not in writing. b. If Chris buys the hardware and software himself for $36,000 and sells it to the owner for $39,000 he is entitled to his commission because the price to the owner is still within the price allowed. c. Chris will not be in breach of his fiduciary duty if he buys the recommended system from a firm in which he has an interest even if he does not mention that fact to the owner. d. Chris could be in breach of his duties if he delegated the task to someone else. e. Chris is entitled to accept a commission from both the seller and the purchaser so long as the total price paid by the purchaser is less than $40,000 and the hardware and software is comparable to that recommended in the report. Answer: D 5. Which of the following statements is correct with respect to the employer’s liability for the conduct of the employee? a. The employer is always liable for the wrongful conduct of his employee b. An employer is only liable for the wrongful conduct of his employee that takes place during the course of or closely related to the employment c. If a person is injured by an employee acting in the course of the job, that person must sue the employer not the employee

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d. e.

Any employee can bind an employer in contract All employees are agents of the employer

Answer: B 6. Which of the following would end the employment relationship by breach thus giving rise to a claim for damages for wrongful dismissal? a. The employee is told he will no longer be needed at the end of the period of employment specified in the contract e.g. 1 year b. The employee is told he will no longer be needed at the completion of the specific job he was hired to do, e.g. paint a bridge c. The employee is asked to leave because he is too sick to continue doing his job d. The employee is asked to leave because a downturn in the economy has resulted in no work for him to do e. The employee is asked to leave after he refuses to do a reasonable but unpleasant task, which is part of his employment, when another more junior employee could have been asked to do it. Answer: D 7. Eastside Nurseries Ltd., which had long been a family business, was faced with a demand by its workers that it recognize their new organization, a union, for the purposes of collective bargaining. The group was certified by the appropriate governmental board as a union but the parties could not reach an agreement as to what should be included in the new collective agreement. Eventually the Eastside Nurseries Ltd. locked out the employees. This sort of dispute is called which one of the following? a. Jurisdictional dispute b. Recognition dispute c. Arbitration dispute d. Interest dispute e. Rights dispute Answer: D 8. Which of the following statements is correct with respect to the operation of the collective agreement? a. All disputes arising out of the enforcement of the collective agreement must be handled by conciliation/mediation b. All disputes arising out of the enforcement of the collective agreement must be handled by arbitration if they cannot be otherwise resolved. c. Mediation is a process whereby the mediator/conciliator will hear both sides of the dispute and make a decision binding on the parties d. Arbitration is a process whereby the arbitrator will hear both sides of the dispute and try and persuade the parties to come to an agreement e. It is unlawful to include in a collective agreement a provision whereby a new employee must become a member of the union Answer: B

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9. For the past seven years, Hudson has worked as vice-president in charge of personnel (a non-union position) for Mountain Enterprises Ltd. As part of a corporate reorganization, the directors of the company decided to downgrade Hudson’s position to manager of personnel. Hudson is very upset at this change and consequently refuses to go along with it. The company dismisses him immediately without any notice or pay in lieu of notice because of his refusal. If Hudson sues for wrongful dismissal, which one of the following statements indicates the most likely outcome of the case? a. The company will win because non-union employees are always subject to dismissal without notice because there is no collective agreement. b. The company will win because Hudson's refusal constituted "cause." c. The company will win because they dismissed him, rather than saying he was "fired." d. Hudson will win because the company breached the employment contract and he does not have to accept that breach. e. Hudson will win because an employer owes its employees a job unless the employee is convicted of a theft. Answer: D Short Answer Questions 1.

Joe had worked for Sam’s Manufacturing Company for ten years when Sam came up to him one day because he lost a major contract, he had no work for him to do, and he was fired as of that time. Explain Joe’s legal position.

Answer: It is not “just cause” for an employer to dismiss because he has no work for the employee to do. In these circumstances, the employer must still give proper notice. Joe will be able to sue successfully for wrongful dismissal. 2.

Joe worked for Sam in Sam’s Manufacturing Plant as supervisor for five years, and five years prior to that, was made foreman. Because of reorganization, the position of supervisor was eliminated and Joe was reassigned to his old job as night foreman. He refused to take it and sued for wrongful dismissal. What would be the outcome?

Answer: This is an example of constructive dismissal and Joe would have been entitled to reasonable notice. Although there is some debate about this, Joe will likely be successful in his wrongful dismissal action. 3.

How is certification obtained?

Answer: The union representatives attempt to get the employees to sign up as members of that union. When a certain percentage has joined, usually 45%, they can apply for certification. In most instances, a certification vote is held and if over 50% of those voting choose certification, the union is certified. In some provinces if over a certain amount, e.g. 55% in British Columbia joined the union; the union can be certified automatically without a vote.

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What conditions must be met first before the employees can go out on strike?

Answer: The employees must hold a strike vote. A specific period of notice must be given, e.g. 72 hours in British Columbia. If a mediator or conciliator is involved, they must book out before the notice is given. The collective agreement must have expired. 5.

Once a picket line is properly set up, no one can cross it. Explain the accuracy of that statement.

Answer: There is no legal obligation to honour a picket line. If you want to cross it, you have a right to do so. 6.

Explain under what circumstances a principal can be held liable for torts committed by an agent.

Answer: Where there is an employment relationship as well, or where the agent has been involved in fraudulent or negligent misrepresentation. 7.

Explain how the principle of estoppel can be important in an agency relationship.

Answer: The authority of the agent to bind the principal is found not only in the actual authority that the agent has been given, but also in the apparent authority, that is the authority that the principal has led others to believe that the agent possesses. 8.

Joe was a salesman, newly hired by Radio Hut, and on his first day on the job, he was left in charge of the store while the manager and the other salesmen went to lunch. They specifically told him not to sell anything over $50.00 but to just tell the customer to come back in an hour when they would be returned. While they were at lunch, a customer came in and decided to purchase a new stereo TV set and several other accessories. The total sales price was $1,600.00 and the customer couldn’t wait. Joe sold them the merchandise including a $400.00 discount. When the customer returned the next day to pick up the goods, the manager refused to go through with the deal. Explain the manager's legal obligations in these circumstances.

Answer: Joe had apparent authority and was able to bind the store to the purchase; therefore, the customer had the right to insist that the manager go through with the deal. 9. Explain what is meant by an agent’s fiduciary duty to the principal. Answer: An agent has an obligation to act in the best interests of the principal, to put the principal's interests ahead of his own. 10.

Explain what is meant by an undisclosed principal and the significance of such a relationship.

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Answer: An undisclosed principal is involved when the agent deals with a third party in such way that the third party is not aware that he is acting on behalf of somebody else, the principal. In such circumstances, in the event of a default, the third party can sue either the agent or the principal but is bound by his choice. Essay Topics 1.

A major distinction between Canada and the United States is their approach to wrongful dismissal. In Canada, long term employees require significant notice periods before they can be dismissed, whereas, in the United States the notice periods are significantly shorter. Discuss these differences in approach towards wrongful dismissal and the requirement of notice.

There are significant examples of legislative interference with the contractual nature of employment. Discuss several examples of such legislative interference in terms of the objectives to be accomplished and whether these objectives have been met.

Examine the collective bargaining legislation in place in your jurisdiction and discuss whether a balance has been struck between employer and union power, whether the results are fair to both parties and whether such fairness or justice should be the primary goal of collective bargaining legislation.

Discuss the weapons of strike, lock out and picketing, and whether or not they have any place in our present society.

Discuss the concept of vicarious liability as it relates to employment and agency law.

Discuss the extent of an agent's authority to bind a principal in dealings with a third party.

Discuss the extent of the obligations of the agent to the principal based on his fiduciary duty.

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Methods of Carrying on Business Teaching Suggestions I try to spend at least three hours on methods of carrying on business. I start out by indicating that there are many different types of organizations and structures used to carry on business related activities but explain that we will concentrate on the three that can be used by individuals to carry on their business activities. These are: sole proprietorships, partnerships and corporations. There are some common elements shared by all three. All three have to deal with government regulation, getting licenses, paying employees, making and forwarding deductions, paying taxes and keeping records. I first discuss the sole proprietor. A sole proprietor is a person who simply starts a business with no formal process other than sometimes formally registering a business name. The key issue for considering the business efficacy of a sole proprietorship is weighing the risk of bearing unlimited liability. That is, a sole proprietor can lose not only what he has invested in the business but all his assets (personal and business related) are at risk to pay the debts of the business. The sole proprietor is liable in contract and in tort for both his own action and those of his employees done in the course of the business. I point out that this risk can be substantially overcome by acquiring sufficient insurance. The advantage for a sole proprietor is that he is his own boss. There is little outside interference other than the normal requirement of licenses paying tax and keeping records. I conclude discussion of the sole proprietorship mode of business that explaining that many professionals are not permitted to incorporate the actual practice of their professions and so if they want to practice alone they must do so as a sole proprietor. If they want to practice with others they do so in partnership with those other professionals. I next discuss the second method of carrying on business: partnership. I go over the definition in the Partnership Act, and explain that the Partnership Act is derived from an English statute that summarizes the case law, and versions with some variation have been enacted in most common law jurisdictions including all Canadian english speaking provinces. I explain that the Act requires that a partnership involves ongoing business activity being carried on in common and is not a one-time venture. As well, it is only necessary that the parties’ objective be to make a profit, not that they actually do so. The Act specifies a number to activities that by themselves will not create a partnership. It is important to indicate that while partnerships usually are and should be created by agreement you can also become involved in a partnership inadvertently. When the partnership is created by contract that contract should be in writing but need not be. A partnership can even be implied from the conduct of the parties. Partners can and usually do override many of the terms of the Act that pertain to the relationship between partners in their partnership agreement, but cannot override or reduce their obligations to customers and outsiders.

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The key concept to understand in determining the business efficacy of a partnership is that the partners face unlimited liability not only for their own conduct but also for that of each of their partners. That potential legal liability is serious enough to keep in mind when the partnership is created intentionally. However, if a person finds themselves in partnership inadvertently often the first they are aware of it is when they are being sued for their erstwhile partner’s activities. Unlimited liability means that partners will risk the loss of what they have invested and all of their accumulated personal assets: e.g. houses, cars, boats etc. Partners are responsible for any contract entered into by any partner with respect to partnership business. In effect each partner is an agent for the other partners and can bind the partners within their actual and apparent authority. Each partner is also vicariously liable for the torts committed by any partners or employees of the partnership within the scope of the partnership business. Partners are also responsible for breach of trust. For example, one partner sometimes absconds with money held in trusts for clients and the remaining partners are liable for the loss. I also note that even where you are not carrying on business together if you allow someone to call you a partner you can be liable as a partner under the principal of estoppel. As far as the relationship between partners is concerned it is important to emphasize that the partners can modify their obligations to each other in the partnership agreement and secondly that each partner owes a fiduciary duty to the others. As discussed with agency this means that partners must act in the best interests of the other partners and put those interests above their own. Any important decisions of the partnership must be unanimous. From the point of view of an individual partner this is a great advantage over corporations where the majority rules. Also partners don’t earn a salary but all share equally in the profits. These two provisions are often changed by creating different classes of partners in the partnership agreement. Also when a partner dies or goes insane the partnership is dissolved. This will also be changed in the agreement so that the partnership is only dissolved with respect to that one partner. This has been included in the B.C. statute. Partnerships are normally dissolved by one partner serving notice on the others but this can also be changed in the agreement. In any case a judge will always have the power to order the partnership dissolved upon application of one of the partners where the judge feels that the continuation the partnership is no longer justified. In the event of dissolution excess funds in the business are applied in the following order and priority: debts are paid first; expenses incurred by individual partners second; and loans by the partners are paid last. Any excess after these debts are paid in full is then divided equally between the partners or as per the agreement. If there is a shortfall each partner is responsible to make it up out of his personal fortune (unlimited liability). A limited partner is an investor and can only lose what he has invested (limited liability), but in order to be so protected that limited partner must be registered as such, not allow his name to be associated with the business, and not be an active participant or help manage that business. If a limited partner fails to maintain these qualifications, he may be treated as a general partner with unlimited liability. Recently, there has been a movement to create limited liability partnerships (LLP's). Where allowed by legislation, and permitted by a professional organization such as the law society or accounting association involved, the firm can declare themselves to be a limited liability partnership

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but they must indicate this in their registered business name. The effect is to make any error or negligence of one partner only attributable to that one partner. The other partners will not be responsible for the loss and resultant debt. This significantly reduces the unlimited liability imposed on partnerships and the mistakes of one partner can’t pull down the whole firm. When I talk about corporations I find my hardest job is to get across the point that corporations are an independent legal entity separate from the actual person who took the steps to have the corporation created (a “legal fiction”). When dealing with large corporation students won’t believe they don’t exist as a real entity, and with small corporations many have just as hard a time understanding that it is an entity separate from the person who incorporated it. If one imagines the company without its buildings, vehicles, equipment, etc., there is nothing left. It is a fiction. But it is a legal fiction meaning that all who deal with it must act as if it does exist as a separate and independent entity. Still there are exceptions and judges and lawyers know it is a fiction and where appropriate will have no hesitation in “piercing the corporate veil” to assign liability to those who control it. This will usually happen where the corporation is used to commit a crime or fraud, and for tax purposes. I briefly go over the history of incorporation and point out that in Canada there are three ways for a normal business to be incorporated depending on the jurisdiction: the registration system, the letters patent system, and the articles of incorporation system. Although the systems are different the result is the same in that a separate legal entity is created, which is capable of carrying on business in that jurisdiction and others. I would suggest that you spend some time here discussing the particular system in place in your province. Note that it should also be mentioned that some corporations are created by direct government legislation such as the CBC, etc. I point out that most of the unique aspects of a corporation derive from its separate legal entity status. And I point out that these may be taken as advantages or disadvantages depending on your perspective. These are limited liability as explained in the Salomon case, the free transferability of shares (although this is restricted when dealing with closely held corporations), the separation of management and “ownership” (ownership here refers to shareholders), the fact that the corporation doesn’t die naturally (e.g. Hudson’s Bay Company, now "The Bay"), and the fact that the shareholders owe no duty to the corporation. I also point out that the shareholders control the corporation through majority vote. This is fine if you are a majority shareholder but if not you face the “tyranny of the majority” and have little or no say. I also point out here that the process of incorporation is usually more expensive than other methods of carrying on business and also more expensive to keep up. I next explain that broadly held corporations can involve public companies traded on the stock exchange with many more restrictions on reporting and control, whereas closely held corporations are more like incorporated partnerships with only a few shareholders who are also the directors and actually participating in the business. These have much less reporting and control restrictions, although there is a requirement that there be a

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restriction on the transferability of the shares. Usually one shareholder must first offer his shares to the others and get permission of the directors before being allowed to sell them to outsiders. The directors, unlike the shareholders, have significant duties imposed on them to the corporation. They must act like reasonably prudent business people when acting for the corporation, and they also have a fiduciary duty to that corporation. It is important to emphasize that this duty is owed to the corporation, not to the shareholder, and this is another opportunity to review the nature of fiduciary duty. I also point out that in addition to the duty owed to the corporation, directors also owe a duty to outsiders. They can be liable for crimes committed by the corporation or those employed by it, for pollution, for unpaid wages and for a failure to collect or remit deductions or taxes, and for claims of creditors where dividends have been improperly paid out. I also take a few moments here to talk about the duty of promoters not to cheat the ultimate shareholders by misrepresentation or inflating the value of assets when they sell the corporation. I then look at the rights and duties of shareholders, pointing out that there are few, if any, duties to the corporation, only not to participate in insider trading if they have enough shares. The shareholders don’t have a right to a dividend even if they hold preferred shares. Although the corporation is a separate person controlled by the directors, a minority shareholder has a right to bring a derivative or representative action on behalf of the corporation if the directors refuse to do so. Where a majority shareholder does things to hurt the minority shareholders that also harms the company (usually because of a personal dispute) that minority shareholder or even a creditor can bring an oppression action with the court having many options to redress the wrong including dissolution of the corporation. This often happens where assets are being stripped from the corporation and going to another corporation or individual. Sometimes the action of the corporation hurts the minority shareholder but benefits the company as a whole. When this happens in some jurisdictions, the shareholder can dissent and have their shares purchased at a fair price. In some provinces there are preemptive rights for closely held corporations where with any new share offering the shareholder must be offered enough of those new shares to retain his proportional control of the corporation before they are offered to others. The shareholders also have the right to see certain records, hence the issuing of an annual report, and they exercise control by voting at a regular shareholders meeting. Here they normally vote for a board of directors, which is responsible for the ongoing management of the business. Here majority rules, with each common share having one vote. Note that different classes of shares can be created with special rights and restrictions. These are normally called preferred shares where they will receive a stated dividend each year. They have no right to sue for such a dividend, and normally don't have the right to vote, but will acquire such a right if they don't receive the promised dividend. Also they are normally entitled to cumulative rights where those unpaid dividends must be accumulated and paid before any dividends are paid out to the general creditors. I next look at financing. Equity financing is through the sale of shares and of course it is an investment in the corporation and does not create a debt. Debt financing is founded on loans to the corporation and just like any other credit transaction bestows the right on the

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creditor to sue for enforcement. This can be a simple loan from a creditor to the corporation, either secured or unsecured. It can also take the form of debenture or bonds. The corporation owes its debt obligation to a trustee who issues shares in that debt called bonds. If there is a default, a term of the loan normally gives the creditor the right to take over the management of the corporation. This is called receivership and must be distinguished from bankruptcy, which requires a court order to force the transfer of the corporation’s assets to a trustee in bankruptcy. Finally I take the time to point out how flexible these structures can be. There are all sorts of combinations and permutations that can be created with different shareholder structures, combinations of debts and share ownership, holding companies, franchise agreements joint ventures, partnerships between corporations, and shareholder agreements. These shareholder agreements are very important when dealing with closely held corporations where they can create almost any right or responsibility between the participants as their imagination allows. I have added a discussion on franchising which is really just a variation on corporations doing business with each other through contracts, but because there is normally an unequal bargaining position there is the potential for abuse. It may be worthwhile to go over the statute controlling franchising in your jurisdictions (if there is one) to get a feeling for the regulations and disclosure requirements involved. Chapter Summary General Take care in choosing method to carry on business Government regulations impact all methods of carrying on businesses Sole Proprietor Sole proprietor works for himself or herself No formal process required Sole proprietor has unlimited liability Personal assets are at risk for business debt Some professionals can’t incorporate Most sole proprietorships are small businesses Partnership creation Partners carry on business together to earn a profit No formal process needed to form partnership Common law case law is codified by Partnership Acts. Partnership should be created by contract Partnership Acts govern relations between partners where there is no contract Some of these provisions can be modified by contract Partnership can be created inadvertently Carrying on business together can create a partnership Sharing profits indicates partnership

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But note exceptions listed in Partnership Act Liability Representation of partnership can create liability All partners are liable for all debts and obligations of partnership Liability of partners unlimited Personal assets are at risk for partnership debts and liabilities Unlimited liability cannot be changed by partnership agreement Retiring partners should notify customers and public Insurance can alleviate unlimited liability problem Control Majority vote governs day-to-day activities Major decisions require unanimous consent Rights and obligations Partners share equally in profits Partners don’t get a salary but can take a draw against the profit Partners owe fiduciary duty to each other and partnership Relations between partners can be modified by agreement End of partnership Partnership can end as per partnership agreement Partnership dissolves upon death or bankruptcy Partnership dissolves upon notice Partnership dissolves upon court order Assets first go to pay off liabilities and expenses Assets then return capital and then divided equally Limited partners Allows limited partner to only lose what has been invested Limited liability given to limited partners if: - They don’t take part in management - There is one general partner - Name of limited partner is not part of firm name - The limited partnership must be registered Limited partner can become general partner with unlimited liability Limited liability partnerships Some provinces allow limited liability partnership Must be registered and use LLP designation. Must be permitted by professional organization and have insurance Negligent partner retains unlimited liability for his own conduct But other partners are not liable Where professional incorporations allowed, they don’t include limited liability

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Corporations Creation A corporation is a legal fiction But recognized by the courts as a separate legal person Corporations have been created by royal charter Corporations have been created by special act Incorporation can take place at the federal or provincial level. Incorporation by registration is no longer common Incorporation through letters patent is no longer common Incorporation through articles of incorporation is now the common method Result is creation of separate legal entity A company incorporated in one province may register to do business in another Closely and broadly held corporations Closely-held corporations are smaller with fewer regulatory controls Closely-held corporations have restrictions on transfer of shares. Broadly-held corporations are larger and more regulated Shareholders Shareholders are separate from corporation Shareholders control corporations through their votes Majority rules based on shares held Common shareholders have the right to vote and collect dividends, once declared Preferred shareholders have no right to vote but are promised a regular dividend Shareholders have no right to a dividend (cannot sue if not declared) But where no dividend is paid, other rights can be acquired by the preferred shareholder Shares with special rights and restrictions may take other forms Separate legal entity A corporation is a separate legal entity A corporation has the same powers and capacity of a natural person Capacity may be limited with special act companies Agents acting for corporations may have limited power Shareholders are not liable for the debts and liabilities of the corporation Shareholders have limited liability (will only lose investment) Court may lift corporate veil where there is crime or fraud etc. Several corporations may be treated as one for tax purposes Directors do not have the same protection Corporation does not die Corporation does not end with deaths of shareholders Management and shareholders are separate Managers are answerable to directors and owe duty to corporation Managers sometimes act against interests of shareholders Shareholders are not required to act in best interests of corporation Insiders must not act on privileged information

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Shareholder rights Shareholders have: - Right to vote - Right to assets upon dissolution - Right to inspect records - Right to dissent - Right to be free of oppression Shareholder may have preemptive rights Shareholder has right to bring representative (derivative) action Directors and officers Directors must exercise skill of reasonably prudent person. Director’s duty owed to corporation not shareholders Directors owe duty of honesty and good faith Director must act in best interest of corporation Information must be passed on to corporation Business opportunities must be passed on to corporation Hidden payments violate fiduciary duty Conflict of interest must be disclosed Where violation director must pay over any profit Directors liable to creditors for improper dividends Directors must forward taxes and deductions Directors are responsible for unpaid wages Director responsible for pollution and other statutory offenses Note due diligence defence Directors appoint and control managers Managers have similar duties to directors Promoters have duty not to mislead Note corporate abuses and scandals caused by abuse of power Note trend to adopt human rights, labour, environment and anti-corruption standards Steps should be implemented to detect and prevent fraud and to avoid risk Financing Corporations allow flexible financing Equity financing involves the issuing and sale of shares Disclosure in prospectus required with broadly held corporation Acting on insider information prohibited Issued shares usually much less than authorized share capital Common shares have no special rights or restrictions Preferred shareholders are usually promised dividend but can’t vote Unpaid dividends accumulate Debt financing involves corporation borrowing money Shareholders often loan funds to a corporation Creditor usually takes security for loan Personal guaranty defeats limited liability Bonds are debt obligations traded like shares

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Creditor usually has right to appoint receiver if loan defaulted A receiver takes over the control of the corporation Receivership distinguished from bankruptcy Proposals delay actions by creditors Shareholders agreements and other special situations Position of shareholders can be further refined through Shareholders Agreement Shareholder Agreement can protect minority shareholder Shareholders Agreements can ensure employment and restrict control Corporations and partnership can be used in combination Companies can come together in a joint venture Holding companies ensure control Many variations accommodate business Franchise Involves contract with franchisor for the exclusive right to sell product or service May be unequal bargaining position between parties Disclosure of all information before contracting vital Several provinces have passed statutes to prevent abuses Corporations and crime There are many examples of corporate crime Mergers and downsizing contribute to increase in corporate crime Technology and globalization contribute to the increase in corporate crime Risk management strategies can combat corporate crime Research and reference checks can avoid problems with employees, partners and other businesses Careful supervision, security, and surveillance can avoid problems Employers must take care not to infringe the rights of employees Expert help should be obtained when a crime is suspected Improper process can have serious repercussion to business Employer should move quickly when fraud discovered Police involvement and prosecution can have beneficial results Corporate liability for criminal acts broadened It is important for the business to implement prevention strategies to avoid prosecution Questions for Review 1. Why is it so important to take care in choosing the method used to carry on a business? Answer: The method chosen to do business can affect the amount of taxes paid, the liability of the individual and the business, as well as how the principals interact between themselves and with there customers and supplier. 2. Explain the nature of a sole proprietorship and the liability of a sole proprietor. Why do professionals often do business in this way?

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Answer: A sole proprietor is a person doing businesses in his own name and capacity. There is no incorporation and no partnership. Professionals often do business this way because in many jurisdictions they are not allowed to incorporate and the advantages of incorporation have been denied them. 3. Describe the nature of a partnership, the purpose and effect of the Partnership Act, and the effect a partnership agreement can have on the relationship between the parties as set out in that statute. Answer: A partnership consists of two or more people carrying on business together with a view to making a profit. The Partnership Act summarizes the common law principles and supplies the terms to govern the relations between partners if there is no partnership agreement. The partners can contract to override those provisions with respect to the relations between them by a partnership agreement, but such an agreement cannot affect their responsibilities to their clients and other outsiders. 4.

What factors will indicate the existence of a partnership?

Answer: The primary indicators of a partnership are carrying on business together and the sharing of net proceeds (profits). 5. Explain the nature of the liability of partners and the effect of a partnership agreement on a partner’s liability to outsiders. How will the retirement of a partner affect those obligations? Answer: Generally, partners face unlimited liability for their own actions and those of their partners. That unlimited liability will not be affected by the terms of a partnership agreement. The liability of a retiring partner continues for things done during the time he was a partner, even if the other partners agree to take over the liability. It will also continue after the retirement unless he notifies the clients that he has retired and is no longer a partner. 6.

Explain how major decisions are made in a partnership and how partners get paid.

Answer: Major decisions are made by unanimous consent of the partners unless the partnership agreement has changed this. They get paid by taking a share of the profits earned by the partnership. They do not take a salary but can take a monthly draw against those profits. 7.

What is the nature of a partner’s duty and to whom is that duty owed?

Answer: Partners owe a fiduciary duty to the other partners. 8. Explain what will bring a partnership to an end and how the assets of the partnership are to be distributed upon dissolution.

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Answer: A partnership will come to an end as per the partnership agreement or by one of the partners serving notice on the others. Death or insanity will also bring a partnership to an end, although this can be modified to some extent in the partnership agreement. A partner can also bring an application to the court to have the partnership dissolved. Upon dissolution funds are used first to pay off debts owing and then expenses of partners or loans from them. Any excess is divided equally between the partners or according to the partnership agreement. 9. What is meant by a limited partner? What is the extent of that limited liability? What qualifications must be met for such a limited partnership to exist and how it can be lost? Distinguish such a limited partnership from a limited liability partnership. Answer: A limited partner must be registered as such, not participate in the management of the business and not allow his name to be associated with the partnership. If that is done the limited partner can only lose what he has invested and does not face unlimited liability like the other partners. A limited liability partnership is a new development. Some provinces permit the creation of a partnership where only the partner at fault will face unlimited liability. 10. What is the effect of incorporation and what is meant by the term “corporate myth”? Answer: The effect of incorporation is to create a separate legal entity or person to carry on the business separate and apart from shareholders and management. This is an artificial person and since it doesn’t have any real substance and is a legal fiction it is referred to as a corporate myth. 11. Distinguish between the registration system, the letters patent system, and the articles of incorporation systems of incorporation. Answer: In a registration system, incorporation is accomplished by filing a memorandum and articles. In a letters patent system, incorporation is accomplished upon application by the granting of letters patent. In an articles of incorporation system, incorporation is accomplished upon application by issuing a certificate of incorporation. But they all accomplish the same thing: the incorporation of a business entity that has a separate legal existence from the shareholders and managers who make it up. 12.

Distinguish between broadly held and closely held corporations.

Answer: A broadly held corporation has many shareholders and is usually traded on the stock exchange, whereas a closely held corporation has only a few shareholders and is more like an incorporated partnership. 13. Explain the right of a shareholder with respect to control of the corporation, how that right is exercised, and what is meant by a shareholder’s limited liability.

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Answer: The shareholders are in complete control of the corporation and determine the course of the business. They exercise that power in regular shareholders’ meetings through the election of directors who make the operational decisions of the company. This control is exercised by simple majority vote rules. The shareholders’ liability is limited in that they can only lose what they have invested in the corporation and are not liable for other debtors and obligations unless they have signed a personal guaranty to that effect. 14. Explain under what circumstances the courts may “lift the corporate veil” and the consequences of that happening. Answer: The courts are reluctant to lift the corporate veil and impose liability on shareholders, and usually restrict this to situations where the corporation is being used by the shareholder to commit a crime, fraud, or some other wrong or for tax purposes. 15. Under what circumstances the existence of a corporation can be brought to an end and what happens to a corporation when all of the shareholders die? Answer: A corporation does not dissolve naturally but may be brought to an end by action of the shareholders or creditors. This may be the result of a bankruptcy or an oppression action. Note that in some jurisdictions this can happen simply by failure to file annual reporting documents as required. However, death of one or more of the shareholders will not bring an end to the corporation as the shares will normally pass to the heirs of the deceased shareholder. 16. Describe the advantages and disadvantages of having the ownership and management of a corporation separate. Answer: Ownership as used here refers to the shareholders and if kept separate they can have limited liability and no fiduciary duty to the corporation. They are free as investors to invest in competing businesses, etc. Also professional management with special skills can be more easily hired to run the business. The disadvantage is that shareholders often don’t have as much direct control of the business or access to information as they would like. 17. What is meant by a shareholder’s right to dissent, to be free from oppression, and preemptive rights with respect to the corporation? Answer: The right to dissent is available is some jurisdictions and involves the right to have a minority shareholder’s shares purchased at fair value when a decision is made that negatively impacts them but is still for the good of the company. The right to sue for oppression is available to both minority shareholders and creditors where a decision is made that negatively affects both the person oppressed as well as the corporation. This is usually to strip assets or otherwise transfer the value of one corporation into another one. Preemptive rights arise when a new share offering is being made. Enough shares of that

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new offering have to be offered to existing shareholders so that they can maintain the same portion of “ownership” in the corporation. 18. Explain what is meant by a representative action, when it arises, and who can bring such an action. Answer: When the directors choose not to sue another company, or some other party including themselves, even a minority shareholder has the right to bring an action on behalf of the corporation against that wrongdoer. This is referred to as a representative or derivative action 19. What are the duties of a director and to whom are those duties owed? What standard of care is required of a director? What constitutes a director’s duty of good faith? Answer: Directors owe a duty of competence to the corporation and must act to the level of a reasonably prudent business person. They also owe a fiduciary duty to the corporation. Note that the duty is owed the corporation, not the shareholders. Good faith includes an obligation to act in best interest of corporation. Information must be passed on to the corporation and its board and officers. Business opportunities must be passed on to the corporation. Hidden payments violate fiduciary duty. Conflict of interest must be disclosed. 20. What are the various ways a director can breach his or her fiduciary duty? Explain the consequences of such a breach? Answer: (See 19 above) Where this fiduciary duty is breached the director is liable to the corporation for any losses suffered and must account for any profits received. 21. Explain a director’s liability for improperly declared dividends, failure to collect deductions from employees, and the consequences of such a failure. How does “due diligence” affect those obligations? Answer: The director is personally liable for paying out dividends when the company is insolvent, where they have failed to collect and forward such deductions as employment insurance, taxes, and workers compensation. The only defense available to them in these circumstances is that they exercised due diligence to ensure that such obligations of the corporation were properly performed 22. Describe effective strategies for a corporation to avoid being the victim of fraud and theft. Answer: This question is based primarily on material discussed at the end of the prior chapter but relates to this one in that it is a function of how such businesses are effectively managed. The business should take steps to promote loyalty, provide effective training, use good hiring practices, provide careful supervision, security and surveillance,

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appoint loss prevention teams, adopt good risk management practices, make careful credit and reference checks of employees, suppliers and customers 23. Distinguish between authorized and issued share capital and common and preferred shares. Explain what is meant by cumulative rights with respect to preferred shares. Answer: When incorporated, a company will be given authority to issue a large number of shares (authorized share capital) but normally will actually issue only a portion of those shares. Different classes of shares can be issued. Common shares have no special rights or restrictions. Preferred shareholders are usually promised regular dividends but can’t vote. If the promised dividend for a preferred share is not paid over several years that claim accumulates so that the preferred shareholder must be paid the entire accumulated claim before dividends are paid out to the common shareholder. These are referred to as cumulative rights. 24. Distinguish between equity and debt financing. Explain the nature of bonds and how they differ from shares. Answer: Equity financing involves shareholders investing in the corporation with a hope of sharing the profits in the form of dividend payments. There is no legal right to a dividend. Debt financing involves a creditor who loans money to the corporations, which carries with it a legal right to repayment and interest. A share gives a right to vote and control the company and to share in a dividend if one is proclaimed, but a bond represents a debt obligation that must be repaid and the bondholder can sue for repayment if needed. 25. Explain what is meant by a company going into receivership. How does receivership differ from bankruptcy? Explain how a proposal under the Bankruptcy and Insolvency Act may affect the position of a creditor. Answer: When a creditor loans money to a corporation the contract will often contain a term that if there is a default the creditor will have the right to appoint a receiver (an agent) to take over the management of the corporation for the benefit of the creditor. This is receivership and no court action is required. Bankruptcy involves an individual or a corporation being subject to a court order (a receiving order) to transfer its assets to a trustee in bankruptcy who then manages those assets for the benefit of the creditors. Here a court order is required unless the transfer is made voluntarily (an assignment in bankruptcy). If the company makes a proposal to the creditors that is accepted, this is an agreement to make alternative arrangements and if properly performed bankruptcy is avoided 26. Describe the kind of corporations where a Shareholder Agreement would likely be found and the effect it will likely have on the position of a minority shareholder.

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Answer: This is usually a closely held corporation where the shareholders all enter into an agreement that can have a profound effect on the position of a minority shareholder who can acquire unique claims and rights that are then protected by individual contractual agreement with each of the other shareholders. 27. Explain what is meant by a joint venture, a holding company, and a franchise. Why are they attractive ways of carrying on business? Answer: Joint ventures are contractual relationships where two or more businesses get together for some project, usually of limited duration. They can take many different forms. They can be no more than a contractual arrangement, but they can also involve partnership arrangements, corporations, corporations in partnership, holding companies, etc. A holding company involves one company being shareholder in another. One individual might have 51 percent of the shares in a company that, in turn, has 51 percent of the shares in another company that, in turn, has 51 percent of the shares in a third company. That individual, with only a fraction of the actual equity ownership of the third company still retains complete control of all of them. In a franchise arrangement one business enters into contract with another to sell its product exclusively with appropriate names, logos, and advertising exclusive to the chain. All of these options provide a great deal of flexibility in how a business person may choose to carry on his business. Questions for Further Discussion 1. One of the great advantages of a corporation over a partnership is the limited liability of the shareholder investors. If the business runs into trouble, the debts are the corporation’s rather than the shareholder’s, who can only lose what they have invested. This is one of the most important characteristics of a corporation and one of the significant limitations of a partnership. Discuss whether such limited liability is appropriate from a business point of view. Is it fair to all parties? What about creditors or others who have claims against the business because of poor decisions that have been made? Who should be responsible? In your response consider the movement toward creating limited liability partnerships (LLPs) and whether this is a forward or a backward step. Also consider the creation of the corporate myth, which is the basis for the limited liability of shareholders. Comment: This deals with the classic problem of whether limited liability is ever justifiable. It certainly makes shareholders not responsible for the debts of their business, but this is done at the expense of other, often innocent, people. Should people be allowed to escape their obligations in this way? The other side of the coin, of course, is that people are always notified of that limited liability by the company name and should take the risk into consideration in assessing the value of the deal. It is interesting to deal with the expansion of this protection now with limited liability partnerships. This can even generate a discussion of the value of bankruptcy and people being allowed to escape from there basic obligations.

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2. It is possible to be in partnership with someone else without knowing it, simply by getting into some sort of cooperative business venture. The burdens associated with partnership, especially unlimited liability for a partner’s actions, can be very onerous. Discuss whether people should ever have partnership imposed on them in this way or whether this relationship should be limited to those situations where there is a clear understanding between the parties to create such a partnership relationship Comment: This question is designed to deal with the problem of whether people should ever be forced into a partnership relationship inadvertently with the accompanying unlimited liability for the wrongful acts of an unwanted partner. They can be in business activities completely innocently with no idea that they are in a partnership. Why in the world should they be responsible for the other person’s wrongdoing? Of course, the answering argument is that you have a loss and someone is going to suffer, either the innocent victim or the less innocent business person who may have made it possible for the wrongdoer to commit the wrong. 3. A corporation is considered a legal entity, separate and apart from the shareholders who make it up. This is a myth or fiction and has no basis in reality. Most of the unique characteristics of corporations result from this separate legal entity status. Discuss whether this bit of make-believe in our legal system is justified, considering the result. In your answer consider the recent well-known events involving corporate crime, swindles, and other abuses such as Enron or WorldCom, the banking and subprime mortgage scandals, and the worldwide recession caused by the collapse of the financial sector. Do you think doing away with the corporate myth would make any difference? Comment: This question forces students to deal with the question of whether the corporation is a legal myth or exists in reality, and to grapple with the problem of just where the line should be drawn between fiction and reality. Just how far should the idea of separate legal personality and the advantages that flow from it be taken? It is interesting to discuss such well known corporate crimes like Hollinger, Enron and WorldCom, but you should try to get at the heart of what the problem was. Was this a problem with separate legal entity or were the shareholders cheated just as much as anyone else. Were these situations made possible because of the separation of management and ownership? This is really a situation where management ran amok, although the question remains whether the separate legal entity aspect of the corporation contributed to the problem and whether management got away from the control of the shareholders. 4. While shareholders are isolated from liability for the careless actions of corporations, this protection is not always carried through to directors who may be held criminally and civilly liable for the actions of the corporation, especially when they cause physical injury to others. Directors, like partners, also owe a fiduciary duty to the corporation and can be personally sued when they violate that duty. Discuss the relative obligations of directors and partners to each other, to the business, and to outsiders. Consider whether the imposition of such liability goes too far or not far enough from a business and ethical

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point of view. In your discussion consider the nature of fiduciary duty and whether such an overwhelming obligation has any place in the business world. Comment: This is really an extension of the issues raised in question #1. The liability of directors for the actions of the corporation seems to be expanding. They have a personal obligation to the corporation and others and can be held personally liable for failures to live up to those obligations. Why should they be responsible and the shareholders who choose them not be? It can be argued that they should be responsible because they make the decisions. Directors owe a duty of competence and a fiduciary duty to the corporation. They are responsible for unpaid wages; they owe a duty to ensure taxes are paid and remitted to the government; they can be sued by creditors when dividends are improperly paid to shareholders; and they can be charged with crimes committed by the corporation and employees of it, including pollution of the environment. Is it appropriate that directors should bear this kind of responsibility? Partners on the other hand owe a special duty to each other and owe a duty to an outsider which is not protected by limited liability. This is because a partnership has not been incorporated and treated as a separate legal person. Most partners would argue that they ought to have the same kind of protection as corporations and certainly limited liability partnerships are a move in that direction. Cases for Discussion 1.

Atlantic Glass and Storefronts Ltd. v. Price (1974), 48 D.L.R. (3d) 471 (N.S. Co. Ct.)

Mr. Price originally operated “Fins, Furs and Feathers” as a sole proprietor but neglected to register the change under the Partnerships and Business Names Registration Act when he incorporated the business as P.R. Enterprises Ltd. When the company failed to pay their supplier—Atlantic Glass and Storefronts Ltd.—the supplier sued Mr. Price directly instead of the company. Is Mr. Price personally liable? Explain the arguments on each side. Decision: This case aptly illustrates the need for a business seeking to limit its liability to the corporate entity to make it clear to third parties that they are dealing with a limited liability company rather than an individual carrying on business as a proprietorship. In this case Mr. Price originally started business as a proprietorship operating as “Fins, Furs and Feathers”. A few years later he incorporated a limited liability corporation (P.R. Enterprises Ltd.) and assigned that corporation the right to also carry on business as “Fins, Furs and Feathers”. However, he did not clearly communicate to the Plaintiff that they were providing services and materials to the newer company. Further, had the Plaintiff searched the corporate registry at the time they made the agreement they would have found that the earlier created proprietorship was the only entity registered as carrying on business as “Fins, Fur and Feathers”. As such, the Court rejected Mr. Price’s claim that the account should be enforceable against the limited liability company only and ordered Mr. Price personally liable to pay the account.

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Redfern Farm Services Ltd. v. Wright 2006 MBQB 4 (CanLII) (2006), 200 Man. R. (2d) 12

Michael and Kyle Wright and their father William Wright all carried on business as farmers in Manitoba. Each had separate farm property registered in their own name but they carried on the business of farming indiscriminately as to who owned what. They fed and pastured the animals together and carried on other aspects of their business together. The three operations were all quite intertwined. They did carry on the crop production aspects of their businesses separately, but that was only a small unprofitable part of the overall operation. They also maintained separate herds of cattle and kept the profit for themselves when they were sold. Note that although the herds were separately identifiable they were fed, corralled and nurtured as one common herd. In response to questioning by a representative of Redfern Farm Services with respect to the grain operation the father said “I order the seed, I order the fertilizer, I order the spray, I order the day custom applicator, I talk to Darryl, I’m the one that does the crop rotations, I use everybody’s fields as my own. I’m the one that pays the bills.” The father bought the supplies used by all and owed $55,365.82 to Redfern which was not paid. Redfern sued all three. What are the arguments that can be advanced for Redfern and for the brothers? What is the likely outcome of the case? Decision: The court determined that the farm was operated on a global basis for profit and that the parties were working together to obtain that profit. The shared land machinery and produce from the land support that fact. The fact that the proceeds were distributed unequally does not limit the commonality of the enterprise. A partnership was created. Also, because of the way the business was operated on a day to day basis, the plaintiff was led to believe the business was a partnership. Therefore the sons were also liable for the supplies and had to pay an equal share. 3.

Public Trustee v. Mortimer et al (1985) 16 D.L.R. (4th) 404 (Ont. H. C. J.)

Mortimer was a partner in a law firm and acted as the executor for the estate of Mrs. Amy Cooper. When she died, he distributed the proceeds of the estate to a series of beneficiaries. He also stole over $200,000.00 from the estate, keeping it for himself. The issue here was whether the other partners were also liable for Mr. Mortimer’s wrongful conduct. Discuss the arguments on both sides. What kind of information is needed in order to answer the question? Decision: The main problem was whether this was done in the course of the partnership business. The court held that this was clearly the kind of business that the partnership was involved in and the assets and facilities of the firm had been used to accomplish and execute the will. There was no question that the other partners were responsible along with Mr. Mortimer for the theft. Although it wasn’t necessarily part of the firm’s business to act as executors for estates, because the other partners were aware that he was doing this and allowed the partnership’s facilities and resources to be used in the process they shared liability. The staff and facilities were used, all correspondence took place under the firm’s letterhead and the estates accounts went thought the firm’s ledgers. This

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was done in the ordinary course of the firm’s business and the other partners are accordingly liable. It is interesting to note that the statute of limitations had gone by before this action was brought, but they were still allowed to proceed under the principle that the limitation period should start running once the wrongdoing was discovered. The ultimate decision of the court was that Mortimer was responsible for the entire amount and the partners were only responsible for that amount stolen during the time when they were partners. 4.

Brew v. Rozano Holdings Ltd. 2006 BCCA 346; [2006] 10 W.W.R. 655

Ms. Brew was a veterinarian and entered into a partnership agreement with several other veterinarians to practice that profession. One of the terms of the partnership agreement was that she was allowed time off with pay for maternity leave. She took the time off but it put a great strain on the other partners and she willingly came back and worked part time. After she returned to work full time a meeting was held in which the other partners indicated their unwillingness to honour the agreement for another pregnancy. The agreement also contained a restrictive covenant preventing her from opening another practice in the vicinity. She brought this action against the other partners. Indicate what would be the basis for her complaint and what sort of remedy would be appropriate. What are the arguments the other partners would likely raise? Would it affect your answer to know that she had recorded that meeting surreptitiously and failed to warn her partners that if they persisted she would be able to consider the partnership agreement repudiated and be free from any such restrictive terms? Decision: In this proceeding Ms. Brew sought a ruling that the other partners had breached the partnership agreement by making it clear that they would not honour the maternity leave terms of the agreement for any further pregnancies Ms. Brew underwent. In seeking the ruling Ms. Brew sought three remedies: a declaration that she was free to leave the partnership, monetary compensation for the loss of income she would otherwise be entitled to during subsequent pregnancies and a further declaration that she was not bound by the non-competition clause as the remaining partners had wrongfully repudiated the maternity leave provisions of the agreement. Ultimately, the Court refused Ms. Brew’s claims. This case is a good illustration that a partnership includes an overreaching legal obligation that all partners owe each other a duty of good faith and fairness. The Court agreed with the remaining partners’ contention that it was inherently unfair to both take on the extra work created by Ms. Brew’s maternity leave absences and also pay her a share of the business earnings during that time. Further, the Court relied on the fact of the surreptitious recording and failure to warn of her intended lawsuit as evidence of bad faith on her part in attempting to gain an advantage in all the circumstances. However, the Court also ruled that the partnership in its present form and terms as to maternity leave entitlements was unworkable. As such, the Court invoked it equitable jurisdiction to dissolve the partnership with the result that the non-competition clause was ended as well.

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Rochwerg et al v. Truster et al [2002] O.J. No. 1230 (C.A.)

Mr. Rochwerg was a partner in an accounting firm and while he paid over some of the remuneration he received from serving as a director on two associated companies, he failed to disclose the fact that he was also entitled to stock options. When the other partners discovered the existence of the stock options, they demanded an accounting. Explain whether Rochwerg is or is not obligated to turn over these shares to the partnership. Decision: The court held that these stock options amounted to secret profits that Mr. Rochwerg made while carrying out partnership business. He owed a fiduciary duty to the other partners and so was required to pay any profits into the partnership for distribution to all the partners. Rochwerg retained only that portion he was entitled to as one of the partners. Any gains related to the partnership business must be paid over to the partnership to be shared by all partners. 6. Wildman v. Wildman [2006] O.J. No. 3966; 273 D.L.R. (4th) 37; 25 B.L.R. (4th) 52 The Wildmans were married in 1993 and the husband owned a successful high-end landscaping business generating an income for Mr. Wildman of $700 000 per year. The wife did not work. The marriage broke down and the husband was ordered to pay child support and spousal support. At the time of this the action in 2006, these payments were over $500 000 in arrears. Assuming the husband is unable or unwilling to pay, what options are available to the court. Indicate the arguments supporting and opposing such options and the likely outcome. Decision: The case illustrates an important exception to the general principle that creditors cannot “pierce the corporate veil” to recover compensation from individual directors or shareholders for debts owed by the corporation. However, in this case the Court did pierce the veil noting that it was not doing so to collect on a debt owed by the corporation. Rather, the debt was owed by the principle shareholder and director of the corporation who was trying to avoid payment by placing all of his wealth and assets in a holding company to avoid his former wife’s claims against him. As such, this case illustrates an important consideration for small and closely held corporations: a portion of its assets are vulnerable to claims by former spouses if that shareholder spouse attempts to hide his assets within the company to avoid paying those legal obligations. 7. Re S.C.I. Systems, Inc. and Gornitzki, Thompson & Little Co. et al. (1997) 147 D.L.R. (4th) 300 (Ont. Gen. Div.) S.C.I. Systems was a creditor and held a promissory note against Gornitzki, Thompson & Little Co. Ltd. (G.T.L.). Instead of paying the note, the director and sole shareholder of G.T.L. had the company declare and pay dividends, pay down loans to themselves, and transfer funds to other related corporations so that there was no money left to pay S.C.I. Explain what options S.C.I. has in these circumstances and the likely outcome. Decision: This case is a good illustration of how broad the “oppression remedy” pertaining to corporate activities can be and how directors can become personally liable for the actions they direct on behalf of the company. As to the oppression remedy, that

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remedy is available to creditors as well as shareholders. In this instance S.C.I. made use of that remedy as it was a creditor of the company and entitled to be dealt with fairly when considering the activities of the company. In this case the Court noted that the directors’ decision to declare a dividend (and essentially remove all funds from the company) was not fair to the creditor S.C.I. who loaned money to the company based, in part, on the financial status and funds of the company at the time of the loan. That essential unfairness was exacerbated by the fact that declaring such a dividend was also contrary to provisions of the Ontario Business Corporations Act. As the individual directors authorized the actions and were the actual recipients of the funds removed by way of dividend and loan repayment, the Court exercised its broad equitable jurisdiction to award damages against each director personally making them personally liable for repayment of the loan to S.C.I. Sample Examination Questions Multiple Choice Questions 1.

Which one of the following statements is incorrect with respect to sole proprietorships? a. b. c. d. e.

The sole proprietor has unlimited liability The sole proprietor must adhere to licensing and government regulations The sole proprietor is relatively free for outside interference The sole proprietor has limited liability The sole proprietor is responsible for the tortious conduct of any employee that takes place during the course of business

Answer: D 2.

Which of the following statements is correct with respect to partnership? a. Partnership involves 2 or more persons carrying on business with a view towards profits b. Partnerships involve limited liability c. Partnerships are created only when 2 or more persons specifically agree to be in partnership d. Partnerships are only created when they have been properly registered with the government e. Partnerships are like any other form of contract; they can only be created when there is consensus between the parties in the form of offer and acceptance to that effect

Answer: A

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Which of the following statements is correct with respect to the Partnership Act? a. The Partnership Act always overrides any provisions contrary to it set out by the partners in the partnership agreement b. The Canadian Partnership Act is enacted by the federal government and creates a uniform and cohesive system of partnership law for all of Canada. c. The Partnership Act states clearly that a partnership is only created by specific agreement between the partners to that effect d. The Partnership Act sets out provisions that will govern the relations between the partners unless those partners have agreed otherwise e. None of the above

Answer: D 4.

With regard to liability of partners, which of the following is false? a. A limited partner is liable only for the amount of his initial investment if he follows the directions set out in the partnership act, e.g. not taking part in management. b. A general partner could not be liable for losses suffered by a client because of misapplication of funds unless he knew about or took part in the misapplication. c. A general partner who retires from the partnership by giving notice of his leaving to the other partners could still be found liable for debt pursuant to a contract made when he was a partner. d. A general partner has unlimited liability for any loss suffered because of the negligent act, e.g. omission, by one of his partners only if there are insufficient funds in the partnership to pay the person who suffered the loss. e. The partnership, and thus the partners, are liable for any loss suffered because of a tort committed by its employee in the course of his employment.

Answer: B 5.

You have been asked by two of your classmates to join them in incorporating a closely held company that would commence a consulting business. One was in your class so you know him quite well, but the other is graduating from a different school. You have been discussing company law to review the protection it gives you. Read each of the following statements separately and indicate which is false. a. As a shareholder, you will have the right to vote for the directors, who, in turn, will choose the officers. b. A shareholder's agreement would lessen any misunderstandings about rights and obligations. c. If you each take one-third of the first allotment of the shares, you all will necessarily be a minority shareholder.

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d. If the directors decide to issue a new allotment of shares, the company must offer you a portion of the new issue to allow you to keep your proportional share of the company. e. If you were voted out as a director by the others who could show that it was in the best interest of the company, you could always sell your shares to any interested buyer. Answer: E 6.

Which of the following is false with regard to the characteristics of incorporated companies? a. The company is a separate legal person which can sue and be sued. b. Directors are responsible for the management of the company. c. Shareholders, as shareholders, are not liable for the debts and other obligations of the company. d. A shareholder's liability is limited to the amount he or she paid for the shares. e. The shareholders would be vicariously liable for any damage caused by a company employee carrying out his or her duties.

Answer: E 7.

Which of the following situations would allow a shareholder of a closely-held company, with permission of the court, to sue on behalf of the company? a. If four of the five directors in the best interests of the company, voted against the fifth as director, voted to end the employment contract of the fifth and voted not to buy his shares. b. If the company had been wronged (lost $30,000) by the negligent and fraudulent acts of one of its directors but the company refused to take any action against the wrongdoer. c. If the shareholders refused to enter into a shareholder's agreement. d. If the directors refused to declare a dividend. e. If the directors solicited proxies from all of the shareholders

Answer: B 8.

Which one of the following is an example of breach of fiduciary duty? a. The directors of the company refuse to give a pay raise to the employees although they had not received a pay raise for five years. b. A director profited $120,000 from a contract between the company and a firm in which he had an interest after he made full disclosure of his interest to the board of directors and abstained from the vote on the contract. c. An officer of the company learned of a business opportunity intended for the company and intercepted it for his own benefit.

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d. The directors refused to declare a dividend contrary to the request by its preferred shareholders. e. A shareholder owning 2% of the outstanding shares started a business in direct competition with the company in which he held shares. Answer: C Short Answer Questions 1.

Explain the liability of a partner for another partner’s actions.

Answer: Each partner is vicariously liable in tort law for any torts committed by a partner in the course of the partnership. Also each partner is considered an agent of the other partners for the purposes of contracts entered into by them. 2.

Explain any limitation on the liability one partner has for another partner’s actions. .

Answer: Each partner has unlimited liability for the actions of the other partners done during the course of the partnership, unless one of those partners qualifies as a limited partner. The liability of such a limited partner is limited to the amount invested. 3.

Distinguish between a partnership and a corporation.

Answer: A partnership involves several people carrying on business together but no separate legal entity is created whereas with a corporation, people own shares in a separate legal personality called the corporation. 4.

What are the advantages and disadvantages of being a sole proprietor?

Answer: Disadvantages-unlimited liability and only one person involved. Advantages-little outside interference and they are not accountable to others. 5.

Explain what is meant by a preferred share?

Answer: A preferred share is one where special rights and/or restrictions have been placed on the share. Usually they have a claim to a set dividend and no right to vote unless that dividend is not paid. 6.

Explain the significance of the determination that a company is a broadly held corporation or public company as opposed to a closely held corporation.

Answer: There are more significant reporting and accounting obligations on a broadly held corporation. These are usually traded on the stock exchange or involve a great number of shareholders. A closely held corporation is more like an incorporated partnership with fewer obligations of reporting and accounting.

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Explain the nature of the director’s duties to the corporation.

Answer: A director owes a fiduciary duty to the corporation in that the director must act in the best interests of the corporation, not taking any advantage of corporate opportunities for himself, and must not act negligently in the carrying out of his direct responsibilities. 8.

If a director fails in his duty to the corporation, what rights does a minority shareholder have to hold him accountable?

Answer: The minority shareholder can bring a derivative (representative) action on behalf of the company to hold the director accountable for his breach of duty. 9.

Explain under what circumstances a shareholder's right to sue against oppression arises.

Answer: Where the directors of the company make a decision with the effect of hurting the minority shareholder and the corporation. . This is an abuse of their position and the minority shareholder can sue for relief from oppression. The power of the courts in these circumstances extends to putting the company into receivership or having it dissolved. 10.

Joe is a shareholder of XYZ Corporation, an extremely profitable company in the software business, and was upset when the directors of the company refused to declare a dividend again, ploughing the money back into research and development. Joe sued, along with several other shareholders, claiming that there was no excuse for withholding dividends under these circumstances. Explain the likely outcome.

Answer: A shareholder has no right to a dividend and Joe will lose his action. Essay topics 1.

Discuss the problem of liability with respect to partnership and how this difficulty can be overcome, if partnership is chosen as the method of carrying on business.

Explain why the law of partnership poses a danger to people carrying on joint business activities and how the principle of fiduciary duty works in a partnership relationship.

The separate existence of a corporation is said to be a legal myth. Discuss the development of this myth and its value in our society today.

Discuss and contrast the various methods of financing a corporation. Deal with the advantages and disadvantages of each.

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Contrast the obligations and duties of directors and shareholders of a corporation.

Discuss the principle of limited liability, why it arises in company law and its significance.

Discuss the advantages and disadvantages of incorporation as a method of carrying on business as compared to sole proprietorship and partnership.

Discuss how the relationship between a franchisor and franchisee is established in terms of contract and company law. In your answer consider how the relationship is open to abuse and how such abuse can be avoided.

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Property Teaching Suggestions I usually devote about an hour to property. I don’t deal too much with personal property since it has already been discussed under the topics of sale of goods and personal property security. However, I spend time at the start explaining how personal property is distinguished from real property. As well, I review the distinction between tangible personal property (goods or chattels) and intangible personal property (a chose in action). I also point out that intellectual property is a subset of personal property and will be discussed as a separate topic. I then spend a few minutes on found property pointing out that the finder has good title against anyone except those who have prior claim such as the original owner. I then distinguish between a gratuitous bailment and a bailment for value. After describing the various forms of bailment I stress that the standard imposed on the bailee is to take reasonable steps to protect property in his care. I begin the discussion of real property by explaining where the idea of a fee simple comes from and pointing out that ownership includes air above “ground level” and the land beneath that is practically usable by the owner and note exceptions. I explain what happens when a life estate is given. Leasehold interests also give exclusive possession but for a specified period of time. A periodic tenancy is for a specific time (one month or one year) but is automatically renewable unless notice is given to terminate. I then explain the nature of an easement, which does not convey any right to exclusive occupation. A right of way is a specific type of easement where someone is given the right to cross over the property to get to another property but not to stop on the property in the process. A restrictive covenant limits the way a property can be used or what can be built there. This interest runs with the land and binds future owners if it is worded in a negative way. I explain that a building scheme is similar, but it binds all of the homes in a subdivision. A building scheme resembles zoning but is usually imposed by the original developers to control future development and protect the owners’ interest in how future development may be done. I then look at the distinction between joint tenancy and tenancy in common. With a tenancy in common each owner has an undivided interest in the property. If one owner dies that deceased owner’s interest goes by way of inheritance to their heirs. With a joint tenancy the owners have a shared ownership of the property and when one dies the other(s) as survivor(s) takes over the whole interest. This is called the right of survivorship. I also discuss the difference between a land registry system and a land titles system in place in various parts of Canada. With the land registry system the registry is a depository of documents that determine the rights of the parties. In a land titles jurisdiction the land title officers inspect the transfer documents and then issues a certificate of title. That certificate determines the rights of the parties with respect to that property.

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I deal with landlord and tenant briefly by pointing out that there are few regulations with respect to commercial tenancies and the relationship depends on the contract (lease) agreed to by the parties. In contrast, I explain that for residential tenancies all jurisdictions have passed legislation that is essentially consumer protection legislation controlling primarily what landlords can and can’t do. This varies from province to province but covers such things as condition of the premises, rent controls, how often rent increases can be imposed, security deposits, notice periods with respect to termination and restrictions on a landlord’s right to enter and inspect the property. When I discuss mortgages I first explain that this is a method of providing security to a creditor for a debt owed, the transfer of the title to the creditor being the security. I explain the historical development pointing out what original principles govern the law today. I point out that it was the Courts of Chancery that recognized that when the title to the property had been transferred as security for debt, the debtor (mortgagor) still had an equity of redemption in the property, which was a right to redeem that property by paying what was owed even after default. The Court of Chancery also recognized the creditor’s (mortgagee) right to have a time limit set with respect to that equity of redemption (the process of foreclosure). I then point out that the mortgagor retaining an equity of redemption can use that as security for a second mortgage. When there is a default, the second mortgagee usually asks the court for an order for judicial sale so that his interest is not foreclosed out by the first mortgagee. This sale takes place within the period ordered by the court to allow the mortgagor to redeem the property (redemption period) and as a result effectively reduces the period the mortgagor has to redeem the property. I don’t usually have time to deal with environmental matters other than stress that there are now many environmental restrictions and regulations that control the use of property and impose obligation on the owners and users to maintain land, air and water quality. These regulations are found at the federal and provincial level as well as to a limited extent based on the common law. Finally, I deal briefly with insurance. The key is to understand the nature of an insurable interest. The insured must have a sufficient financial interest in what is being insured so that if a triggering event takes place, he will suffer a loss and the insurance benefit will be compensation for that loss and not a windfall. It is important to match the amount of insurance to the value of the property, neither over nor under insuring. With life insurance the extent of the insurable interest is deemed to be whatever the life has been insured for. I also go over the insurance company’s right to salvage and subrogation. That is if they pay out an insurance claim for the loss of a vehicle they have the right to salvage the parts from that vehicle or rebuild it to recover some of what they have paid out. Similarly, if they pay out for such a loss they also have the right to step into the shoes of the insured and sue the person who caused the accident. This is called subrogation. I also mention bonding, which is like insurance and provides coverage when the bonded person does something wrong, but the bonding company has the right to go after the person bonded to recover their loss. Often an employee or agent who is in a trusted position handling valuables or confidential information will be bonded against

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theft or other wrongdoing. This is a fidelity bond. Often a construction company will be required to put up a bond to ensure that they do a good job of what they have contracted to do. If they fail to do a proper job, the bonding company will be called on to honour the bond and compensate for the damages. This is referred to as a performance or surety bond. Chapter Summary Real property consists of land and buildings Personal property may be tangible or intangible Property law explains your rights to possess and use something as against the rest of the world Personal Property Tangible personal property is called chattels or goods Possession gives right to goods over all but someone with prior claim Bailment involves one person holding goods of another Standard of care higher where property held by bailee “for value” that for gratuitous bailment Where bailment for value, duty is determined by contract or industry standards Duty of common carriers and innkeepers now determined by statute Bailee for value can hold goods when not paid Personal property can become part of real property when affixed to it Real Property Real property above and below ground is limited to what the holder can reasonably use Mineral rights usually withheld by crown Fee simple estate equivalent to ownership today Governments have power to control or acquire land Note obligation not to interfere with neighbours Life estate lasts for life of grantee and then reverts back to grantor Leasehold estates are for specified time but may also be periodic Easement gives others the right to use the land Right of way is a type of easement, giving someone the right to cross property Restrictive covenants must be negative and restrict how property can be used Restrictive covenants bind future owners Building schemes are like restrictive covenants but bind whole subdivisions A licence does not convey an interest in land Joint tenancy includes right of survivorship Tenancy in Common does not include the right of survivorship A joint tenancy can be changed to a tenancy-in-common, called severance Statutes now allow fee simple separated vertically and horizontally: condominiums Condominiums involve shared property and rules Special levy for unusual expenses Cooperatives involve people owning a share in the whole property Option to purchase holds offer to sell open for specified time Options often used by developers and speculators Mortgages on property used to secure loan

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Registration Registration protects creditor’s security against third party Land Registry is depository of documents In Land Title jurisdictions title is guaranteed by certificate Transfer by deed in land registry jurisdiction Criminal offence to falsify or conceal title documents Form submitted to transfer title in Land Title jurisdiction Right to land may be obtained by adverse possession or prescription in Land Registry jurisdiction Right to land cannot be obtained by adverse possession or prescription in a Land Title jurisdiction Mortgages Mortgage involves transfer of title to creditor as security Equity of redemption allows debtor to regain property even after default Foreclosure puts time limit on debtor’s right to redeem Final order ends equity of redemption Equity of redemption can be used to secure further debt Second mortgagee must be prepared to pay out first Mortgage doesn’t actually transfer title in land titles jurisdiction The exercise of the power of sale/judicial sale shortens the redemption period A less common remedy involves taking possession of the property Landlord and Tenant A lease conveys possession of property for a specified period Periodic leases involve automatic renewal until notice Statute of Frauds require longer leases to be evidenced in writing Frustration applies to leases in some jurisdiction by statute Leases are binding on a subsequent purchaser if registered Agreement determines obligations in commercial lease Landlord must deliver vacant possession and quiet enjoyment Responsibility for repairs is subject to agreement Tenant must use premises as agreed Commercial lease terminated at end of specified lease period Where a periodic lease is involved, one clear rental period notice is required Tenant must comply with agreement and may be required to pay utilities and taxes In the event of default, the landlord can evict tenant In the event of default, landlord can seize tenant’s goods If tenant defaults, landlord can sue for rent for remaining term Landlord has no obligation to mitigate Injured party can seek damages or injunction Normally neither party is required to pay for normal wear and tear Court may authorize tenant to pay less rent to pay for repairs Lease also may provide right for tenant to renew, to sublease, or assign Tenant’s fixtures can be taken with them when they go, if they've caused no damage Commercial tenancy statues normally allow parties to determine lease obligations

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Residential tenants Legislation creates protection for residential tenants Standard form leases often required Landlord obligated to make general and emergency repairs Tenant are obligated to pay for damages they cause Neither party required to repair normal wear and tear Landlord restricted from entering premises Tenant can sublease or assign with landlord’s permission Amount and purpose of security deposits restricted and must be returned with interest Rent increases normally limited to one per year with substantial notice Notice period for landlord to terminate lease is extended Tenant can give notice when rent is paid in some jurisdictions Landlord must maintain services Landlord may give reduced notice where tenant is in default Landlord cannot seize tenant's property and must mitigate loses Statutes establish tribunals to hear complaints Frustration applies to residential tenancies Property owners and occupiers responsible for immoral acts on property Environment Increasing environmental regulation has become important concern of business Riparian rights are the right to continued quality and quantity of water flow Riparian rights are often overridden by statute Nuisance can be used to stop pollution Common law is not efficient in protecting the environment Environmental regulation comes from all levels of government Federal regulations Federal environmental regulation may apply even to local projects Statute authorizes government department to regulate Controls imposed and whistle blowers protected Enforcement officers given significant powers of inspection and enforcement Spills must be reported and remedied If a company fails to act, costs can be imposed on the violator Significant penalties are imposed on company and its directors In most cases due diligence is available as a defence Limited civil remedies are provided Provincial Regulation Provinces also require environmental assessment process Provincial departments enforce environmental protection provisions Municipalities also have power to impose controls on business Overlap of regulation poses a serious problem for business Insurance Insurance involves paying a premium to spread the risk Insurance companies will often reinsure to cover their risk Insurance agents represent the company whereas insurance brokers represent the insured

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Insurance policies may include riders or endorsements that modify or add to the original terms Take care to read the contract, especially the fine print An insured must have an insurable interest in order to recover for a loss Shareholders now have an insurable interest in a company’s assets Be careful not to over insure Be careful not to under insure Insurer has right to salvage what they can from the loss Once paid, insurer assumes insured’s right to sue Insurance is also available to cover business downtime Liability insurance covers injury or loss caused to others Bonding is available to cover wrongful acts of employees or failure to perform contractual obligations Life insurance pays beneficiary when insured dies Businesses often obtain life insurance on key personnel Health and disability insurance are also common A comprehensive policy covering all or many risks may be the best solution Questions for Review 1. Distinguish between real property, personal property and intellectual property. Distinguish between a chattel and a chose in action. Explain how personal property can be used to secure a loan. Answer: Real property refers to land and buildings and things affixed to it. Personal property consists of tangible, moveable chattels and intangible assets called choses in action. Intellectual property is a subcategory of personal property. As noted in Chapter 5, personal property can be provided as additional loan security through the provisions of the Personal Property Security legislation in place in each province and territory. If the loan is not repaid, the personal property can be seized and sold with the proceeds used to pay any loan shortfall. 2. Explain how the expression “finders keepers” relates to property law. Explain who is entitled to goods found in the public part of a building. What if it is found by an employee of the owners of the building? Answer: With personal property the finder of goods has good title against all but someone with a prior claim, hence “finders keepers”. If it is found by an employee or on a private part of the building the property goes to the property owner/employer. 3. Explain bailment and the obligations of the bailee when it is a voluntary bailment for the benefit of the bailee. What if it is for the benefit of the bailor? What if the bailee is an innkeeper or common carrier? Answer: Bailment takes place when one person is given possession and care of chattels belonging to another. If that bailment is for the benefit of the bailee, the obligation of the bailee to care for them is very high but if for the benefit of the bailor that obligation is reduced. If the bailee is an innkeeper or common carrier the duty and standard of care is set out in applicable legislation passed specifically for such parties and situations.

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4. Explain what is meant by a fee simple estate in land and any limitation on a person’s right to that land. How can personal property become real property? Answer: Fee simple is the closest thing to ownership of land that we have. It is limited in the sense that the state has the right to restrict what is done on that land and in some circumstances to expropriate it for community projects. Goods can become part of the real property when they are affixed or attached to that real property for the purpose of improving the use of the real property. 5. What is the nature of a life estate? Who is entitled to the reversion and what obligations are imposed on the holder? Answer: The life estate divides the fee simple so that the person given the life estate has the right to possess and occupy the property during their life time and the remainder will go to another (the remainderman) upon death. Alternatively, the right to the property will revert to the person or estate of the person who created it (the reversion). 6. Distinguish between a leasehold estate and other interests in land. Explain what is meant by a periodic tenancy. Answer: A leasehold estate gives the tenant exclusive possession and right to use the land for a specified period. An easement or right of way allows a person access to or through a property but does not allow that person to exclude others as a leasehold interest does. A periodic tenancy is automatically renewed every month or every year until notice is given to the tenant to vacate. 7. Distinguish between an easement, a right of way, a restrictive covenant, and a building scheme. Answer: An easement involves a right to cross over or intrude onto another’s land. Common easements include permission for utilities to place a power line, water, or sewer line permanently crossing over or under one property in order to service another or to allow one building to permanently overhang another. When the intrusion is not permanent, but is simply the right for a vehicle or individual to cross over one property to get to another, it is called a right of way. A restrictive covenant is a restriction on what can be built on the land or what it can be used for. If the covenant is expressed in negative terms it runs with the land and is binding on future owners. A building scheme is the same idea but is binding on a whole development of properties. 8. Compare a joint tenancy and a tenancy in common, and explain severance and its effect on such tenancies. Answer: With a joint tenancy both parties own the whole property and if one dies the other retains ownership of the whole property thus acquiring the exclusive right to it by survivorship. With a tenancy in common both parties only have an undivided interest and if one dies that portion of the property goes to his heirs. Severance is the process of changing a joint tenancy into a tenancy in common, which eliminates the right of survivorship.

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9. Explain the nature of a mortgage and how it is used to secure a loan. Identify the parties to the mortgage. Answer: In a mortgage arrangement the owner of the property (the mortgagor) temporarily conveys the title of his property to the creditor (the mortgagee) as security for the loan. In the event of a default the mortgagee can claim the property or force its sale with the proceeds being used to pay the loan. 10. Distinguish between the effects of registration in a land registry as opposed to a land titles jurisdiction and explain why registration of interests in land is important. How does a mortgage affect the title in these jurisdictions? Answer: Registration in a land registry district just notifies the parties of the documents that can affect title. The parties still have to determine the effect of those documents. In a land title jurisdiction registration involves the creation of a certificate of title that determines the rights of the parties. In a land registry system the title is transferred to the mortgagee as security, whereas in a land titles system the title is not transferred but the rights created are the same. 11. Explain what is meant by adverse possession and prescription, and the role these principles play in a land titles and land registry jurisdiction. Answer: Adverse possession takes place when someone openly (notoriously) occupies property and the owner does nothing about it for 20 years. After that they acquire title by adverse possession. Prescription is similar in that a person openly crosses property or makes some other use of it and after 20 years a right or easement to use that property is created by prescription. This can only happen in a land registry jurisdiction, not a land title jurisdiction. 12. Describe an equity of redemption, foreclosure, and the redemption period. Why are they important to mortgage transactions? Answer: In a mortgage situation the creditor/mortgagee has title. But the owner retains the right to get the property back even after default. This is called the equity of redemption. Foreclosure is an application by the creditor/mortgagor to end this right to redeem. The redemption period is the period the court designates within which that right to redeem must be exercised or be forever foreclosed. Foreclosure is a court order to end the redemption period. 13. Explain what is meant by a lease and distinguish the lease from other types of interests in land. What is meant by a periodic lease and how is it ended? Answer: The lease gives an exclusive right to land that is for a specific period of time. A periodic lease is automatically renewed at the end of each period, e.g. monthly until notice is given to end it. 14. Summarize landlord and tenant obligations with respect to commercial tenancies and the lease terms on those obligations. Are there any statutes that dictate the amount of notice that must be given by the parties to terminate the tenancy or to increase the rent?

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Answer: Repair obligations are usually set out in the lease agreement. Landlord must deliver vacant possession and quiet enjoyment; tenant must pay rent and use the property properly as per the agreement. Tenant must pay for any damage he does more than simple wear and tear. Unlike residential tenancies, there are no statutes in Canada that dictate terms as to notice or rent increases. Rather, if the parties want such terms, they must be included in the lease agreement. 15. How do most residential tenancy statutes modify the obligations of the parties to make repairs to the premises? Explain how the rights of the landlord to enter residential premises have been restricted. Answer: Tenants must repair what they damage. Landlords must make major repairs. There is no obligation on a tenant to repair normal wear and tear. The landlord can only enter during daylight hours after giving specified notice 16. Explain the nature of a security deposit and any restrictions on how much can be taken and what it can be used for. Answer: Security deposits are only for rent or for damage depending on province. Amount limited also varies with province, e.g. 1/2 of one month’s rent 17. Explain the landlord’s obligations with respect to services provided during the term of the tenancy. What can a landlord do when a tenant defaults in a residential tenancy? Answer: those services must be maintained. If the tenant defaults the landlord can ask him to leave or bring an application to the residential tenancy board for the termination of the tenancy and if necessary the eviction of the tenant. The landlord cannot seize the property of the tenant for unpaid rent in a residential tenancy. 18. Why does federal legislation with respect to the environment become important for landowners and business people? Answer: Most local streams are fish bearing or potentially so and so the regulations of the Fisheries Act and other federal legislation apply. 19. Explain the role of the Canadian Environmental Protection Act and how its objectives are realized. Answer: The Act provides for research (gathering, compilation, storage, evaluation, and publication of information and data); setting of standards, guidelines, and codes of conduct; monitoring and inspection; identification of prohibited and controlled activities; and the enforcement, remediation, and imposition of penalties when offences and violations take place. 20. Explain the role of enforcement officers appointed under the Canadian Environmental Protection Act and how they can interact with business. Answer: Officers can enter and inspect premises, stop and inspect conveyances to take samples, detain vehicles and material to make tests, and examine records and

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computers. They can issue environmental compliance orders, which may involve, among other things, the requirement that a person refrain from or stop doing something in contravention of the Act. Finally, they can charge individuals with offences where violations do occur. 21. Who can be charged with an offense under the Canadian Environmental Protection Act? Answer: Anyone in Canada that commits one of the designated offenses under the Act including individuals, companies and officers and employees of that company. 22. Explain what is meant by an insurable interest, and distinguish between an insurance agent and a broker. Answer: A broker represents the person seeking insurance and the insurance agent acts for the insurance company supplying that insurance. An insurable interest is some interest in the thing insured so that if the feared event happens the insured will suffer a loss. Thus the insurance payment is compensation, not a windfall. 23. Explain the nature of the insurance policy, a rider, an endorsement and reinsurance. Summarize the different types of insurance that are available to businesses. Answer: Insurance policies usually take the form of a standard form contract dictated by regulations. A rider provides added coverage related to the unique needs of the particular customer. When modifications to an existing policy are needed, an endorsement outlining the specific change is added. Liability insurance covers negligence caused to a customer or the public, property insurance covers losses to buildings and assets (may have to be specified as fire, loss, theft etc.), life insurance of partners and key people in the organization may be taken out. Business interruption insurance may also be obtained. 24. Distinguish between liability, property, and life insurance. Explain the difference between whole life and term insurance, indicating why life insurance might be important for a business or for professionals to acquire. Answer: Liability insurance covers accidents caused by the employees of the business to customers, other businesses, and the public. Property insurance covers loss to property, both real and personal. Life insurance provides a payment upon the death of the insured. Term insurance is intended to merely provide a specified benefit when a person dies whereas whole life insurance has an investment aspect to it and a benefit will be provided even where the insured doesn’t die. A business might take out life insurance on key personal to pay for assistance or compensate for the disruption and loss caused if they were to die. 25. Distinguish between a bond and insurance. Explain the difference between a fidelity bond and a surety bond. Answer: Instead of accidents, bonding can cover wrongful action such as theft on the part of the person bonded. A fidelity bond covers wrongful conduct by employees. If

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an employee steals or cheats clients, the bonding company will provide compensation, but retains the right to go after the employee to recover what they have to pay out. Sometimes a construction company will be required to put up a bond to ensure they will perform as required in a contract. This is a surety bond and guarantees performance of a contract rather than compensation for wrongful conduct. Questions for Further Discussion 1. There is a considerable difference between the laws with respect to residential and commercial tenancies. Most of the statutory changes favour the tenant and have led to considerable complaints by landlords about the difficult position they find themselves in. Do you feel that these changes introduced by statute have unfairly interfered with what should be a relatively simple commercial relationship? Is this another instance of government imposing inappropriate regulation that unfairly restricts a landlord’s right to manage his or her property? Consider this as a form of consumer protection legislation and ask what problem it was intended to solve, whether an adequate solution has been arrived at, and whether the solution creates more problems than it solves. Comment: This deals with the question of interference in the freedom to contract between landlord and tenant. Is the approach taken really fair to both parties or does it favour the tenant? Is that a good idea? Look at the laws in place in your jurisdictions. The last part of this question, whether the statute effectively solves the problem it was designed to deal with, is a very good way to get a discussion going that goes right to the heart of the matter. The problem obviously is control of abusive landlord practices which take advantage of less sophisticated tenants. Do the controls imposed go too far? Are there any provisions that protect landlords from abusive tenants? 2. Bailment involves one person putting his or her personal property into the care of another. The responsibility to look after that property is often limited in the contract creating that relationship. Do you think that a party agreeing to be responsible to look after another property, either in the process of repair, storage, or otherwise, ought to be able to contract out of their responsibilities with an exemption clause? This question really is much broader. This is because whenever an exemption clause is included in any contract, one party is severely disadvantaged. Should the parties to contracts, especially where the bailment of goods is involved, be able to contract out of such basic responsibilities? In your discussion consider the often unequal bargaining power of the parties, standard form contracts, and the concept of fundamental breach discussed in Chapters 4 and 5 and how it should be applied to these contracts. Comment: This asks again the question as to whether contracting parties ought to be free to put exemption clauses into their contract that favour one side at the expense of another, especially where one of them might be an unsophisticated consumer. In the area of bailment these exculpatory clauses exempt or reduce the bailee’s responsibility to care for the goods: e.g. “not responsible for goods left”. The other contracting party may not be aware of the significance of the term even where it is specifically brought to his attention. On the other hand, by imposing restrictions are you taking away the freedom of the parties to contract or to put in whatever they want? Remember that the price and charges imposed will reflect the risks. The

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presence of an effective exculpatory clause will, to a large extent, determine the extent of that risk. 3. Consider the laws that have been imposed on individuals and businesses to control pollution and reduce waste. Is this a reasonable demand and consider how these policies might impact Canadian businesses that operate abroad perhaps in order to evade these costly requirements. Comment: This again is a question of balancing of interests. In the past very little attention was given to such questions and other than a few ineffective common law rules very little was done to check pollution. Today we are reaping the consequences in terms of air and water quality as well as the problems associated with global warming. The more regulations we impose the costlier it becomes to do business here and many businesses relocate offshore. That hurts our economy. On the other hand if we reduce those regulations that adds to the pollution here. Where is the balance? 4. A serious problem that often arises for an insured claiming on an insurance policy is the requirement that all information be accurate or that any changes in circumstances be communicated to the insurance company. Benefits have been denied when the loss takes place when the premises were left vacant, where the use of the premises has changed, or where the information on the application is accidentally or knowingly incorrect (even if the information has nothing to do with the event giving rise to the claim). Discuss whether such an approach is too harsh and gives too much advantage to the insurance companies and whether consumers are adequately protected from abuse. Comment: Insurance contracts are considered to be contracts requiring the exercise of good faith between the parties and absolute truth and disclosure of all pertinent information is considered to be an essential part of this relationship. In many jurisdictions statements of fact that is incorrect or where important information is not disclosed that might affect the rates will defeat the contract and make it unenforceable. But when this is done innocently and the insured has suffered a loss, should the insurance company be allowed to avoid their obligation to pay the claim? Even if the misinformation or failure to disclose was done deliberately if it didn’t relate to the reason for the loss should it affect the claim? The other side is that the insurance company may have charged higher rates or even refused coverage if the truth had been disclosed. So they are being cheated if this is allowed. Maybe the harsher approach should be restricted to business insurance where both parties are somewhat sophisticated in these kinds of transactions. Where consumers are involved and failure to disclose or misinformation might be better tolerated with rates simply adjusted accordingly. Cases for Discussion 1. Backmirzie v. 1500569 Ontario Ltd. Ont. S.C.J., Howden, J., Dec. 06/06, Digest No. 2634-018 [2006] O.J. No. 4831; 153 A.C.W.S. (3d) 982 Parvanh Backmirzie left two valuable Persian rugs with La Moquette Fine Rugs and Furnishings to be sold on consignment. But they were not sold and while waiting to be picked up by Backmirzie they were stolen during a break-in at the store. This

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action is brought by Backmirzie against the company owner of the store demanding compensation for the loss. Explain the basis of this action, the arguments that could be advanced by both parties and the likely outcome. Would your answer be affected by the additional information that several days before the break-in the proprietor of the store phoned Backmirzie saying she should pick up the rugs as she had observed two men in the store looking at them and they appeared to be “casing” the store and she feared a break-in. But she delayed picking them up and the rugs were stolen. Decision: As the rugs had been left at the store to be “sold on consignment” by which the store would have received a portion of the sale proceeds, the Court ruled that the store held the rugs as a “bailee for reward”. In doing so, the Court accepted Backmirzie’s contention that the store was required to exercise “reasonable care” in storing and protecting the rugs until they were sold or retrieved by Backmirzie. (It is important to note that the obligation to take reasonable care does not make the bailee a guarantor or insurer as against loss.) Ultimately, the Court accepted the store’s contention that they had exercised reasonable care as: • The store was always locked after store hours; • The store moved the carpets to a place behind other carpets in order to prevent visibility from the street; • The store was equipped with a working alarm system which was activated when the rock went through the window and the police responded within 5 minutes; • The store staff noticed the suspicious activities of two men prior to the theft and alerted Backmirzie to her concerns, asking her to remove the goods; Ms. Backmirzie agreed to do so but failed to act with immediacy; • the store had not insured the goods against theft but neither had the plaintiff and there was nothing in their contract requiring the defendant to insure the goods. 2. C.A.)

Heffron v. Imperial Parking Co. et al. (1974) 46 D.L.R. (3rd) 642 (Ont.

Mr. Heffron parked his car in a parking lot operated by Imperial Parking Company and left the keys in the ignition as instructed by the attendant. When he returned at about 1:00 a.m., he found the car missing. It was eventually found with considerable damage and several personal items missing. The lot in fact closed at midnight but the practice was for the attendant to take the keys of the cars remaining and give them to an attendant at a nearby parking garage, who would then return them to the owners when they claimed their cars. Discuss the obligation of the operators of the parking lot in these circumstances. How would it affect your answer if the ticket involved contained the words, “We are not responsible for theft or damage of car or contents, however caused”. What if the driver had merely parked the car and taken the keys with him? Decision: The court held that a bailment for reward had been created here since the keys left in the car put that car in the attendant’s keeping. It was fundamental to the contract to return the car to the driver. Since this had not taken place the bailment had

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been breached. The court also held that this was a fundamental breach and the return of the car was so basic to the contract as to override the exemption clause. The judge also found Imperial responsible for the loss of the personal goods that could have been reasonably expected to be in the car. If Heffron had taken the keys with him this would have been a mere license situation and no bailment would have been created. The lot would likely not have been responsible for the loss. Note the result of this case may have been very different if decided after the more recent Supreme Court of Canada decision in Tercon Contractors Ltd. significantly restricting the manner in which “fundamental breach” may render an exemption clause unenforceable. 3. Lawrence v. Maple Trust Company 2007 Ont. C.A. 74 (CanLII) (2007), 84 O.R. (3d) 94, (2007), 278 D.L.R. (4th) 698, 220 O.A.C. 19 Susan Lawrence owned a home in Toronto. A person, posing as Ms. Lawrence, went to a lawyer with a forged agreement to purchase and had the property transferred to another person who called himself Thomas Wright. He obtained a mortgage for $291 924 from Maple Trust Company, which was duly registered against the property. An existing mortgage on the property in favour of the TD Bank was paid off and the imposters took the remainder. Maple Trust had no knowledge of the fraud and had in fact lived up to their due diligence requirements with respect to the transaction. Ms. Lawrence was also innocent, having no idea of what had happened. This happened in a land titles jurisdiction. Who should bear the loss in this situation? Explain the arguments on both sides and the likely outcome. Decision: The Trust Company contended that their mortgage should be deemed valid as they inspected the registry and acted on the fact that the property was registered in the name the fraudster used (Thomas Wright) and the registration scheme is intended to allow lenders to rely on the registration details in carrying out their business. Ms. Lawrence contended that the fact of registration cannot overcome transactions which are fraudulent at the outset. The Court went through a detailed analysis in deciding how far the fact of registration should prevail in Ontario. Ultimately, the Court heldWright never took valid title to the Property because he obtained it by fraud. He was, therefore, not a registered owner. In accordance with s. 68(1) of the Act, only a registered owner may give valid charges on land. Maple Trust was an intermediate owner of an interest in the Property. It had an opportunity to avoid the fraud. It did not take from a registered owner. Therefore, despite registering its charge, Maple Trust loses in a contest with the true registered owner, Ms. Lawrence. Accordingly, the charge against the Property in favour of Maple Trust was set aside. 4.

R. v. Petro-Canada (2002) 222 D.L.R. (4th) 601 (Ont. C.A.)

Petro-Canada was charged with “discharging a contaminant into the environment”, an offence under the Ontario Environmental Protection Act. In fact, a pipe had failed and leaked gasoline but Petro-Canada responded quickly. It was also established that there were a number of safety systems and procedures in place. Petro-Canada claimed due diligence as a defence. Explain what must be established to succeed in a due diligence defence and on which side the onus of proof resides. How would it affect your deliberations to know they had used piping “not up to industry standards”?

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Decision: In this case Petro-Canada argued that the obligation was on the Crown to show that they had not shown due diligence. The appeal court found that this was not the case. Once the prosecution established that the contamination constituting the offence had taken place the onus was on the accused to show that they had exercised due diligence. There was no obligation of the crown to show that they had failed to exercise due diligence. Petro-Canada had not met the onus of establishing due diligence and were convicted. 5. Zimmerman v. Royal & SunAlliance Insurance Co. Ont. S.C.J., [2007] O.J. No. 3485; 52 C.C.L.I. (4th) 235; [2007] I.L.R. I-4637; 160 A.C.W.S. (3d) 157 The Zimmermans owned a property for 14 years, which they had converted into two apartments. They lived in one apartment for a period of time and then rented both out to students and nurses. In November 2003, both apartments were vacant because the Zimmermans were doing some upgrades. They were there at least part time every other day, but were not continuously in residence during this period. The insurance contract required that the insurer be notified if the premises were to be vacant for over 30 days. When a leak in the heating system caused extensive damage to both apartments the insurance company refused the claim on the basis that they had not been notified of the vacancy. What arguments can the Zimmermans raise to support their claim? What is the likely outcome? Decision: The Zimmermans contended that although they were not living at the apartment during the hiatus, one or other of them were at the apartments on a regular basis in the course of the repairs and upgrades. The Court adopted the insurance company’s submission that “vacant” refers to an absence from the premises to live at another location regardless of returning on even a regular basis for other purposes (such as to carry out the intended repairs and upgrades). As the Zimmermans were obliged by the terms of the policy to inform the insurance company of such a vacancy, the claim was dismissed as it was deemed to be a “material change” in the risk that the insurance company was not able to address given the failure to advise. 6. Clemmer Steelcraft Technologies Inc. v. Bangor Metals Corp. 2009 ONCA 534 (CanLII); 55 C.B.R. (5th) 177; 169 A.C.W.S. (3d) 671 Brute Manufacturing Ltd. operated a manufacturing business and was under the supervision of the Companies’ Creditors Arrangement Act. With the court’s approval they sold certain heavy equipment to Steelcraft, including a large spray booth used in the process of painting large equipment. But they were also a tenant of Bangor Metals Corp. at the time of the sale and Bangor claimed they were entitled to the spray booth as a permanent fixture. Explain the arguments for both sides and who would likely be ultimately entitled to the spray booth. Would it affect your answer to know that the spray booth was very large, was fastened to the floor and roof and connected to the electrical and natural gas supply? What if the terms of the lease provided it could not be removed without the permission of the landlord? Decision: Clemmer contended that it was entitled to the spray booth as the Court had approved the sale of that item to Clemmer as part of the listed items included in the asset inventory approved by the Court. On a subsequent hearing in Superior Court the presiding Judge reviewed his earlier decision and ruled that the spray booth was not

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validly included given the terms of the original lease making the device the property of the landlord given the scope of incorporation into the rented premises. The Court of Appeal ultimately sent the case back to the Ontario Superior Court for further hearing as it ruled the original Superior Court Judge failed to properly consider all the necessary evidence to rule on whether the spray booth was now a fixture and/or became the property of the landlord pursuant to the terms of the lease. Sample Examination Questions Multiple Choice Questions 1. Jane asked her friend Harry to look after her very valuable Stradivarius violin while she was away on vacation. Which one of the following statements is correct with respect to the legal relationship created? a. This is an example of a gratuitous bailment for the benefit of the bailee b. This is an example of a gratuitous bailment for the benefit of the bailor c. This is an example of an involuntary bailment d. Because he is doing his friend a favour Harry has no legal duty to be careful of the violin e. Because the violin is a Stradivarius this is an example of a bailment for value Answer: B 2. In which one of the following would Joe be able to collect the entire amount of insurance claimed? a. Where Joe insures his law partner's life for $500,000 and the amount he actually lost when the partner died was only $100,000. Joe claims $500,000. b. Where Joe's house suffers $20,000 damage and he only had it insured for $100,000 when the actual value was over $250,000. Joe claims $20,000. c. Where Joe owns a one half interest in a house valued at $100,000 which is completely destroyed in a fire. The house is insured for that amount and Joe makes a claim for $100,000. d. Joe insured the club house of a Hell's Angels motorcycle club located in the next block for $75,000 which is valued at about that amount. The clubhouse is subsequently destroyed in a fire. Joe claims $75,000. e. Joe takes out a life insurance policy on his wife for $500,000 and shortly thereafter during a fight when he was in a drunken rage he struck his wife causing her death. Joe claims $500,000 Answer: A 3. Which of the following is correct with respect to the principle of subrogation as it relates to insurance law? a. Subrogation refers to the insured right to demand payment from the insurance company if the insured against event takes place. b. Subrogation refers to the principle that the insured cannot benefit from his own wrong doing c. Subrogation refers to the principle that if the insured does not take out enough insurance he will be taken to be responsible for a portion of any loss incurred

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d. Subrogation refers to the principle that if an insurance company pays out on a policy they assume all of the rights of the insured, against the person causing the loss e. Subrogation refers to the practice of the insurance companies taking out their own insurance where the policy involves potentially large losses or high risk Answer: D 4. Which of the following statements is correct with respect to bonding? a. Bonding is another term for insurance. The two terms, bonding and insurance, are interchangeable b. If a person is bonded and that person commits some wrongful act such as stealing a client's money the bonding company is bound to compensate him for any losses he suffers from being caught. c. Bonding provides protection to the victim injured by the wrongful conduct of the person bonded d. Bonding provides protection against loses incurred because of fluctuations in the financial markets e. Bonding is a government certification system whereby the government guarantees that a person so bonded or certified will do the job he is hired to do as set out in the bonding certificate Answer: C 5. A husband and wife own lot A as joint tenants and lot B as tenants-in-common. The husband's will reads: “I leave lot A to my son John and Lot B to my daughter Mary”. Who takes what when the husband dies? a. The son, John, gets Lot A and daughter Mary gets Lot B just as their father wished and designated in his will. b. John will get Lot A but Mary will not get Lot B because it was co-owned with the mother as tenants-in-common so the mother takes Lot B as the other tenant-in-common. c. Mary will get all of lot Lot B but John will not get Lot A because it was coowned with the mother in joint-tenancy so the mother takes Lot A as the surviving joint tenant. d. Mary will get her father's interest in Lot B, but John will only get a life tenancy in Lot A. e. Mary will get her father's interest in Lot B, but John will get no interest in Lot A. Answer: E 6. Which of the following is false with regard to real property law? a. A registered interest less than an estate, e.g. a right of way, binds the parties to the contract and also binds the subsequent purchasers of either the dominant or servient tenement because it “runs with the land”. b. When documents concerning an interest in land are filed in the Land Title Office, each document is examined and, if it is in order, the title certificate is amended to show the change.

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c. If a person wants to live in a co-operative, he will be buying a share in a company which entitles him to lease one of the units; he will not be buying the fee simple interest. d. If a first and only mortgagee, unpaid, proceeds to have the house sold under an order for judicial sale, all the money realized from the sale of the property goes to that mortgagee even if it is greater than the debt owed plus costs. e. The right to foreclose is a remedy from the Court of Equity which allows the mortgagee to end the mortgagor's equitable right to redeem. Answer: D 7. Below are the mortgages registered against Bingo’s berry farm when it defaulted, and the amounts owed on each: first - in favour of Canada Trust for $100,000 second - in favour of Kits Credit Union for $50,000 third - in favour of uncle Isaac for $20,000 Canada Trust petitioned for foreclosure. Which of the following is false? a. The respondents in the action include all the others whose interest in the property will be affected by the proceedings. b. If Canada Trust eventually received the order absolute of foreclosure, the interest in the land of all those ranking below it would be lost because it forecloses the equity of redemption and that is all the others have. c. The mortgagor is responsible to pay any shortfall from the judicial sale. . d. If the property is sold by way of a judicial sale and the first and second mortgagees are paid in full, but the third is not paid in full, the third is out of luck; he has no further remedy. e. If the property goes to the first mortgagee by way of foreclosure and is then sold the mortgagor is not responsible for any shortfall. . Answer: D 8. Which one the following is false with regard to real-property law? a. Property includes not only the land but also the buildings attached to it. b. The "fee simple" interest in land is the greatest interest that can be granted and bestows the rights to use or sell the property. d. If two people own land as joint tenants, the surviving joint tenant takes the interest of the deceased co-owner. d. A legal, registered restrictive covenant “runs with the land”, i.e. it can bind subsequent owners who were not parties to the original contract under which it arose. e. A person who owns an interest less than an estate, e.g. a right of way, has a right to exclusive possession of that property. Answer: E 9. Which of the following is false with regard to interests less than estates? a. A valid easement is an interest less than an estate and can run with the land; that is, it can bind subsequent purchasers of either the dominant or servient tenement

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b. An easement gives the owner of the dominant tenement the right to enter the servient tenement for a purpose that will enhance the enjoyment of the dominant tenement c. If a person habitually exercises a right over the neighbouring land of another for a long period of time, he will acquire an easement by prescription in some provinces. d. A subsequent owner of property can be in breach of a building scheme by failing to do something the scheme requires, e.g. building within a specific time period. e. An easement may restrict an owner's use of his property where another property benefits from the restriction (dominant tenement). Answer: D 10. People living on rivers in Canada are entitled to have the water to come to them in undiminished quality and quantity. This is an expression of what kind of rights? a. b. c. d. e.

Natural law Environmental rights riparian rights Res Ipsa Loquitur The rule in Rylands v. Fletcher

Answer C 11. The main concern about environmental legislation from a business point of view is? a. b. c. d. e.

The costs of compliance the government regulatory red tape the need to comply with environmental impact studies the threat of massive fines and penalties all of the above

Answer E Short Answer Questions 1. Distinguish between a bailment for value and a gratuitous bailment. Answer: Bailment for value involves a contractual relationship where the goods are being taken by the bailee pursuant to an obligation to repair, use, store, etc., whereas in a gratuitous bailment no such contract is involved. 2. Explain what is meant by an insurable interest. Answer: An insurable interest is an interest that the insured has in the property or matter being insured, such that if the insured against event takes place, he will be economically hurt, resulting in the insurance payment compensating him for a loss rather than being a windfall profit.

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3. Distinguish between a fidelity bond and a surety bond. Answer: A fidelity bond involves a person or an employee being bonded against his own wrongful conduct for actions such as theft, whereas a surety bond is intended to provide assurance that one party through a contract will properly perform their side of the contract, for example, a contractor on a construction project. 4. Distinguish between an easement and a right of way. Answer: A right of way is a particular type of easement giving the holder of it the right to cross the land to get to another location but not to stay on that land whereas an easement may involve some permanent intrusion onto the property such as an overhanging portion of a building or a sewer line 5. Distinguish between a tenancy in common and a joint tenancy. Answer: A tenancy in common is where two people share an estate on the same property, each owning an undivided one-half interest. When one dies the heirs inherit that half interest. In a joint tenancy, on the other hand, each of the two parties owning the property own the whole property and when one of them dies, the other retains the entire title by survivorship. 6. What is the main difference in the effect of a registration of a certificate under certificate of title jurisdiction such as British Columbia as compared to a title registration system in other parts of Canada? Answer: In the title registration system, the registry contains the documents that can affect title but it is up to the person searching that title to determine the effect of those documents. In a land title system, however, a certificate of title is granted and the title is, thereby, guaranteed by the registry to be as stated on the certificate of title. 7. Explain what is meant by a landlord’s obligation to provide quiet enjoyment. Answer: It is the landlord’s obligation to insure that nothing happens to interfere with the tenant’s use of the property. 8. Indicate what residential rent control regulations are in place in your jurisdiction. Answer: This will vary with the jurisdiction, but should include not only restrictions on the amount of rent that can be charged but also the control of how often such rent increases can be imposed. 9. Explain what is meant by the equity of redemption in a mortgage transaction. Answer: The equity of redemption was a right created by the courts of chancery which gave the debtor the right to reclaim the property by paying what was owed

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even after default. The value of the equity of redemption is the market value of the property minus the amount that is owed on it; hence, the term equity. 10. Joe owned property against which he had given a first mortgage to Sam for $100,000.00 and a second mortgage to Harry for $75,000.00. Because of a slump in the market, the value of the property was only $150,000.00 when Joe defaulted. Sam foreclosed. The court granted a six-month redemption period. Harry obtained an order for judicial sale. The property was sold for $150,000.00. Sam was paid $110,000.00 which included the amount of the loan plus interest payable because of payments missed, plus legal costs. Harry only realized $40,000.00 against his claims of $80,000.00, representing the interest on payments not made, plus his legal costs. Explain what rights Harry has under these circumstances. Answer: Harry can sue Joe for the $40,000.00 deficiency if he thinks it is worth his while. 11. Which level of government, federal or provincial, has the power to pass legislation dealing with the environment? Answer: Both, the federal and provincial, depending on the types of activities or the areas involved. 12. Explain what is meant by riparian rights. Answer: A person living on a river has the right to have water come to them in undiminished quantity and quality. Essay Topics 1. Discuss the various obligations of bailees when looking after the property of others. 2. Distinguish the various different types of insurance that are available and under what circumstances each would be appropriate. 3. Discuss the advantages and disadvantages of the land title system of registration versus the normal system of registration of land as it is used in Canada. 4. Discuss how the normal rules in relationship to residential tenancies have been modified in your jurisdiction by statute and discuss the effectiveness of such changes in terms of the objectives of the statutes. 5. Discuss the principle of the equity of redemption as developed by the courts of chancery, and indicate its importance in the field of mortgage law today. 6. Consider the various remedies that are available to the mortgagee in the event of a default, and discuss the various effectiveness of each.

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7. Discuss the areas of threat to our environment and what steps have been taken in the various jurisdictions in Canada to counter those threats. 8. Consider the various statutes that have been passed in the environmental area in terms of the objectives of such legislation. In your answer consider whether those objectives have been realized.

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Ideas and Information Teaching Suggestions I normally have only an hour to spend on this subject and so I concentrate on the subject of intellectual property and leave the rest of the material for independent study. I point out that intellectual property is not a separate kind of property but a subset of intangible personal property. I further point out that intellectual property has become so important in recent times that it is best treated as a separate topic. We look primarily at copyright, patents, trademarks and confidential information. Copyright, patent, trademark, industrial designs, and integrated circuits are covered by federal statutes. Actions to enforce these rights can be brought in both the provincial and federal courts. In the past there have been difficulties over where software programs would fit but the Copyright Act was recently amended to include computer software under its protection. It is important to point out that the legislation attempts to balance the need to allow people reasonable information about innovative ideas and protecting the rights of the creators of those innovative ideas. Copyright not only covers written works but also art, sculpture, music and the expression of ideas. It is the expression of the work that is protected not the idea behind the work. Thus it would be a breach of copyright to simply copy and distribute this text. However, would not be a breach of copyright to write another text dealing with the same ideas. To get copyright protection the work produced must be original and created by the author’s own efforts. The work doesn’t need to be good or have merit, only that it be an original work. Literary works including computer software, dramatic scripts, musical scores and artistic works are covered. Eligibility for copyright protection in Canada is automatic as soon as the work is produced. Registration is possible and has the advantage of protecting the work in other jurisdictions. The period of protection is normally the life of the author plus 50 years. However, photographs and corporate documents are only protected for 50 years after production. The protection granted is that only the holder of the copyright has the right to reproduce the work and to profit from it. I explain that there are exceptions including reproduction for private study and for research purposes. Finally, I explain that the creator can assign the copyright to others, but will always retain moral rights with respect to it. That means that he is entitled to have his name associated with it and that it not be changed or degraded by alteration without his permission. Patents are covered by the federal Patent Act, which requires that patents be granted by the patent office. A patent gives the patent holder a monopoly over the use of the invention for a period of 20 years but requires disclosure sufficient for someone else with the same training to reproduce the invention. The idea is to get as much information out there to stimulate others but to protect the rights of the inventor as well. The danger of .

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not applying for a patent and not making this disclosure is that someone else might come up with the same idea and patent it and you would then be prohibited from using your own idea even if you could show that you were first. It can’t be just a theory or even a refinement of an already existing machine that would have been an obvious development to someone else with similar expertise. It has to be an original invention with some practical use. Trademarks must also be applied for. A registered trademark provides protection for 15 years and can be renewed. Special names, symbols, designs, symbols, logos, or other distinctive marks associated with a product or business can be registered. Trademarks protect consumer by making sure they get what they expect and it protects the producer by supporting the reputation and good will of the product or business. I also deal with the tort of passing-off here. This takes place when a different business uses a symbol or name that is likely to cause confusion as to which company the customer is dealing with. I explain that there is no requirement that the symbol being used by the other company be a registered trademark, it is an infringement if causes confusion with the registered trademark. I also mention the Industrial Design Act here. This statute provides protection for uniquely designed products that have a distinctive and memorable shape that is decorative rather than practical. These designs may be registered and the protection is for an initial five year period and can be renewed for another five years (providing a total of ten years protection). The federal Integrated Circuit Topography Act is a relatively new statute providing protection for the integrated circuits used in computers and other products when they are registered under that Act. After dealing with these statutes I talk for a few minutes about infringement and the remedies that are available: injunctions, damages and an accounting. I explain that when an interim injunction is obtained the results can be devastating to the party being bound by that order. I explain the balance of convenience test here and point out that if such an interim injunction (interlocutory injunction) is granted, that is normally the end of the matter and there is no need to go to trial later since the damage has already been done. I also review the remedy of an accounting. Instead of compensation the money that must be paid to the victim is based on what the wrongdoer has profited from the prohibited conduct. It is also important to mention the Anton Piller order. This is a very effective tool allowing for the seizure of the offending products or documents before they can be destroyed or otherwise disposed of. It is also important to teach that criminal penalties are also available with respect to copyright and patent infringement. Finally, I cover privacy and confidential information. There is no common law protection in tort for a breach of privacy, although the breach might involve other wrongs such as defamation or trespass. Many provinces have passed privacy acts that make breach of privacy in its various forms an actionable tort by statute.

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There is no legislation, provincial or federal, protecting trade secrets in Canada. I explain that a business would be wise to include in contracts with employees (and others they deal with) provisions that impose an obligation of confidentially on the parties. While this isn’t strictly necessary, since such a duty likely already exists, it eliminates any question and drives home the point that confidentially is important in the relationship. Another option is to include a restrictive covenant in an employment or service contract prohibiting the employee from working for a competitor for a limited time period. I point out that consultants and employees, even suppliers and businesses providing services, can have a general obligation of good faith including the obligation to respect confidences. However, I explain that it is better to put in place specific policies and procedures to ensure that such parties know of the obligation at the outset. Often employees, consultants, and others simply don’t know what information they are required to keep confidential or even that there is a duty to keep anything confidential. It is important to mark documents as confidential and limit their circulation. Finally, I explain that training as to these issues is vital for employees. I usually try to include some discussion of the internet here but it deserves more time and for this reason the topic has been moved to chapter 10. Chapter Summary Intellectual property Great changes caused by computers and internet Intellectual property is intangible personal property Business often undervalues and fails to protect intellectual property Federal and provincial courts often have concurrent jurisdiction with respect to intellectual property Copyright Copyright protects the expression of the idea, not the idea itself Copyright lasts for the life of author plus 50 years Copyright can be assigned, but authors retain moral rights Employers entitled to copyright unless agreement otherwise Computer software now protected by copyright Copyright protection in Canada can give protection in other jurisdictions Copyright protection is automatic in Canada but registration provides additional benefits For copyright protection work must be original and fixed in a permanent form Limited copying is permitted Licenses to copy can be obtained for a fee Patents Patent protection continues for 20 years but requires disclosure Patent protects the idea, not the work itself Invention must be new and useful No patent is granted for obvious improvement, scientific principle, or higher life form

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Patent must be applied for and fee paid Where patent not used, the patent holder can be forced to grant a licence Canadian patent establishes right to patent in other jurisdictions Employer has right to patent of employee’s invention unless agreement otherwise Federal and provincial courts can hear patent infringement case Industrial design and Integrated circuits Industrial Design Act protects distinctive shapes Integrated Circuit Topography Act protects printed circuit design Trademarks Trademark Act protects distinctive names and logos Trademark protection is obtained by registration and lasts for 15 years Infringement involves others using the mark to confuse the public or devalue the business Trademarks can be words, symbols, or both in combination Certification marks, proposed trademarks, and distinctive shapes are also covered by the Trademark Act Trademark protection requires registration and the payment of a fee Trademark must be distinctive, socially acceptable and not associated with prohibited institutions Trademark can be challenged up to five years after registration Trademarks can now be licensed for use by others A business that passes itself off as another may be liable A registered trademark required for a passing-off action Interim injunction common where need for remedy is urgent in intellectual property disputes Interim injunction requires the balance of convenience to favour the applicant Anton Piller order provides for seizing of offending documents or products without notice Accounting requires improper profits to be paid to victim Privacy, Security and Confidential information Confidential information and trade secrets require protection Common law requires confidential information not to be disclosed or used by the confidant It is a good policy to include non-disclosure provisions in employment and consulting contracts Important to inform employees of what is confidential Injunction is often more effective as a remedy than damages or accounting Inducing breach of contract can sometimes be claimed when an employee moves to a competitor Privacy Several provinces have made breach of privacy an actionable tort Federal Privacy Act protects personal information in federal government institutions Federal PIPEDA applies in all provinces that don’t have substantially similar statute

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These Acts impose restrictions and obligations on all companies that have personal information in their control Businesses must develop policies and procedures: - To make business accountable for information - To place limits on information use, retention, and disclosure - To ensure accuracy and safeguard information - To provide access and a process for challenging the information’s accuracy All businesses must develop policies and procedures to protect private information Keeping information secure requires action by business Digital storage makes information subject to easy loss, whether intentional or inadvertent Importance of backups stored in different locations can’t be overemphasized Encryption is important to keep information secure, especially for electronic communications Even encrypted communications are not completely secure Simply deleting computer files does not remove them Wireless networks can be easily compromised Credit card and debit card fraud becoming a bid problem Steps must be taken to ensure that PIN numbers are protected Employees and the machines should be regularly monitored to ensure that there is no misuse Employers may be liable for employees’ abuses Solution is to monitor employees’ use of computers and other resources Important to inform employees of surveillance Confidential information should be contained, and employees should be told what information is confidential Careful hiring practices are the best safeguard Questions for Review 1. Distinguish between intellectual property and other kinds of property and explain which courts have jurisdiction with respect to intellectual property disputes. Answer: Intellectual property is a subset of intangible personal property. Law with respect to copyrights, patents and trademarks has been assigned to the federal government and so both the federal court and the provincial courts have justification over these matters. 2. What is protected under copyright law? How is that protection obtained and how long does it last? Answer: Copyright protects the expression of ideas in books, photos, music and other artistic works. Protection is obtained automatically in Canada upon publication and that protection generally lasts for the life of the author plus 50 years. But note exceptions for photographs and corporate documents.

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3. Who is entitled to patent and copyright protection when an employee or consultant develops the material? Answer: Usually the employer or the company the consultant is working for unless agreed otherwise in the contract. 4.

What federal statute protects computer software?

Answer: The federal Copyright Act protects software. Other aspects of computers may be protected by other statutes. 5. What qualifications must be met in order for a work to qualify for copyright protection? Answer: The work must be original, take a permanent form and be expressed in one of the forms covered by the Act. 6. Explain what a patent protects, how patent protection is obtained and how long that patent protection lasts. Answer: A patent protects the invention itself rather than the expression of it as with copyright. A patent must be applied for requiring disclosure of enough information so that someone else could produce the same results. In most cases this protection lasts for 20 years. 7. What qualifications must an invention meet in order to qualify for patent protection? What will not qualify? Answer: It must be new, useful and not just an obvious development or improvement of an existing machine. No patent will be granted for a mere scientific principle or abstract theorem. Also higher life forms cannot be patented in Canada but there are ways to get around this. 8. What is protected by the Industrial Design Act and the Integrated Circuit Topography Act? Answer: The Industrial Design Act protects distinctive designs, shapes, or patterns associated with products that have no useful function, but simply add to the appeal. The Integrated Circuit Topography Act protects the unique design of the integrated circuits that are the heart of the modern computer revolution. 9.

Distinguish between a certification mark, a trademark and a distinguishing guise.

Answer: Trademarks are names symbols, logos, or other distinctive marks that are associated with a business. A certification mark is a special mark associated with quality

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or standards such as CSA. A distinguishing guise is a distinctive shape or a product or container that can also be registered and protected. 10. Explain the distinction between a trademark infringement action and a passingoff action and indicate when one would be chosen over the other. Answer: If another business uses a similar symbol so as to make their customers think they are dealing with the actual owner of the trademark when they are not, an infringement has taken place. Intentional copying of a registered trademark is not the only way an infringement can take place. Any use of a similar mark that devalues the goodwill or reputation of the business can qualify as an infringement, whether intentional or not. People or businesses that advertise their service or product in such as way as to lead others to believe they are being supplied by or associated with another business, when they are not, are liable to be sued for the tort of passing-off whether or not the symbol or words they use to do so are registered as a trademark. 11. Explain what the Trade-marks Act protects. How is that protection obtained and how long does it last. Answer: Names, symbols, logos or other distinctive marks that are associated with a business and are registered as trademarks are protected under the Trade-marks Act. This protection lasts for 15 years and is renewable but must be used. 12.

What harm does trademark infringement cause a business?

Answer: The trademark is valuable intellectual property and an infringement interferes with the good will and reputation of the business that owns it. In most cases the infringement is being done by a business that it producing and selling a poorer product. As a result, the infringement eventually devalues the good will and reputation of the legitimate holder. In the shorter term, infringement leads to confusion as to who and what the legitimate producer and product is. 13.

What will cause an application for trademark to be refused?

Answer: Restrictions include anything to do with royalty, national flags, institutions such as the Red Cross or R.C.M.P, or provincial or national coats of arms used without permission. Anything illicit or obscene or even a simple surname of a living or recently deceased individual will not be accepted. Also, a term that is simply descriptive of the product, the nature of the service, the location or one that is misleading in anyway will be rejected. And no trademark can be used that can be confused with the registered or preexisiting unregistered mark of another similar business or one selling similar products or services. 14. Distinguish between an injunction, an Anton Piller order, damages and an accounting. Explain where one would be preferred over the others.

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Answer: An injunction is an order to stop the offending conduct. An accounting is an order to calculate the profits made by the offending conduct and to pay over those profits to the victim. An Anton Piller involves a court order that the offending products or records be seized before they can be destroyed or removed. In most instances an aggrieved party would seek an injunction at the outset as stopping the offending conduct is the best immediate solution. An Anton Piller order is useful for confiscating any remaining items that may exist and also for obtaining business records which show how much profit the offending party has earned through the infringement. Finally, damages are the least likely remedy sought as it may not result in an immediate cessation of the offending conduct. 15. Explain the common law obligations with respect to people who are given confidential information. Answer: As a rule, employees, suppliers, and contractors have a common law obligation not to disclose confidential information to others. This may be based on a fiduciary relationship of trust or simply as part of the contractual obligations between the parties. A fiduciary duty arises where one party places trust in another and is vulnerable to harm if that trust is abused. Examples of such fiduciaries are partners to each other, senior employees to their employer, and agents to their principal. This duty can best be described as an obligation to act in the best interest of the party to whom the fiduciary duty is owed. An important aspect of that duty is the obligation to keep confidences. Even without a fiduciary duty, there can be a legal obligation not to disclose such information or to use it for your own purposes where the information was given in confidence. 16. What steps should be taken by a business to ensure their employees don’t divulge confidential information? Answer: The employer must make it clear to the employee that confidential information is not to be disclosed and also what is confidential and what is not. Proper training is vital. A non-disclosure provision can be included in a consulting or other contract. A restrictive covenant can also be included in the initial employment contract, requiring an employee not to work in the same industry or for a competitor while employed and for a specified period after that employment ends. 17. Explain the importance of provincial privacy acts, the federal Privacy Act and the federal Personal Information and Electronic Documents Act and how they interrelate. Answer: Provincial privacy acts often give the victim the right to sue for tort in a breach of privacy situations and define what constitutes such as breach. The federal Privacy Act protects personal information in the hands of federal government institutions, limits its collection, and provides for limited access where appropriate. It also establishes the office of the Privacy Commissioner. The federal Personal Information Protection and Electronic Documents Act is the governing law unless a province has “substantially similar” legislation in place. This Act came into force in three stages but as of January 1, 2004 it applies to all organizations in Canada involved in the collection, use, and

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disclosure of personal information in connection with a commercial activity and controls and restricts what can be done with that information. 18. Explain why the Personal Information Protection and Electronic Documents Act is in force in some provinces and not in others. Answer: The act applies to all organizations in Canada involved in the collection, use, and disclosure of personal information in connection with a commercial activity. The only exceptions are companies already subject to “substantially similar” provincial legislation. So in those provinces that have substantially similar legislation the provincial legislation applies rather than the federal Act. 19. What must be included when a business develops policies and procedures under the Personal Information Protection and Electronic Documents Act? Answer: The federal Act requires the business or organization to develop a privacy policy that will protect such private information from being disclosed to others. Each organization is required to develop and implement policies and procedures to protect personal information, to handle complaints and inquiries and to train staff about the policies developed. Each business must develop its own policies and procedures satisfying certain specified requirements. 20. Explain why digitally-stored information is particularly vulnerable to loss or disclosure. How can that information best be secured from intentional or inadvertent loss? Answer: Digitally-stored information is much more easily lost, stolen or destroyed than paper files. It should be backed up and encrypted for protection. 21. How can a business best protect their communicated information from inadvertent disclosure or intentional interception? Answer: The best solution is to limit access through the development and implementation of effective security practices that are scrupulously followed including the use of effective passwords and firewalls etc. and through sophisticated encryption of the information. 22. Explain how a business can ensure that their employees are not involved in any illegal or other inappropriate activity with respect to computers, the internet and voice mail. Answer: A business can implement ssurveillance including monitoring the employees’ use of the computers and other company resources. However, employees should be notified that it is in effect. Of course nothing will take the place of good hiring practices and proper training with clear written policies and effective procedures. 23. What steps should be taken to ensure that the employees don’t become involved in such inappropriate activities in the first place?

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Answer: The best protection against improper conduct of employees is the development and communication in writing of clear policies and procedures with respect to the use of company resources; careful hiring practices, including criminal and credit record checks; thorough training; and appropriate accountability, including surveillance and monitoring. Questions for Further Discussion 1. There are two ways of looking at the problems associated with intellectual property. As with any form of property law, the rules restrict and protect that property for the use of one individual or group and exclude others. But intellectual property is the vehicle for commercial and economic progress and is not restricted by international boundaries. Also, because it is intangible, the use by one group does not deny it to others as would be the case with a stolen car, for example. Third world countries, even emerging economic giants like China and India, often look at such intellectual property laws as a way to restrict their advancement and further the profits of western capitalistic nations and corporations at their expense. The same kind of debate happens at home between those who copy music over the internet and those large record companies and artists that feel that such activities are akin to theft. Consider these positions and discuss the relative merits of both sides. Is there any way to accommodate these conflicting interests? Comment: This is a pretty straight forward question but one which generates some passion. Some feel it is their right to have access to information. A previous Harry Potter novel was “ripped” and made available to anyone who wanted it on the internet within eleven hours of going on sale to the public. The same applies to music and movies. If people can’t afford it, they feel they are entitled to it anyway and don’t consider it stealing or some other interference with other people’s property rights. But the question is even more basic when dealing with third world countries. These intellectual property laws are considered by many to be a way of keeping the less developed countries in that condition. 2. The AID’s epidemic is just one of the catastrophic health problems that illustrate the disparity between medical advances and the costs that make them inaccessible to those who need them. Today steps are being taken to provide low-cost drugs to third world countries, but the general problem remains, and it surrounds the patent protection provided to the companies that develop the drugs. Consider the balance now struck between guaranteeing profits of pharmaceutical giants that developed these drugs and the need of inexpensive variants in those countries and ours to preserve life. Discuss the negative impact of our patent protection policies in these areas and consider what can be done to overcome the problem. Comment: This is a continuation of the above question in that it deals with the balance of needs of many, personal property rights and right to profits of those in business. Much of what is now happening in those impoverished countries is voluntary on the part of the drug companies as part of their humanitarian efforts. Still one might question whether even that would have been implemented without the pressure and threats of imposed

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restrictions and controls. What is more important, the profits of the pharmaceutical companies or the many lives lost and the suffering taking place in these impoverished nations? Note as well, the argument that without those profits the required drugs would not have been created in the first place. 3. Consider the recent privacy laws that have been introduced at both the federal and provincial levels and the restrictions and controls this imposes on business. Does this place an unreasonable burden on business? How would you suggest that these provisions be expanded, reduced, or otherwise altered? Comment: This is just a further discussion of the problems and costs imposed by more government regulation. Like all other similar question the discussion has to be around whether the need to keep such information private and confidential outweighs the extra costs in time and equipment imposed on businesses. Note that this discussion has to take into consideration the changing times and the much easier access to information made possible as we advance into the digital age. Cases for Discussion 1.

Parker v. Key Porter Books Ltd. (2005) 40 C.P.R. (4th) 80 (ON S.C.)

Tonya Maracle was a Mohawk artist who produced several small, unique wood pieces called dream catchers (a striking circular piece constructed of interwoven twigs and other material). A representative of Key Porter Books Limited approached Ms. Maracle and expressed an interest in publishing photographs of them and to that end she gave her permission, so long as they would be used only in a children’s book and that Soaring Eagle, the business she owned with her sister, would get the credit. This was agreed and several of the dream catchers were taken and she heard nothing more for several weeks. Finally, she received a letter returning them but with no explanation. She simply assumed that Key Porter had changed their minds. But her sister discovered a book published by Key Porter Books, Dreamcatchers: Myths and History, which contained 21 photographs of Ms. Maracle’s dream catchers, including a picture on the cover. A total of 9550 copies of the book had been published. What is the basis of her complaint if any, and what would be the appropriate remedy in the circumstances? Decision: In pursuing the claim artist put forward several claims based on breach of copyright including claims for damages based on “secondary infringement” and “breach of moral rights”. Ultimately, the court denied the claims based on secondary infringement and breach of moral rights but allowed damages on other bases noted below. In doing so, the court noted that Ms. Maracle was prepared to allow the publisher to use photographs of her work on two conditions: as part of a children’s book and with her company “Soaring Eagle” being given credit for the works. Key Porter Books ignored those conditions and used the photographs in a “trade publication” directed at other book companies without any acknowledgement to Ms. Maracle as the artist responsible for the work. As such, damages were awarded to Ms. Maracle and her business partner based on breach of copyright causing business losses to Ms. Maracle and her business partner and further compensation to redirect the profits and royalties enjoyed by Key Porter Books back to Ms. Maracle and her business partner. As such, this case aptly illustrates that

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acquiring the right to use an artistic work for one purpose cannot then be relied on to use the artistic work for another purpose and if one does so, that constitutes a breach of the copyright the artist holds for the work for those other purposes. As well, this case illustrates the broad scope of claims that can be considered in breach of copyright cases. 2. Théberge v. Galerie d’Art du Petit Champlain Inc. 2002 SCC 34, [2002] 2 S.C.R. 336, 210 D.L.R. (4th) 385; 23 B.L.R. (3d) 1 (S.C.C.) The Galerie d’Art du Petit Champlain obtained several copies of posters created by Théberge. Théberge had assigned the copyright to a publisher who had published the prints obtained by the Gallery. The Gallery then used a newly developed process to lift the ink from the posters and move it to a canvas background, which they then sold to the public. Théberge brought this action claiming that his rights had been infringed. Explain the nature of the rights that he claimed had been violated. Explain the arguments as to whether those rights had in fact been infringed and the likely outcome. If the court determines that those rights have been violated, explain the appropriate remedy in the circumstances. How would it affect your answer to know that the process in question leaves the former poster blank and the process involves the transfer of the ink to the canvas, thus not increasing the actual number of images? Decision: The principal issue in this case was whether Galerie could alter the material on which the artist’s image was originally placed. The court noted that Galerie had lawfully acquired the posters and cards and the artist had sold the right to the image on those posters and cards. Théberge claimed that altering the material on which the image was displayed breached his “moral right” to control the quality and integrity of his work even when that work passed into the hands of a third party. As such, Théberge sought orders allowing the seizure of the altered images, prohibiting further reproductions and monetary damages for the profits realized by Galerie. The court held that Théberge’s moral right did not extend in these circumstances as the rendering on to new material did not degrade the quality or nature of the image and did not result in further copies being created. As such, Théberge’s claims were dismissed and Galerie was allowed to convert the posters and cards on to new material as it chose to do. 3. Halford v. Seed Hawk Inc. 2006 FCA 275 (CanLII) 275 D.L.R. (4th) 556; 54 C.P.R. (4th) 130 (F.C.A.) James Halford was a university-trained farmer who invented a device for putting seeds and fertilizer into the ground in one operation. It was a relatively simple device but he was granted a patent for it. Norbert Beaujot, an engineer and part-time farmer, developed a similar device and incorporated a company to commercially exploit it. Halford sued. Beaujot had seen the Halford device in operation before he developed his own, but the machine he developed was quite different although it accomplished the same thing. What is the nature of Halford’s complaint? Explain the arguments for both sides and the likely outcome. What is the appropriate remedy if Halford is successful? Decision: This case aptly illustrates how “inventiveness” that leads to progressive improvements in technology can and cannot be protected by patents and patent law. The court noted that both devices accomplished the same task and incorporated many of the

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same structural elements to do so: e.g. placement of seed and fertilizer in the same furrow, the device being designed as a towable piece of equipment instead of being “selfpropelled”. As such, Halford claimed that its “first in time” patent was infringed by Seed Hawk simply copying a large portion of his device and design. Ultimately the court ruled that Seed Hawk’s device had significant design differences setting it apart and sufficiently different than that of Halford’s: a cutting tool and pivotal arm being added to the seeding device. As such, the court held that these improvements to what was found on the Halford device constituted Seek Hawk’s device sufficiently different and improved so as not to infringe on Halford’s device. Ironically, the court also allowed Seed Hawk’s claim that Halford’s device simply synthesized the obvious elements of pre-existing technology such that Halford’s patent was not valid as it simply “brought together” what was already obvious and could be synthesized by any competent tradesperson asked to combine the existing technology for that purpose. As such, Halford’s lawsuit seeking an order prohibiting Seed Hawk’s infringement ended with Halford’s own patent being extinguished. 4. Hermes Canada Inc. v. Henry High Class Kelly Retail Store 2004 BCSC 1694 (CanLII) (2004) 37 C.P.R. (4th) 244 The defendants operated a store in the Vancouver area that carried a line of handbags and other products all of which were copies of the famous Hermes brand. The term Hermes didn’t appear on any of the products and on very close inspection “HENRY HIGH CLASS KELLY” (the name of the store) was imprinted on the handbags and other products in question. Hermes brought this action to stop the sale of these products. On what basis should Hermes base their complaint and what remedy would be appropriate. Would it affect your answer to know that there is no registered trademark or other protection in the design of the bags themselves, just the Hermes name? Decision: The argument is that the sale of these handbags will cause confusion in the public as to whether they are genuine Hermes bags. To establish passing off there must be good will in need of protection, misrepresentation and at least the potential of damages. This was an application for an interim injunction and the judge found: “...the defendant’s store, perhaps at the instances of a third party copier, has very clearly dedicated itself to matching the Hermes handbag line, product for product. The entire point of the defendant’s business is to sell handbags which a customer will either believe to be a Hermes second line product, or which, at the least, a customer will believe to be a Hermes copy of sufficient quality as to lead others to believe the consumer has purchased the genuine product.” 5. International Corona Resources Ltd. v. LAC Minerals Ltd. (1989) 61 D.L.R. (4th) 14 (S.C.C.). Corona owned certain valuable mining claims in Ontario and was looking for a partner to help develop them. LAC Minerals was invited to participate and their representative came out and visited the site. While there, they were informed that Corona didn’t own the claims surrounding this property but were hoping to acquire them. The partnership deal did not materialize but LAC Minerals, without informing Corona, managed to acquire the

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surrounding claims and the two companies developed the adjoining properties. Corona brought this action, claiming that LAC Minerals had violated their obligations to Corona when they acquired these properties. Explain what obligations were violated and what defence LAC Minerals could raise. What is the likely outcome? Decision: The Supreme Court of Canada determined that Lac Minerals had been given the information in circumstances that made it clear that it was to remain confidential. They could not disclose it to others nor make use of it for themselves. When they bought those surrounding claims, it was a misuse of confidential information and Lac Minerals had to compensate Corona for their loss. Note that this resulted in the largest monetary settlement in Canada up to that time. Note that this was not a situation where there was a fiduciary duty, but the obligation of confidentiality in these circumstances was similar. Scott Paper Ltd. v. Canada (Attorney General) [2008] F.C.J. No. 539; 2008 FCA 129; 291 D.L.R. (4th) 660; 377 N.R. 173; 65 C.P.R. (4th) 303 (F.C.A.) 6.

Scott paper had registered the trademark VANITY in 1989 and had not used it since. In April of 2002 the registrar gave notice to Scott paper requiring them to show that it had been used in the last three years and if not when it had last been used. Scott paper responded that it had not been used but that plans were well underway to use it in 2002. Do you think that the trademark should be expunged? For what reason? What are the arguments for both sides? There is a provision in the Act to allow a mark to continue if there are special circumstances to explain why it could not be used. Does this apply here? Decision: This case aptly illustrates the statutory provision prohibiting holders of a trademark to simply “sit on” that marketable slogan to the detriment of others who may actually use the trademark. As such, the court noted that Section 45 of the Trades-mark Act requires the Registrar to expunge the trademark registration if: a) the trademark has not been actively used for three years or more; b) another party has applied to the Registrar to have the trademark expunged, and; c) the current holder cannot demonstrate “special circumstances” justifying the non-use. Ultimately, the court held that no such special circumstances did exist and the current trademark right was expunged (allowing others to apply for use of the marketable slogan). In considering what would amount to special circumstances, the court made it clear that a deliberate decision to not use the trademark could not support a claim of special circumstances regardless of any present intention to make use of the trademark. 7.

York University v. Bell Canada Enterprises 2009 CanLII 46447 (ON S.C.)

York University claimed that several anonymous authors had published a number of libelous emails and web postings. This action was brought against Bell and Rogers for an order requiring them to disclose the identity of these people so that York University could bring a libel action against them (this is called a “Norwich” order). The emails in question accused the President of academic fraud and alleged that a newly appointed dean did not have the academic credentials claimed. These were purportedly published by a

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group of concerned York students. Should such an order be made? Explain the arguments (both legal and social) on each side. Decision: This case aptly illustrates the tremendous change the internet has created in the scope and immediacy of communication and information exchange. As well, this case illustrates how the competing interests of privacy, freedom of speech and the right not to be defamed by anonymous sources will be resolved in Canadian courts. In this case the court noted that the anonymous postings were clearly derogatory and defamatory and had the authors identified themselves they would be required to prove the truth of the assertions or face a claim for damages as a result. As such, the court ruled that any privacy or freedom of speech rights were subordinated to the University’s right to pursue the authors in light of the clearly defamatory postings. As such, the court ordered Bell and Rogers to disclose the actual identities of the posting authors. Sample Examination Questions Note that the questions set out below are meant to illustrate the type of questions that can be asked and in fact have been taken from a separate test bank. Some of these questions may go beyond what is covered in the text or what has been taught. You should take care to ensure that the questions chosen deal with material that has been covered in this text or by the instructor in class.

Multiple Choice Questions 1. Tom, a classmate of yours at U. of T., was employed as a programmer by Mohawk Oil Company about three months after graduation. Because you could understand the program he was working on and because you write well, he called to ask if you wanted to take on the task of writing the manual to accompany the program. Read each of the following separately and indicate which is false. a. The issue of who owns copyright in the manual does not depend solely on who writes it; if you write it all by yourself, you still may not own it. b. If two persons wrote the manual together, it is possible to have joint ownership of the copyright. c. If the company hires you as an employee to write the manual, the company would own copyright unless your employment contract provided otherwise. d. If you contract as an independent contractor (independent consultant) with the company to write the manual, who owns the copyright can be specified in the contract. e. The owner of the copyright will be whoever first gets his claim of ownership in the copyright office. Answer:

2. Which of the following is false with regard to the law governing patents? a. A patent will not be granted if the invention has been the subject of a publication over one year prior to the application. b. Computer programs, as a general rule, cannot be patented because they are merely a set of instructions to the computer.

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c. If a patent is developed by an employee, the employee has the right to obtain the patent. d. In exchange for the monopoly given under the Patent Act, the owner of the patent must disclose the invention in its entirety. e. A recent amendment to the Patent Act gave drug manufacturers more exclusive control over their products and prevents others from producing "generic drugs" for a period of time. Answer:

3. Which of the following is true with regard to trade mark infringement and the remedies of the trade mark owner? a. Once a trade mark is registered the owner of the trade mark cannot lose the right to use that mark. b. All trademark and passing off actions must be brought before federal court. c. Before a trade mark owner can sue successfully for an infringement, he must prove that the mark used by the defendant was the same as his mark. d. The owner of a trade mark can sue someone who forges his trade mark, and can ask the court for an injunction, an accounting of profits and custody of the offending wares. e. If a person forges a trade mark, that person can be sued by the owner of the trade mark for infringement in a civil action, but is not subject to criminal penalty. Answer:

4. Aunt Juliet wants to know whether or not to register her trademark. Which of the following is false with regard to registration of trademarks? a. Registration of the trademark would give her exclusive use of that mark nationwide even though she was not marketing her wares nationwide. b. If she does not register her trademark under the Trade Marks Act, she will have no legal protection of her mark. c. By registering her trademark, and proceeding according to the Trade Marks Act, she would have greater protection if she wants to use her trademark in a different country d. Registration gives her the right to use her mark for fifteen years and to renew it. e. Registration of a trademark is a complicated process and should be done with professional assistance. Answer:

5. Which of the following is false with regard to industrial design? a. A person who creates a unique shape of a manufactured article can protect his design by registering it under the industrial design act.. b. A creator's unique design of a manufactured article, e.g. a chair, is protected at the time of creation and no formal registration is required. c. Industrial design protection lasts for up to 10 years.

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d. The design of a manufactured article such as a sofa is not protected by copyright. e. Industrial design protection is based on Federal legislation. Answer:

6. Which of the following is correct with respect Canadian Legislation? a. The Uniform Electronic Commerce Act (UECA) is binding federal legislation giving validity to electronic documents and signatures. b. The federal Privacy Act supersedes all provincial legislation and makes breach of privacy an actionable tort. c. Personal Information Protection and Electronic Documents Act (PIPEDA) is Federal legislation superseding all similar provincial or federal statutes d. The Personal Information Protection and Electronic Documents Act (PIPEDA) only applies in those provinces that haven't adopted substantially similar acts. e. The Uniform Electronic Commerce Act (UECA) applies in all provinces that haven't passed substantially similar legislation. Answer: D Short Answer Questions 1.

Explain what is meant by moral rights under copyright law.

Answer: If the author of the work assigns that copyright to someone else, the author still maintains moral rights in relationship to it. That is, the right to have his name associated with it and not to have the work modified without his permission. 2. Indicate four remedies that may be available to the victim of the breach of copyright. Answer: Damages, both normal and punitive; injunction, both permanent and interim accounting and an Anton Piller Order. 3.

Distinguish between what is protective under patent law compared to copyright.

Answer: Copyright protects the specific way an idea is stated whereas patent law is intended to protect the product made based on the idea or principle. 4.

Distinguish between a trademark action and a passing off action.

Answer: Even where there is no registered trademark, when one business does something that will confuse the public into thinking that they are dealing with another business, that other business can sue in common law by way of a passing off action. 5. What kinds of things are protected as industrial designs? Answer:

A design or pattern that distinguishes one manufactured item from another.

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What is the period of protection associated with patent law?

Answer:

Twenty years from the time of registration of the invention.

7. What is the most effective way to ensure security of digital information and internet communications? Answer:

High level encryption.

Essay Topics 1.

Discuss the various remedies that are available and their effectiveness when intellectual property such as copyright and patent are interfered with.

Contrast patent and copyright protection and in your discussion consider the differences in the nature of the protection, the kind of things protected, the effectiveness of the protection granted and the objectives of the legislation.

Discuss how the common law protects intellectual property and in your discussion indicate why it was necessary to introduce statutes in some areas.

Discuss how tort, contract and criminal law have been or may be used to protect intellectual property.

Discuss the idea of the fiduciary duty that an employee owes to the employer, giving examples of under what circumstances such a duty is imposed.

Discuss how the common law protects privacy and in your discussion indicate why it was necessary to expand that protection by statute and how that has been accomplished.

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Electronic Commerce and International Trade Teaching Suggestions This chapter deals with material that I often cannot include in my business law courses because of time restrictions. I have on occasion included a discussion on the use of the internet and coincident with that some limited discussion on the problems of jurisdiction but I have not dealt with international business matters in any of my courses except indirectly. But I do think the topic is important, especially as our economy becomes more and more global in nature. In future offerings I will find time to cover the topics covered in Chapter 10, recognizing that the use of the internet and its global nature has become a dominant feature of our current business environment. Still, for this chapter I don’t have much to add as to teaching suggestions other than to recommend that examples of some pitfalls of using the internet and doing business in other countries be used. Emphasize how the internet and global economic practices have outpaced the development of the law and so many of the solutions to potential problems are more practical than legal. For example, security and privacy issues seem better dealt with through practical solutions such as encryption of information rather than regulation. Also, providing examples of the pitfalls of doing business in other jurisdictions with different laws and attitudes is important and useful. A good example is the Vancouver based funeral service business that expanded into the US. They bought out a business in Mississippi from a family who later sued claiming fraudulent misrepresentation. Although the deal only involved a few million dollars they were faced with a jury judgment of over $500 million and had to come up with a bond covering a significant portion of that amount before they could appeal. By the time the matter was resolved they were forced into bankruptcy over a rather insignificant matter because of the attitudes of the people of that area and their unique laws. Chapter Summary Business and the Internet Internet facilitates business and education Normal civil and criminal remedies apply to internet Laws are outdated and regulation is lacking with respect to the internet Jurisdiction A major problem is to determine which jurisdiction’s laws apply to internet and internet transactions Another major problem is determining where an action should be brought Regulations can compromise freedom of expression Internet providers may be subject to different laws in many jurisdictions Canada requires a real and close connection for action to be brought

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Passive internet messages are more likely to be exempt Internet offer or service should state limitations of availability Dangerous to ignore foreign actions since judgments can be enforced in other jurisdictions Business Transactions over the Internet Initially, business often failed to register domain names Each domain name is a unique address, giving rise to considerable conflict Cyber squatters capture domain names that rightfully should go to others Arbitration and litigation is possible, but it is often cheaper just to buy the name It is important to take steps to avoid name infringement problems Torts Internet defamation is a particular problem because of ease of widespread distribution Note the danger of liability extending to employer or business providing bulletin board or chat room service Electronic commerce is becoming a significant method of doing business Traditional contract rules apply to internet transactions On-line Contracts Provinces are adopting federal Uniform Electronic Commerce Act guidelines Statutes recognize electronic equivalent of written documents and signatures The parties can declare in the contract which jurisdiction’s law will apply Clicking a button will bind party to terms Post box rule will not apply to internet transactions It is difficult to be sure of whom you are dealing with over the internet Illegal activities are rampant on the internet On-line payment difficult to secure Legality varies with jurisdiction Close connection and other factors determine jurisdiction Parties should declare what law applies and what court has jurisdiction Problems can be avoided by including arbitration clause Many organizations facilitate arbitration of disputes) Regulating the Internet Little effective regulation of the internet International business transactions No international court to litigate private matters Import and export of goods most common Protection of intellectual property serious problem Contract governs all international transactions

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Contracts Important to know who you are dealing with Expert help needed to draw up agreements Important to declare what law applies and what court has jurisdiction Know what you can and can’t do in that foreign jurisdiction Supplementary standard form contracts Bills of lading Letters of credit Insurance Dispute Resolution Arbitration clause can avoid litigation Parties can control who arbitrates and arbitration process Arbitration awards enforceable in courts Litigation and jurisdiction Right of a court to hear action may be challenged Legislation replaces common law in determining jurisdiction of court Legislation allows transfer of the action Difficult to enforce a court order in another jurisdiction Foreign courts will enforce a judgment if reciprocal enforcement agreement in place Judgment will not be enforced where laws are different Courts more likely to enforce arbitration award Government regulations and treaties International Treaties Provinces have enacted versions of international Sale of Goods Act GATT reduces trade barriers WTO expands on GATT NAFTA creates free trade zone between Canada, U.S.A. and Mexico NAFTA includes dispute resolution mechanism Canadian Regulations Canada imposes few restrictions on exports Canadian Government agencies assist export process CBSA officials have extensive powers Practice of dumping controlled NAFTA and free trade reduces regulation of imports Restrictions on the import of dangerous, hazardous and environmentally sensitive goods Extra Territorial Reach Some foreign governments attempt to apply their regulations beyond their borders

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Questions for Review 1. How has the internet changed the nature of doing business? Answer: Communication and the transfer of information have become much easier. Distances have become less significant and the internet has contributed greatly to the globalization of our economy. It has also to a large extent replaced paper transactions. 2. Explain the problems with jurisdiction that arise in internet business transactions. Answer: The internet is essentially borderless and so when problems arise it must always be determined what law of what country, province or state applies. A company operating on the internet can do much to solve this problem by including a term in any contract stating the courts of which state or province will have jurisdictions and what law will apply. 3. What must be demonstrated for a Canadian court to hear an action in a dispute involving an online transaction? Answer: Canadian courts are willing to find jurisdiction where there is a real and substantial connection between the act complained of and the province. 4. What is the danger of ignoring an action brought in a foreign jurisdiction? Answer: That action could be successful and the judgment enforced in another jurisdiction where your company has assets. 5. Explain why internet defamation has become a greater potential problem compared to ordinary written or spoken defamation. What other torts can be committed on the internet? Answer: Publication is much broader on the internet and the rules with respect to defamation may be different in various jurisdictions. Instead of liability being restricted to the local area where the article was published the writer is subject to liability all over the world. 6. What sorts of opportunities does the internet provide for losing control over personal information? Answer: The information can be lost through data storage failure and it can be compromised through interference by others: piracy, vandalism or simply inadvertent communication. 7. Explain the unique problems associated with the formation of contracts over the internet and what federal and provincial governments have done to respond to these issues.

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Answer: Statutes in many jurisdictions have made electronic documents and electronic signatures valid for the purposes of contract law and to satisfy the requirements of the statute of frauds. (A signature equivalent like a password is used in these situations.) Also the business can include in their offer (or invitation to make an offer) how the offer is to be made or accepted (by clicking a specified box) and the law of what jurisdiction will apply to the transactions 8. Explain the role played by the federal Uniform Electronic Commerce Act and how it relates to provincial legislation. Answer: This document has no legal standing, but it serves as a model for the design of provincial legislation so that similar statutes will be in place throughout Canada. 9. What is cybersquatting and what attempts have been made to control it? Answer: Cybersquatting is the practice of registering domain names for use on the internet that others have a better claim to. This is now handled through arbitration services although the courts can be used to enforce a prior claim. Often it is easier and cheaper just to buy out the other party. 10. What is the most appropriate means of resolving disputes over online transactions? Answer: This is usually best handled through arbitration or some other ADR method. Usually there are different jurisdictions involved making litigation difficult and usually prohibitively expensive. 11. What are the common law obligations with respect to people who are given confidential obligation? Answer: Where the information is identified as confidential there is a duty on those in close relationships such as business employees and professionals to retain that information as confidential. That is not only to refrain from disclosing it to others but also to not use it themselves for there own purposes. Where agency is involved or other relationships where trust and vulnerability are present there is a fiduciary duty, which includes the above duty of confidentiality. 12. What steps should a business take to insure that employees don’t misuse confidential information or engage in other inappropriate on-line activities while in the workplace? Answer: Access to confidential information should be limited as much as possible and the information should be clearly identified as confidential. Surveillance including monitoring the employees’ use of the computers and other company resources can be effective but employees should be notified that it is in effect. Of course nothing will take the place of good hiring practices and proper training with clear written policies and effective procedures.

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13. Explain the reluctance of governments to regulate the internet’s business or even criminal activities. Answer: The fear is that such controls will inhibit the freedom that has been the basis of the growth and flexibility characterizing the internet and its usefulness. There is also the problem of the difficulty of enforcing any of the regulations the government might impose. 14. Describe some of the overlapping concerns of electronic and global commercial transactions. Answer: Privacy, security, jurisdictional problems and preservation of information are the primary concerns that impact both electronic and global commercial transactions. 15. What are some of things a businessperson who is contracting with a foreign person should consider? Answer: First of all, know who you are dealing with. Where that person resides in a different jurisdiction there is the problem of a different legal system involved and of being able to enforce the contract or a judgment obtained pursuant to that contract. Also there is the problem of where the contract is made. Will the laws of that different jurisdiction apply? There may also be cultural differences that may affect the interpretation of the contract terms. There may also be government regulations of the transaction to consider both at home and in the foreign jurisdiction including tax requirements. Much of this can be overcome by careful attention to the terms to be included in the contract. 16. Outline the terms that should be included in a cross-border contract. Answer: In addition to the normal important terms to be included you should also include a terms stating: where the contract is made; the laws of which jurisdiction will apply to it; and the facilities of what jurisdiction can be used to enforce it (Courts ADR, etc). It is also much better and more cost effective to include a clause requiring all disputes to be arbitrated and also to state how the arbitrator will be chosen. 17. What provisions should be made for dispute resolution? Answer: In most cases where dealing with parties in other jurisdictions it is more cost effective and better for the on going relationship to use ADR to handle any disputes. This requires a clause in the contract for the appointment of an arbitrator. Even then a term should be included stating the law of what jurisdiction would apply and what courts can try any dispute arising from the transaction. 18. What is the likelihood of successfully pursuing a judicial action in a foreign jurisdiction?

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Answer: This depends on the nature for the dispute. In any case it is clear that even a straight forward dispute will be more costly when it takes place in a foreign jurisdiction. 19. What international organizations are set up to assist in the resolution of disputes? Answer: There are a number of organizations set up providing arbitration services such as the National Arbitration Forum. Also businesses like Pay Pal help avoid disputes by providing a third party go between function for payment in consumer transactions. The International Court of Justice (at The Hague) and the World Trade Organizations (WTO) don’t deal with private disputes 20. What questions will a court ask to determine whether or not to hear a matter related to an international contract dispute? Answer: They will look at any local legislation that may affect their jurisdiction such as the Ontario Consumer Protection Act expanding the courts jurisdiction over internet matters. In general it must be demonstrated that the matter being tried is closely connected to that jurisdiction (a real and substantial connection) and that it is the most appropriate jurisdiction to deal with the matter. 21. Explain the problems associated with enforcing a judgment in a foreign country? Answer: What court has jurisdiction? Is there mandatory arbitration involved? Once the judgment has been obtained does the defendant have any assets in your country? If not, will a court in that other country enforce a judgment obtained here? Usually there has to be a treaty to enforce the judgment or it may have to be tried all over again there. Service of the debtor may also be a very difficult problem. Note that if the law is different the foreign court will not enforce the judgment. 22. How effective are international treaties in place to assist contracting parties? Answer: Bern and Rome conventions as well as WTO membership is effective in protecting patents and copyrights. WTO (World Trade Organization), GATT (General Agreement on Tariffs and Trade), as well as NAFTA (North American Free Trade Agreement) have had a great impact on our economy by reducing tariffs and other trade barriers between nations thus encouraging free trade. There are still many difficulties but these treaties conventions and organizations have had a great impact on this nation. 23. Explain what statutes are in place in Canada to support international trade. Answer: International Sale of Goods Act; Export and Import Permits Act; Softwood Lumber Products Export Charge Act; Export and Import of Rough Diamonds Act; Cultural Property Export and Import Act; Corruption of Foreign Public Officials Act; Customs Act; Excise Act; Special Import Measures Act; Export and Import Permits Act; Foreign Extraterritorial Measures Act; North American Free Trade Agreement Implementation Act; World Trade Organization Agreement Implementation Act.

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Questions for Discussion 1. One of the great advantages of the internet, and one of the reasons for its tremendous growth in recent years, has been its freedom from controls and regulation. It has been a little like the Wild West with entrepreneurs, artists and anyone with a desire to communicate being free to do so and only limited by his or her imagination. This has led to invention and creativity but also to abuses. The debate today relates to control and regulation of the internet and the question for discussion is whether you think that this beast should be tamed. Consider the arguments pro and con and discuss the various ways that such controls could be imposed. Look at the jurisdictional problems but consider also how to maintain the freewheeling nature of the internet that has contributed to so much creativity. Comment: This can lead to a good general discussion on the development and impact of the internet. The problems that arise are at two levels. First there is the philosophical problem of whether it is desirable to introduce any or more than minimal controls on the internet. It has become such a valuable tool because of its flexibility. The less regulation the freer developers are to expand it to new and useful heights. Of course the opposite is also true, the less regulation the more opportunity for abuse including promoting socially less acceptable practices such as propaganda, defamation, hate, gambling and pornography. There are also opportunities to develop even more effective means of cheating even relatively sophisticated users. The second problem is much more practical. Just how can any country effectively regulate the internet? They may be able to impose some specific controls but in general as soon as those controls come into place ways are developed to get around them. Is it better simply to leave the internet unregulated rather than make an ineffectual and costly attempt to control something that is basically uncontrollable? 2. A business person who is focused on the bottom line may overlook the social impact his business activities have on people, particularly if they occur in a foreign country. When financial interests are put ahead of public good, the results can be devastating. What concerns should an ethical business manager have in mind when contracting with or opening a plant in a developing country? Keep in mind economic, ecological and social impacts. How can ignorance or dismissal of these factors negatively affect the business climate in Canada? Consider some examples from recent times where highly industrial countries have exploited the people and resources of developing countries. Comment: This question gets into the debate about the role of morals and ethics in business. Most students have no problem with the need for business people to be more considerate of the consequences of what they do, but when they actually get into the position of making a decision usually more practical concerns become dominant. But things have changed with the obvious problems in the US and the impact on the financial institutions on a global scale and of course the more and more pressing consequences of short-sighted decisions that impact the environment. It is arguable that it is no longer possible to think bottom line without also considering the effect of those decisions on .

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these social and environmental matters. The problem is complicated when doing business in other countries because of the differences in laws often permit a more lax attitude in these matters when in fact the potential damage may be that much greater. But there are sound business reasons to be concerned about being a poor corporate citizen in those countries. You may get shut out there and your reputation in this country may also be harmed not to mention that the damage you are responsible for may have global implications. 3. There is always pressure on the various governments involved to renegotiate NAFTA with an eye to protecting their own interests, such as by insulating local industries from outside competition. What are the implications for Canada if we do it or if they do it? How will it affect our trading relationships? Think about the problem of dumping. Should Canada make more of an effort to protect our manufacturing and commodities interests? In your answer, consider the way the softwood lumber dispute was handled? Comment: The question should prompt a discussion on the benefits and drawbacks with respect to such international agreements, especially where one of the parties is relatively weak and dependant with respect to the other. The “buy US” policies associated with infrastructure stimulus programs in the US are a case in point. It is important to point out that there are arguments on both sides, but also point out the dangers of becoming protectionist and how that is inconsistent with the various international treaties in place. It is also helpful to point out how such protectionist policies have led to even greater economic distress in the past. Note also the dangers of retaliation on the part of Canada when the US introduces some change that seems inconsistent with the terms of those free trade treaties. 4. Can we depend on international treaties to regulate and control electronic and global commerce? What role should world trade organizations play in encouraging and regulating international transactions? Is this a forum in which the United Nations can play a positive role? How can economic power be balanced between trading partners? Who should be responsible for protecting lesser powers? Comment: This question is based on the Canadian experience in dealing with the US and the free trade agreements. It seems that when it is in the interests of the US they are prepared to ignore the concept of free trade and regulate either directly or though subterfuge in a protectionist way. The softwood lumber dispute is the primary example. Even when the disputes against the US actions went to the various world trading panels and they lost, they simply ignored the decision and in the end Canada had to make great concessions just to get back into the US market. The point is that in the end the treaties and agreements didn’t help the weaker partner when it became convenient for the more powerful partner to act otherwise. Still what else do we have other than these agreements and organizations such as WTO and GAAT to keep the world economy functioning efficiently? 5. Try drafting your own standard-form contract for a business selling a product over the internet. Think about the elements that must be present for such a contract to be binding

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including how the process of offer and acceptance will be accomplished. What kind of exemption clauses would you like to include? How would you solve the jurisdiction problem? How do you think a customer might react to these provisions? Comment: This is a good exercise to help students think about making clear just what they want to include in such an agreement and to think about the things that could go wrong. When they think about the unique risks they face dealing internationally they will then think about what clauses they can include in the contract to avoid that potential problem. For example, the inclusion of statements as the law of what jurisdiction should apply and how any disputes arising under the agreement will be resolved (Arbitration clauses). Cases for Discussion 1.

R. v. Benlolo 2006 CanLII 19284 (ON C.A.), (2006) 81 O.R. (3d) 440

Alan and Elliot Benlolo sent thousands of invoices to various businesses for the renewal of their listing on an internet “Yellow pages business directory”. The invoices looked very similar to those issued by Bell Canada. In fact the recipients had never been subscribers to the Benlolo service and were misled into thinking they were renewing a service they had been party to. Even after being warned by the Competition Bureau they continued further mailings and eventually were convicted for misleading advertising under the Competition Act. At the same time they were involved in this activity they were engaged in an international telemarketing stock swap scheme, which also involved fraudulently getting people to pay for stocks at inflated prices and leading them to believe they were dealing with legitimate stock brokerage. Note that millions of dollars were taken from their victims. What do you think might be an appropriate sentence or penalty in these circumstances? Decision: In fact this involved four people, three of whom were Benlolo brothers. Two of the brothers had previous criminal records and were involved in other fraudulent activities including another matter of stock fraud that came up and to which they pled guilty. After a long jury trial in which all were convicted, the court imposed a 34 months prison sentence as well as a fine of over $400,000 on two of the brothers for the misleading advertising offence. The two brothers were also given 42 month sentences and required to pay restitution of $1.4 million for the stock fraud offence. Simon Benlolo, who was only minimally involved and had no prior criminal record, was acquitted of 4 of the 5 charges and given a nine month sentence and a $100,000 fine. It was these sentences that were appealed. The fourth defendant did not appeal. The appeal court found that the sentences given to the 2 brothers were appropriate but that the fine imposed on the third brother, Simon, was too harsh. It was reduced to $35,000. In reducing the fine the judge pointed out that any fine imposed should be within the ability of the accused to pay and not effectively increase his incarceration time because he could not pay. One of the problems the court had to consider with reference to the sentences and fines was that this was being done under the Competition Act (rather than the Criminal Code) and traditionally only fines were imposed that were limited to the amount

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of funds obtained by the illegal scheme. However the Competition Act had been changed to make this a criminal offense with maximum sentences up to 5 years and given the need to protect people from this type of scam the sentences and fines (except for that given to Simon) were appropriate and upheld. 2. Easthaven v. Nutrisystem (2002) 55 O.R. (3d) 334, 202 D.L.R. (4th) 560 (Ont. S.C.J.) Easthaven Ltd. was a company registered in Barbados with a head office in that country. It registered the domain name of “Sweetsuccess.com” in order to further an internet sports related business. The domain name was registered with Tucows Inc., a company incorporated in Delaware but with a head office in Toronto. Nutrisystem was incorporated in Pennsylvania (with a head office in that state) as a weight loss business and products and trademarks based on the name “Sweet Success”. When they approached Easthaven about the domain name Easthaven offered to sell it to them for US$146,250. They brought a successful action in Pennsylvania asking that court to order that the domain name “sweetsuccess” be transferred to them. The Pennsylvania court sent an order to Tucows to transfer the name to Nutrisystem. In the meantime Easthaven brought this action in the Ontario court for damages against Nutrisystem and an order against Tucows to prevent the transfer of the domain name to Nutrisystem. Do you think the Ontario court should become involved? How could the matter best be handled? How would your answer be affected with the added information that before the action went to trial in Ontario, Tucows reversed their decision to transfer the domain name to Nutrisystem and put it on “Registrar Hold” meaning it could not be used by either party? In response to this Eastahaven withdrew their action against Tucows. This left Nutrisystem the only defendant in the Ontario action. Decision: The Ontario court had to decide whether it had jurisdiction to hear the case. The only connection with Ontario was that this was where the domain name was registered by the Ontario company Tucows. Since Tucows was no longer a defendant and the domain name of Sweetsuccess.com was intangible property and didn’t exist anywhere in reality, the court found that there was no real or substantial connection with Ontario. There was no connection for a Barbados company to bring an action in Ontario against a Delaware company doing business primarily in Pennsylvania over the use of the domain name. The court also looked at which jurisdictions would be more convenient and found that since the action had already been commenced in Pennsylvania and that Nurtisystem was relying on a US statutes (the Cyberpiracy Act) it would disadvantage them for the Ontario court to take jurisdiction whereas the Barbados company would not be hurt by the denial of jurisdiction by the Ontario court. The judge also noted that had Tucows remained a defendant the decision could well have been different.

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Kanitz v. Rogers Cable Inc. 2002 CanLII 49415 (ON S.C.)

Rogers Cable Inc. provided cable and internet services to customers in Ontario and other areas of Canada. The plaintiffs were customers who brought this class action against Rogers claiming that they had breached their contract by providing interrupted intermittent and slow service over a specific period of time. The original contract that Rogers had subscribers sign when they first obtained the service had a provision allowing them to make changes to it. The subscribers continued use of the service after notification of the change constituted acceptance. If they choose not to accept they were to cease the service immediately and notify Rogers. In fact in November 2000 such a modification was made by the inclusion of an arbitration clause in the contract so that all disputes had to be arbitrated following a specific process rather than litigated. What do you think? Should this provision be part of the contract? Does the Ontario court have the right to hear the class action brought by the plaintiffs? Would your answer be affected with the information that Rogers and Shaw cable had made a swap of customers and facilities in B.C. and Ontario with the result that some of the customers were originally with Shaw and were not original contracting parties with Rogers? What other information would you need to know? Decision: The court held that the customers were all covered by the term requiring disputes to be arbitrated and therefore dismissed the class action. The original contracts had a provision that it could be modified by the company with notice to the customer and that the customer could cease using the service where they disagreed with the change. The publication of the new contract was found to be sufficient notice and the continued use of the service by the customers was found to be indication of acceptance of that change. Znamensky Selekcionno-Gibridny Center LLC v. Donaldson International Livestock Ltd. 2010 ONCA 303 (CanLII) The Russian applicant agreed to purchase 8500 pigs from Donaldson but a dispute arose with respect to the health of the pigs and the matter went to arbitration in Russia as per the contract provisions. The Canadian company refused to go to Russia and participate in the arbitration because of alleged death threats received from the Russians. The Russian arbitrator decided against Donaldson and in this application the Russian purchaser is applying to have the $1 million plus award enforced in Ontario against Donaldson. Donaldson claims that the Russian arbitration should be set aside because of the death threats and is asking that the matter be set down for trial in the Ontario court. What do you think? Was the appropriate place to bring up this argument at the Russian arbitration centre or here in Canada? Decision: This case illustrates the risk a person or business faces if it decides not to participate in a legal proceeding in another country or legal jurisdiction believing it will be immune from the result in its “home venue”. As noted by the court in this proceeding, Russia is only one of many countries to an international treaty allowing for the enforcement of judgements from foreign jurisdictions in all provinces and territories in

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Canada. As such, Donaldson International Livestock needed to convince the Ontario court to exercise its “discretionary” jurisdiction to refuse enforcement of the Russian award. Ultimately the court agreed the alleged death threats were good reason to refuse participation in Russia. However, the matter was sent back for further hearings in Ontario Superior Court to rule on whether the threats were made and whether they were serious enough to justified non-participation in Russia. As such, even after several levels of hearing in Ontario, the case remained unresolved and Donaldson Livestock International still faced the risk that the award would be enforced in Canada without the “merits” of the claim being determined here. Crookes v. Wikimedia Foundation Inc. [2008] B.C.J. No. 2012; Crookes v. Newton 2009 BCCA 392 (CanLII); Crookes v. Yahoo 2008 BCCA 165 (CanLII); see also Crookes v. Newton 2011 SCC 47 Wayne Crookes is a B.C. business person who is claiming he was defamed on the internet. He has named several specific individuals who were the actual defamers but also is suing Yahoo, MySpace, Wikipedia, and other intermediaries, claiming that they are responsible for the defamation because they failed to monitor their sites properly to ensure that such defamatory articles were promptly removed. For example, he claimed Yahoo refused to take down an offending site (chat room) and therefore was equally responsible, and MySpace failed to take down a personal page containing defamatory material and allowed a link to another site containing defamatory material. How far should the liability for defamation go? Should these intermediaries also be responsible? What if they fail to take the offending item down when asked? Are there any situations where an intermediary should also be responsible for defamation? Decision: This case illustrates a limit on how far a person may go in pursuing defamation claims against members of the digital world of the internet. In this case Mr. Crookes claimed that the entities Yahoo, MySpace and Wikipedia should share liability with the actual authors of the defamatory material as it was accessible through their respective sites by way of electronic “hyperlinks”. The Supreme Court of Canada ruled that being a venue for such a hyperlink in of itself cannot constitute publication of the defamatory posting. The court’s decision was based on weighing the public policy consideration of protecting the free flow of information in the digital world of the internet and ruled that site providers that do not actually display the defamatory material itself could not be made liable by being the forum in which such a hyperlink is placed by a third party. Sample Examination Questions Multiple Choice Questions 1. Which one of the following is not an important factor the courts would take into consideration in determining whether they have jurisdiction to try a case? a. The jurisdiction where the defendant resides b. The jurisdictions where the dispute arose

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c. The jurisdiction where there is a close and substantial connection to the matter being tried d. The jurisdiction where the plaintiff resides e. The jurisdiction where the offense was committed Answer:

2. Which of the following would not be an appropriate method to resolve a dispute arising from a transaction between your company and a customer in another country? a. b. c. d. e.

A court in your own jurisdiction where the contract was completed in your office A court in the customer’s country when he had breached the contract The International Court of Justice at The Hague A mutually agreed upon arbitrator such as the National Arbitration Forum (NAF), A dispute resolution mechanism specified in the contract

Answer:

3. Which of the following is incorrect with respect to the legal aspects of the internet? a. Current law is not sufficient to regulate the internet effectively b. The greatest problems are caused by jurisdictional deputes c. There are now effective arbitration mechanisms in place to deal with domain name disputes. d. An effective solution to the jurisdiction problem is for civil litigation to be commenced in any jurisdiction where a complaint originates. e. An action can be commenced in a Canadian court only where there is a real and substantial connection between the act complained of and the province. Answer:

4. Which of the following is correct with respect to the enforcement of foreign judgments in Canada? a. They can effectively be ignored unless you have assets in that foreign jurisdiction. b. No foreign judgment can be enforced in a Canadian province without restabilising the validity of the claim in that Canadian court. c. A foreign judgment can be enforced in a Canadian province without retrial. d. Only American judgments can be enforced in Canadian jurisdictions without retrial e. Only judgments from other provinces can be enforced in other Canadian jurisdictions without retrial. Answer:

5. Which of the following is not an important term to include in a contract concerning a transaction to be completed in a different country? .

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a. b. c. d. e.

Specify what law will apply Specify what courts will have jurisdiction to try a dispute Specify that all disputes are to be arbitrated Specify how that arbitrator will be chosen Specify that the decision of the arbitrator is not enforceable in any court.

Answer:

6. Which of the following is not an international agreement treaty of convention to which Canada is a party? a. b. c. d. e.

NAFTA WTO GAAT CBSA Bern Convention

Answer:

Short Answer Questions 1. Explain how to best insure that your internet site does not violate the laws of various jurisdictions where it is seen. Answer: Clearly state that the product or service is not available where prohibited by local law or better yet make it clear that the product or service is only available to specific locations in which you know the product or service is permissible. 2. Explain why it might be dangerous not to respond to an action brought against your business in a foreign jurisdiction where your company has no assets. Answer: If a judgment is obtained against the business in that jurisdiction there are mechanisms in place where such foreign judgments can be enforced in Canada putting its assets here at risk. 3. Explain what is meant by cyber-squatting and what attempts have been made to overcome the problem. Answer: Cyber-squatting is where one person registered a domain name that should rightfully belong to another and then tries to use it inappropriately or sell it to the person with a better claim. Now complaints can be made to bodies specifically authorized to resolve such disputes or the matter can be determined in court. 4.

How can you avoid being sued for defamation made over the internet?

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Answer: Don’t say or write anything defamatory. Be careful what you or your employees say in any form if electronic communication including blogs, facebook, websites, chatrooms, webmail etc. 5.

How can a consumer ensure that they get what you pay for over the internet?

Answer: Make sure of the validity of the person or organization you are dealing with, pay though some third party such as PayPal or don’t pay until you get the product. 6.

What is the main problem with establishing effective regulation of the internet?

Answer: There are two acceptable answers to this question. First, that such regulation would interfere with the freewheeling nature of the internet which has been the basis for its success. Second, the more practical answer that the borderless nature of the internet causes so many jurisdictional problems that it is extremely difficult to effectively regulate. 7. What standard will a Canadian court apply to determine whether they have jurisdiction in a dispute involving the internet? Answer: A real and substantial connection between the act complained of and the province.

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